Chinese FTZs step into a new era

Following the model of the Shanghai Free Trade Zone, established in 2013, China anticipates opening seven new free trade zones (FTZs) in the coming year, with zones in Sichuan, Shaanxi, and Hubei already nearing readiness to begin operations. Whereas the Shanghai FTZ and three other current operational FTZs – Tianjin, Fujian, and Guangdong – are all built in China’s eastern, coastal industrial hubs, the new zones are largely inland, in central and western states, some of whose industrial bases are comparatively underdeveloped.

China’s first Special Economic Zones (SEZs), developed in the 1980s, offered relatively liberal investment incentives to foreign companies, spurring rapid industrial growth and cementing a segment of Chinese government and business leadership firmly committed to liberalising reforms. The Free Trade Zones build upon the remarkable successes of the SEZ programme, offering an expanded “negative list” of customs and foreign investment procedure exemptions. The Shanghai FTZ now accounts for more than 40% of Shanghai’s total exports, growing its trade volume in 2016 alone by 6.5% to nearly US $120 billion. It consists of a logistics park, a traditional Export Processing Zone, a specialised financial centre, and a high-tech park.

“We have not stopped liberalising the financial sector,” Shanghai mayor Ying Yong was quoted as saying in South China Morning Post (SCMP) in January 2017, speaking in public about the need to enhance FTZ incentives even further. “We will create new vitality in economic activities through deepened reforms. We will unswervingly push the development of the free-trade zone and an innovation centre for science and technology.”

Working westward: Chengdu, the capital of the southwestern Sichuan province, has experienced rapid trade growth in recent years, and hopes to capitalise on improved logistical access to Central Asia and European markets with its FTZ. The province reports that the recently completed 9,800 km Chengdu-Europe Express Rail, part of the Belt and Road Initiative (BRI) aiming to logistically integrate Eurasian trade, carried more than US $300 million of local products to Europe in 2016 alone. Products which account for these Europe-bound exports include television and home electronics, laptops, tablets and smart phones, auto parts, et al., and all are likely to have a presence in the new FTZ. Sichuan officials report that more than 10,000 business licenses had already been registered for the zone as of the end of 2016.

China also inaugurated a Chengdu-Central Asia Express Rail in July 2014, and major BRI infrastructure investments in neighbouring Central Asian trade partners, including a $50 billion commitment to Kazakhstan, portend an expanded influence of Chinese-manufactured goods in those countries. China overtook Russia in 2015 as the largest foreign investor in the Central Asian bloc. China is also collaborating with the Kazakh government in developing the Khorgos Free Trade Zone, established in 2014. Forbes reported in July 2016 that the free zone had failed to meet expectations, but officials are hopeful new investments in rail and logistics and an expanded SEZ on the Kazakh side will goose trade prospects.

Negative positives: Chinese Premier Li Keqiang has been a vocal advocate of expanding the “negative list” of incentives in Shanghai FTZ and China’s other FTZs, in order to usher in broader liberal reforms. “Over the past three years, Shanghai municipal government, the Ministry of Commerce and other government agencies have been focused on reforms with a keen determination and made substantial headway” in developing FTZs, he said in a recent statement. SCMP’s George Chen reported in 2013 that Keqiang had received significant opposition from several Chinese regulatory bodies on his initial FTZ liberalisation proposals. However, following the progress of Shanghai FTZ in expanding the city’s exports and attracting FDI, Chinese President Xi Jinping has recently expressed support for the model, and Shanghai FTZs incentives will be copied throughout the country. Flagging exports in 2016 on a national level, and the threat of trade disputes with China’s largest trade partner, the United States, make FTZs crucial foundational pieces of short- and long-term Chinese growth strategy.