Report on the Tongji Forum on the China (SH) Pilot FTZ

1. Introduction

The Forum was organized by the International EDP Center of Tongji University that offers Seminars, Workshops and Training sessions to all branches of Industry in all the managerial disciplines and on hot issues for corporations in China.

Of the 130 participants, most were managers in private companies, Chinese, foreign and JVs alike. A dozen of (mainly European) Consuls Generals and Consuls, attended also the morning session.

The morning session was devoted to Lectures and a Panel debate, the afternoon session (after lunch break) was devoted to work-groups.

After an Introductory speech by Dr JIANG Bo, VP of Tongji, the full-day proceedings were divided in 3 parts:


a. Morning Session.

i. Three keynote presentations by Prof ZHOU Zhenhua, Prof ZHOU Hanmin and former DG of WTO, Pascal LAMY on the topic Place and role of the China (SH) pilot FTZ on the national and the global scenes.

ii. A Panel of 5 business managers in the following sectors: shipping, logistics, taxation and banking who discussed the interests of their business sector in the FTZ. The Moderators were Prof WU Jianwei of Tongji-SEM and Mr Dominique de Boissesson, former CEO of Alcatel Asia and Chairman of A Capital, a private equity firm.


b. Afternoon Session

i. Three work-groups for all participants who discussed their expectations of the FTZ, raised several questions and issues on the Pilot Project and made suggestions, each one from his perspective, on the ways business interests can benefit from it. The working groups were facilitated by the Moderators and by the Director of IEDP who reported the content of the debates to all participants in a final plenary session at the end of the day.


 2. Keynote speakers

All emphasized the originality of the present Pilot Project that concerns the entire country and not only or particularly Shanghai. Prof ZHOU Zhenhua and Prof ZHOU Hanmin focused on the national parameters of the China (SH) Pilot FTZ:


Prof Zhou Zhenhua analyzed the role of the SH FTZ on the background of the need to “better adapt to the higher standards and requirements of the new global economic environment, to be in line with the international practices”. Speaking of the negative list for foreign investors he remarked: “Strictly speaking, the negative list we offered last year is not a real negative list. It was more like a summary of some foreign investment related files, but whatever it takes, we finally took that step. It was just like the first step of a baby. You know how important it is. As a result, late last year, our leaders specially asked us to work out the strategy for the year 2014, not on the basis of the released list, but a new promoted one. Since we also have the strategy for 2015, we shall design a better negative list”. He then spoke at length of the need to reform the regulatory systems for monitoring consequences of the new measures for opening up the market access and the financial system. He explained that these systems will need to be tested gradually and that this process will take time.


Professor ZHOU Hanmin pointed out that the reforms introduced in the FTZ will have a positive impact on the Bilateral Investment Treaty negotiations between China, on the one hand and the USA and the EU, on the other. He insisted on an important change in the way the new set of reforms is introduced: this time, the new rules and laws precede the changes in practice. He then spoke of the fifth modernization of China: after the modernization of agriculture, of industry, of national defense and of science technology, this time it is the modernization of the financial sector, its governing mechanism and capability.


Pascal LAMY, speaking from a global perspective, noted that the FTZ is a “litmus test for the new phase of China’s economic development” and that “building on that experience, further developments in openness are to be expected in the near future”. With the changes in global value chains, China needed to react and find new avenues for assuring growth. FTZ will focus on liberalization in services, investments, finance (freeing interest rates, opening capital account, stepping towards RMB convertibility, aligning SH to become a financial center like HK and Singapore), facilitating custom clearance process. China, he said, will be “ahead of the moves” already taken by other countries to implement the WTO Trade Facilitation process.

LAMY referred to the radical shift introduced by the negative list approach and the general expectation to see this list shortened in the coming months and years. He considered the place and number of SOEs in the national economy and the process of their necessary adaptation to market forces to be “a major issue”.

He concluded in saying: “this process of reform, like the previous one, will not be painless, some sectors will resist, others will be impatient to see the process going forward at a quicker pace, new management methods will need to be applied”. Based on the past experience, however, his view is that the FTZ will help China as a whole to move in the right direction for assuring sustainable growth.


3. Panelists

The Panelists touched upon the following issues:


a. General observations concerning the China (Shanghai) FTZ

Industry's reaction: wait and watch, while it takes time for the concrete policy to come out and some disappointment is inevitable, all panelists expressed their assurance that the China (Shanghai) FTZ will be not only successful, but a signal for further openness.


b. Why there is a FTZ

i. For the Regulator/government, the need to reform is clear. The need to change from consumption driven, 'extensive' economy to value added economy or something else has been widely recognized. FTZ is (or should be) an experimental area for it. So far has it served this purpose? It cannot without concrete policy guidance.

ii. For the market, FTZ is supposed to attract more trading volume, both in services and merchandizes.

iii. So far, the large number of company registered in FTZ is more for speculation: people register because they do not want to be left out if some good policy would come out of FTZ.


c. Shipping related issues

i. Tax refund in the port of origin for domestically transshipped export cargo. - Practically, it takes very long to get the tax refund. Relying on tax authority in different provinces to complete this procedure seems to be “mission impossible”.


ii. Allow Chinese owned, flag of convenience vessels to trade on domestic voyage - this item seems only or mainly to benefit Cosco and China Shipping. Not clear how this is supposed to provide real benefits.


iii. Allow more than 50% of foreign stakes in ship management JV companies - this was in the gray area, the market was doing it to a certain extent already. Policy makers are doing well in following the market, at the same time it means the impact is less than what it looks on paper!


iv. Finance and shipping hub.

· FTZ in Shanghai also coincides with the plan to build Shanghai as a Finance and Shipping centre. So the objective should be at least to emulate HK and Singapore. People and companies chose HK and Singapore because of their finance, legal and education systems, as well as their eco-system. The question is: has FTZ taken any concrete steps to take Shanghai towards that direction?


v. Bonded areas.

· Take a step back, look at FTZ only as a bonded area. Jebel Ali, Busan, Bahrain are successful examples. - is Shanghai FTZ running as efficiently and professionally as them? (a genuine question)

· Shenzhen is also a good example of success. Shenzhen's special economic zone had a clear question to solve: Chinese economy needs to change from central planned to market oriented and Shenzhen was the 'guinea pig' and after proven successful, it was adopted in the wider country. Will Shanghai FTZ be able to achieve the same or even more?


vi. Cabotage

Currently, in the FTZ, Chinese Shipping Company with International Convenient Flag have access to the cabotage business along the coast. We suggest all foreign owned regular cargo ships could engage in cabotage along the coast. In such case, the Chinese export cargo can be transited in Chinese harbors rather than in Busan or Singapore. If we can introduce the cabotage alongside the Chinese coast, we can ask US and EU countries to open their coast for cabotage by COSCO and China Shipping Co. China now has enough bargaining power for stipulating new rules.


vii. Tax Refund Upon Departure At Initial Loading Ports policy

Now, it is adopted in Qingdao and Wuhan if they transit in Yangshan Port. We suggest this policy can be introduced to all other ports which have their transit in Yangshan Port so as to benefit all consignors.


viii. International & Domestic mixed LCL (less container load) transshipment at FTZ

In order to forcefully enhance the international transshipment business of Shanghai harbor, it is suggested that Shanghai Customs House allows the International and Domestic Mixed LCL transshipment by learning the Convenient Clearance Procedure in Hong Kong and Singapore.


4. Work-groups

Participants in the 3 respective Work-groups raised the following issues:


Expectations from FTZ


Foreign entities’ perspective:

· the most important expectation is clarity. Foreign enterprises are reluctant to participate in the FTZ until they know exactly what they can and cannot do. Some financial institutions are hesitant to enter the FTZ because they don’t know what could be done inside. They see little use in setting up the office or entity in FTZ, they just sit back and wait.

· There is great need for FTZ informative materials in English and/or other foreign languages.


Local companies’ perspective:

· To get cheaper capital from overseas. Currently in overseas markets, there are low interest rate (3%) loans available. However, in China, the rate is as high as 6% or even 12%. There is a huge gap in terms of the cost of financing. Can Chinese companies, especially the SMEs, get access to cheaper capital through FTZ?

· Information and regulations are not clear enough. Taking Waigaoqiao as an example, it is quite unclear whether companies need to have an office inside Waigaoqiao or not.

· For local residents, Chinese people have a great demand for foreign goods, including some luxury goods. Could they buy the foreign products with lower price through the FTZ at some point? And what opportunities are there for private entities and local residents?

· The goal of FTZ is not to lower the price of foreign goods. However, it will have indirect impact. For example, through FTZ, the supply of foreign products will increase. Then the price will decrease.

· Another potential benefit is that local people and companies will have the chance to learn advanced ideas, business models and new technologies from overseas companies while, at the same time, foreigners can also learn some advanced knowledge from local people.

· If you have your headquarters in Shanghai, you may have money in Japan and debt in Korea. The cost will be very high if you do the settlement and liquidation in different countries. If multinational companies with regional headquarters in Shanghai can establish a unified cash pool, then they can minimize their settlement costs and improve the efficiency. This policy will attract more multinational companies to set their headquarters in Shanghai. A proposal to this effect, made in 2005, did not pass, but it now seems that the government is considering this proposal again. A comment was made, on this issue, by another participant: “according to Article 30 of PBoC, there is already a policy allowing to set up of the cash pool for MNC in terms of its regional headquarters inside the FTZ. In fact, there are some MNC that already started such pilot.”.

· In the private sector, an FTZ Association was already set up, attempting to provide the government with feedback and advice. The Association sincerely invites the foreign experts to join their expert advising panel.


Mid-size overseas investment:

· Will FTZ help the approval for Chinese middle size overseas investment project? Large size investment projects need the central government’s approval. For medium size investments, such as 100 million RMB projects, how can the approval be made quicker and the waiting time shortened through FTZ?

· Financing such medium size projects is very difficult. Can the Shanghai Pilot FTZ help lower interest rate loans etc.? Can European banks and financial institutions grant financial support to Chinese companies that are interested in M&A and other overseas projects?


Expansion of FTZ:

If the FTZ wants to succeed, it will need to expand, because now it is very small. In order to be truly successful, the FTZ should probably expand to the whole Pudong district. If companies know that in the near future the FTZ will expand to the whole Pudong district, companies may choose not to set up office in the remote Waigaoqiao bonded area.


How to attract talents to the FTZ?

· Shanghai can learn from Singapore and Hong Kong and attract talents through tax policy, lifestyle, education, salary, benefits, etc.

· It should be made easier for talents to come and stay. The new revised visa requirements are more restrictive than the previous ones because some of the foreigners took advantages of the business visa without paying required income tax in China. However, if we want to attract people to come in, we should simplify the entry, sojourn and exit conditions and procedures. For example, the application procedure for a Hong Kong visa is identical to the procedure for a visa to mainland China. However, once a visa is approved for Hong Kong, one can obtain a Hong Kong foreigner’s ID card. With such card there is no difference between foreign residents and local citizen when entering and exiting Hong Kong.

· The individual income tax is also an obstacle to attract talents. In Hong Kong, the income tax rate is 15%. In mainland China, the income tax is between 15% and 45%. Most of the talents and experts reach the highest level of tax rate, the 45% level.


Taxation issues

For foreign founded companies currently operating business in, for example, Taicang:

· Should such companies set up a manufacturing entity inside the FTZ or only set up a trading company? Which choice is better?

· What kind of tax exemption policy and what kind of corporate income tax for a manufacturing company inside the FTZ?

· Currently, there is tax exemption on investment in equipment inside the FTZ. Is such tax exemption applicable also in case the supplier of the equipment is from the local market and not from overseas countries?


Clear rules and available information

· SAP, for example, needs to adapt their ERP system to changes in the regime of cross-border trade for taxation purposes and other logistics aspects. However, they need clear rules of the new regime.

· Until now government decisions have been made in a pragmatic way and firms needed to navigate between contradictory applications of pragmatic rules. It is important to realize that businesses need clear rules and laws known by all and well understood by the civil servants who have to apply them.

· The opening of a government Portal would save a lot of human costs and increase the availability and quality of information for which the business sector is so thirsty.


Other issues

· One foreign company’s representative said his company is long established in the area that has become the FTZ. However, 5 months after the announcement concerning the FTZ, they still do not know what benefits they can draw from the FTZ.

· An entrepreneur in the creative industries business asks whether the FTZ, as a Platform, could help turn Shanghai into one of the world international art business centers, like HK, Paris, London, NY. To attract Christie’s and Sotheby’s there is a need to bring domestic policy in line with international practice.

· A free lance MD wonders what could the FTZ contribute to her business of translating TCM literature into foreign languages.