How the Shanghai FTZ is changing trade

The well-publicised FTZ, in operation since September 2013, is an important platform to assist Shanghai to achieve its target. The experimental zone is a pilot initiative set up to allow the Chinese government to tinker with investment and trade policy, opening up its various industries.

"The FTZ has improved the profile of economic reform in the region and attracted interest from onshore and offshore corporates."
Mark Yang, Manager of ANZ’s Shanghai FTZ branch

The zone consists of around 29 square kilometres on the coast of Shanghai. Despite some mixed reviews over a year in, the zone has succeeded in opening the region up and the corporate response has been loud - and absent of any of the doom and gloom forecast by some analysts.

The FTZ has improved the profile of economic reform in the region and attracted interest from onshore and offshore corporates, while creating and continuing to build a friendly business environment by increasing the ease of processes to facilitate overseas investment.

It’s a far cry from some of the concerns expressed back when the zone was announced. When the FTZ was first mooted, some analysts suggested China was at risk of creating financial uncertainty and even a crisis if it went ahead.

The concerns centred on high levels of hot-money flows coming in to the region in the wake of the FTZ. However, regulators including the People’s Bank of China have managed to monitor the area effectively in its first 15 months, ensuring the significant achievements of the zone.

Huge demand

The FTZ is a first for mainland China, encompassing the special customs zones of Yangshan Deep Water Port, Pudong Airport and Waigaoqiao Port. Trade volumes across the zone reportedly reached $US100 billion in 2012.

The reaction from the business community has been significant. Since the inception of the FTZ, the number of companies in the zone has more than doubled, from about 10,000 beforehand to over 23,000 now.

It took 20 years for the local authorities to grow the region to that original level, and only 12 months to reach the later, illustrating the huge levels of growth.

That growth is a direct product of the business-friendly environment the government is trying to create, achieved through welcoming policy moves such as a reduction in red tape.

Today, registering a company in the area can take up to two weeks. In pre-FTZ days, businesses could spend about 2 or 3 months just getting approval to operate there.

Financial reform is another key focus of the FTZ. The region has quickly become an RMB trading centre, supporting the Chinese government's internationalisation plans for the currency.

The success of this change means corporate funding costs in the FTZ are about 15 to 20 percent lower than elsewhere in China.

Exchanges such as the Shanghai Gold Exchange and the Free Trade Account (FTA) Unit banking core system have been approved to support further financial reform.

Challenges

Despite its many successes, the short lifecycle of the FTZ has not been without its challenges. Some parties have criticised the zone for not doing enough and for falling short of expectations in areas such as interest rates.

Investors have also urged the Chinese government to further align the laws, taxes and regulations in the FTZs with international practice.

Authorities are responding to these calls. For instance, the government is looking into lowering the corporate tax rate to levels that match nearby Hong Kong or Singapore.

Claims of impropriety surrounding Qingdao Port have also hurt the zone. In order to prevent fraudulent transactions, authorities have strengthened rules and introduced practices such as third party trade monitoring.

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What’s ahead

The most exciting aspect of the FTZ is what is still to come. The government plans to continue to introduce financial policy changes and reforms, including a push to ensure the FTZ becomes the first Chinese area to achieve interest rate liberalisation.

A key plank in that plan is the introduction of up to 10 commodity exchanges in the FTZ, the first of which, the Shanghai Gold Exchange, was launched in September. The exchange was discussed last November when ANZ CEO Mike Smith and international and institutional banking CEO Andrew Geczy visited the region.

This gold exchange has the support of the Chinese central government and the nation’s central bank. With that in full swing, the plans next are to set up a crude oil and energy exchange, followed eventually by iron ore, base metals and cotton, among others.

This development is extremely important for Australia and New Zealand. Australia is a major commodities supplier in Asia and China is the largest consumer of these commodities.

Shanghai is an important port to import commodities, using the FTZ as a platform. So the FTZ is going to become a very important commodity trading centre for investors and Chinese consumers. In this way, the FTZ has increased strategic value for Australian and New Zealand investors.

As a major bank in the region, ANZ can play an important role in helping Australian and New Zealand customers benefit from the FTZ. ANZ is one of the very few Australian banks to have a sub-branch in the FTZ.

Over the past twelve or so months, the Chinese government has begun to release more friendly financial and commercial polices to help corporates in the FTZ quickly develop their businesses, reduce funding costs, and introduce more products.

Two-hundred years ago, London and New York were the world’s centres for commodity trading, based on the amount of commodity flows and derivatives in the regions. Now it is Shanghai which is leading the world in these areas, leaving China well placed to meet its lofty 2020 targets.

Mark Yang is a manager of ANZ’s Shanghai FTZ branch and also a director of commodities in global markets at ANZ.

Feature photo: Pilot Free Trade Zone's Pudong free trade zone in Shanghai, China, on Thursday, Oct. 24, 2013. Photographer: Tomohiro Ohsumi/Bloomberg via Getty Images.