FTZ investment rules need gradual loosening

Moving too quickly toward reforms may trigger unintended consequences

The Shanghai municipal government released a revised negative list for the city's free trade zone (FTZ) Tuesday, which shortens the number of restrictions on foreign investment by more than one-quarter.

The original list, issued by Shanghai officials last year, covers over 1,000 industries in 18 sectors. Included at that time were 190 items limiting foreign ownership in certain areas of the economy, a list which has since been trimmed to 139 items.

Since its inception, the negative list has been billed as an innovation in government management, one which is expected to simplify the administrative approval process and enhance the productivity of officials. According to its proponents, the list grants foreign investors more freedom to invest in sectors which are not explicitly defined as off-limits. By whittling this list down, authorities are once again showing their determination to streamline the country's bureaucracy and liberalize the economy, particularly the financial sector where many of the biggest changes were made.

It is heartening to see the Shanghai government press forward with its efforts to develop the FTZ through greater openness to foreign investment. But for the sake of all parties, planners should not get ahead of themselves. Amendments to original FTZ rules and restrictions should be made at a moderate pace to ensure safety and stability. In the case of the negative list, shorter isn't necessarily better. Quality and efficiency should be the benchmarks by which reforms are judged.

Over the past year, some have criticized the negative list as being just a copy of the existing Foreign Investment Industrial Guidance Catalog, which is effectively a "white list" that lays out areas of China's economy where foreign investment is permitted.

FTZ authorities responded to this criticism by saying that their list was indeed based on the catalog, as well as national laws and regulations on foreign investment. In fact, with a basis in relevant laws, it was surely no easy feat to reduce the zone's negative list, as doing so must have required extensive alterations to existing rules. Such a step would also be necessary to prevent future lawsuits and disputes within the zone.

But with the law coming into play, the need for gradual reforms once again becomes apparent. This is all the more true since the negative list represents a new, and relatively untested, government management model that authorities will surely need time to explore and perfect.

Local leaders in Shanghai and elsewhere have a history of directly intervening on the business decisions of enterprises within their jurisdictions. The negative list is meant to pare down such involvement, which could lead some related government departments to clash over conflicting interests. At the same time, there is also the possibility that broader foreign investment access could create tricky loopholes.

Meanwhile, since the reduction of the list indicates that more sectors will become open to foreign capital, related industry regulations will have to be adjusted to reflect such changes. Just scaling back investment restrictions won't be enough. A unified mechanism is needed to make sure that vital regulatory safeguards are not compromised.

The government is correct in its continued control of strategically important sectors and industries. The agriculture industry, for instance, must remain dominated by State enterprises. Similarly, foreign investment is still tightly controlled, for good reason, in certain areas of the agricultural value chain, including seed production and grain processing.

With so much attention now focused on the quantity of items left on the FTZ's negative list, the government cannot neglect concerns about quality. Authorities in Shanghai should not rush ahead with sweeping investment policy changes without careful forethought and an eye toward potential pitfalls.