Executives laud reform, point to unfinished agenda
Shanghai has always been at the leading edge of innovation and economic reforms. The city’s latest chapter in new thinking is the first-of-its-kind free trade zone now entering its second year in operation.
The China (Shanghai) Pilot Free Trade Zone shoulders the responsibility of implementing some of China’s most ambitious reforms to put the economy on a more market-based footing. If the experiment proves successful, it’s expected to be rolled out across the nation.
So far, policies in the zone to reduce red tape, simplify customs procedures, limit government interference, widen market access across service sectors and deregulate financial markets have drawn considerable attention and guarded praise.
Among the most vociferous cheerleaders are foreign companies that stand to benefit from more open policies. Several senior executives of multinational companies have shared with Shanghai Daily their views on what the zone has achieved thus far and what it needs to do to realize its full potential.
“We are already seeing the opening-up of several industry sectors that were formerly restricted or outrightly banned from foreign investment,” said Orit Gadiesh, chairman of Bain & Company, and who has been chairman of the Shanghai mayor’s International Business Leaders’ Advisory Council since 2012.
“In combination with the financial deregulation that is underway, multinational companies will be able to get more deeply involved in the Chinese economy, and they will be able do so in a more cost effective and efficient manner,” Gadiesh said.
As of September 15, the zone had attracted 1,677 foreign-funded firms, accounting for 13.7 percent of companies that have registered in the zone.
In a research report done by PricewaterhouseCoopers, nearly 60 percent of 125 respondents said the Free Trade Zone is an attractive destination for their Asian-Pacific headquarters.
One of the biggest innovations in the zone has been the “negative list” system, which enumerates sectors off-bounds for foreigners.
Despite its name, the list has been a positive for foreign investment because it replaces a former system that stipulated which sectors were open and required lengthy paperwork to enter. The new system basically throws the doors open for companies to operate in a much wider realm and simplifies procedures for business registration.
Since the list was first unveiled, it has been steadily whittled back. Earlier this year, the zone’s regulator eliminated a quarter of the sectors on the list. The government has pledged further reductions in the number of off-limits business activities.
“I certainly hope the list will be kept as short as possible, but the implications of the list are much more important than the number of items,” said Albert Ng, chairman of Ernst & Young China, “It adopts an international practice, allowing foreign investors to conduct any businesses not on the restrictions list.”
While achievements abound, there’s still much work to be done by the zone to produce the genuine market reforms foreign companies expect — reforms that can galvanize how business is done in China and how China relates to the rest of the commercial world.
Financial reform remains a sticking point. Foreign investors want to see polices that deregulate interest rates and allow freer flow of capital. That has not happened yet. A lack of clarity persists in many key policies, and ambiguity surrounds issues such as how taxes are levied.
“It is crucial that the government continue to enhance its services for companies beyond simply issuing new regulations,” said Elton Huang, Shanghai senior partner with PricewaterhouseCoopers. “A major task is to settle details for policies already applied in the zone, especially when it comes to interdepartmental regulations.”
Huang said it would be wise for the government to set up a coordinating body, especially in the financial sector, in order to avoid overlaps and loopholes in the reform process.
Also, there is more room for further reduction in government meddling.
Helen Wong, president and chief executive officer at HSBC China, suggested the zone’s regulator further ease controls on offshore lending. At present, bank loans cannot exceed a client company’s net assets.
“We look forward to some relaxation on that because banks have their own risk controls to decide how much they should lend to clients,” Wong said.