Domestic companies outnumber offshore firms in FTZ

Foreign investors still trying to understand zone's framework and awaiting more details, official says

Foreign investors are still cautiously optimistic about the China (Shanghai) Pilot Free Trade Zone, though such enthusiasm was not reflected in the number of business registrations, which mostly came from Chinese companies, officials said.

By the end of last week, the FTZ had approved the registration of 38 foreign companies within its 28-sq-km area, with total registered capital of $560 million, according to data released by the Shanghai government on Thursday.

But the figure was overwhelmed by that of domestic companies: Nearly 1,400 Chinese investors have registered a new business in the FTZ to tap into opportunities in potential reform, with total registered capital of 34.7 billion yuan ($5.66 billion). 10 times that of their foreign counterparts.

Trade and service are still the major sectors targeted by the new companies, accounting for 69 percent and 26 percent of the total, respectively.

The number doesn't seem to be in line with the FTZ's identity as a platform to showcase openness, but officials said the attitude of foreign companies cannot be judged merely by these figures.

"We don't feel we've been deserted by foreign investors," Dai Haibo, deputy head of the FTZ's management committee, told members of more than 100 domestic and foreign media outlets at a news conference.

"I have talked with top managers from leading global companies who have shown great interest in the FTZ," Dai said, naming Goldman Sachs and Allianz Insurance.

It is the first time that local authorities have openly discussed the area, which was regarded as a major reform step taken by the world's second-largest economy.

After its official launch at the end of September, the FTZ adopted innovative management measures and cut bureaucracy, but it has taken criticism for the slow pace of its opening steps.

The "negative list" management approach used in the FTZ, which regulates only the restricted areas with all the off-list sectors free to enter, already has played an active role in promoting foreign investment.

Among the 67 applications the FTZ has received for establishing a foreign company, 55 of them, or more than 80 percent, aimed to tap into the opportunities offered in the "off-list" area, Dai said.

"An open economy applies not only to foreign enterprises but to domestic companies as well," Dai said, adding that the FTZ aims to create a fair competitive environment and lower threshold for private capital.

An obvious phenomenon was the enthusiasm of smaller businesses in the area, "which we've only seen during the development of Pudong New Area in the 1990s," Dai said.

"The stance of foreign companies is more like that of larger State-owned companies, being calm and cautious, and taking actions only after thorough evaluation and preparation."

According to statistics released last week, the average amount of registered capital from foreign companies in the FTZ was $15 million, whereas from Chinese companies it was only $4 million.

In the meantime, most of the foreign companies are still trying to understand the FTZ's framework and are awaiting more details, Dai said.

According to Ai Baojun, vice-mayor of Shanghai and head of the FTZ management committee, a detailed plan of the most-expected financial reforms, including interest reform, opening of the capital account, reform in the exchange rate regime and a larger cross-border flow of yuan, is still in the preparation stage.

"The priority of financial reforms is technical arrangements, and opening the financial sector should be carried out only when possible risks are properly dealt with, which we found is a very complicated process," Ai said, without elaborating.

But the People's Bank of China, the central bank, will soon release supportive measures in the financial sector, and the overall rules of the FTZ will be out in the first half of 2014, Ai said.