FTZ viewed with hope, skepticism(2)

Blueprint for change

A government blueprint of the FTZ shows more than 90 policies. The policies, which cover five major areas, are:

Transforming government functions

Easing restrictions on foreign investment

Facilitating international trade by further opening the service sector

Deepening financial reform

Improving the regulatory and taxation systems

"While previously other similar zones, including the Shenzhen Special Economic Zone, focused on 'incentives' by adopting favorable income tax policies, customs and (value-added tax) breaks, the Shanghai FTZ is intended to be a testing ground for a largely free and open economy as measured by international standards," said Steven Zhang, managing director at New York-based Fund Tax Services LLC.

But Zhang, a Shanghai native, said the FTZ's tax policies will be "expected to be in line with the direction of overall tax reform in China and international practice.

"They will remain subject to study and adaptation, so as not to erode the tax base and to align with China's overall tax system for foreign investment," he said.

Norm Page, a partner at Davis Wright Tremaine LLP, a US business and litigation law firm, and chair of the firm's China practice in Shanghai, said that financial leasing companies will be encouraged to start up in the FTZ. That will include factoring activity (selling of accounts and collecting debt).

"China wants to help small and medium-sized enterprises (SMEs) get more access to financing. SMEs are the biggest source of job growth in both China and the US," said Page, who has lived in Shanghai for seven years.

In one major difference from China's other economic zones, which emphasize manufacturing, the Shanghai FTZ focuses more on the finance industry. That's an area that Chinese and Western economists have argued should be liberalized to boost the economy.

Banking regulators have already moved to allow 11 financial institutions, including the Industrial and Commercial Bank of China, Bank of China, Citi (China) and DBS (China), to set up branches in the zone.

The idea that these foreign banks can participate in equity and capital markets freely in the FTZ will mean more capital for the economy, which "also takes stress off the central bank", said Gutierrez.

"The next big opportunity is, in general terms, services — specifically financial services — and to open up financial services can be the next engine for economic growth for China," said Gutierrez, who served as vice-chairman of Citigroup Inc's institutional clients group.

Christopher Wells, a partner at Bingham McCutchen, a global law firm with offices in China, said that lifting some restrictions on financial services is just a very "modest" change.

"All financial markets that compete with Shanghai — Hong Kong, Singapore, Frankfurt, New York, London, Paris, Los Angeles, San Francisco and Sydney — already allow this and have allowed it for decades," he added.

The FTZ will create conditions to test yuan convertibility under the capital account, market-determined interest rates and international use of the Chinese currency within the FTZ. Citigroup is one of those institutions that plan to set up a branch in the zone.

Watershed moment

Gregory Chin, a professor of political economy at York University in Toronto, Canada and a former Canadian diplomat in Beijing, said the new policies in financial services for the zone mark "an important watershed moment" in Shanghai's efforts to build a greater role as a hub for onshore renminbi business as well as cross-border renminbi business.

"For a long time, especially since China entered the World Trade Organization, foreign banks and financial interests have wanted more room to operate inside the Chinese market, especially in the Shanghai area," said Chin.

"Foreign financial institutions see enormous business potential inside China, especially if they can expand into more areas of renminbi-based lending and other renminbi-denominated financial activities."

Sophii Weng, an economist with Standard Chartered Bank in New York, said the Shanghai FTZ is still in "conceptual territory", even with certain new policies in the banking sector. She said the blueprint for the banking sector lacks "details".