Shanghai’s Free Trade Zone: What should your strategy be?

Written by Zennon Kapron || 28 Oct 2013

Few initiatives in the past couple of years have captured the attention of China’s financial services community more than the recently opened Shanghai Free Trade Zone. Situated in the eastern part of Shanghai and encompassing 29km2 of land which, like the rest of Pudong, was all farmland as little as ten years ago.

 

The Zone to Rule all Zones

Depending on who you speak with, the Shanghai Free Trade Zone will either be a bastion of financial industry reform and opening, unseen since the great opening of the late 1970s where unbridled capitalism reigns free and unhindered, or it will be a mini-HK, where bankers are saved the long-distance phone charges to HK, but not much else.ShanghaiFTZ

Either way, following the developments of the Shanghai Free Trade Zone is critical for any company in, or closely tied to China’s financial services industry to pay attention to. Citibank and DBS have already made big bets, and others might soon too.

One of the most pressing questions we get from clients today is ‘what should their Shanghai FTZ strategy be?’ Many clients in the past have been frustrated by regulations in China and so the idea of setting up in the Shanghai FTZ has a lot of appeal as a way to avoid the challenging regulations in the rest of the mainland China market.

More of the same?

Currently, the FTZ doesn’t actually offer much. The rules and regulations are very similar to what a foreign company would face in the rest of mainland China, however the way they are structured is slightly different.

Presently in mainland China, there is a list of activities that foreign companies can engage in. So as an example, a foreign company can do consulting, which is on the list, but cannot do advertising, which is not. In the Shanghai FTZ, the list is actually reversed, so instead of listing what you can do, it lists what you can’t.

Now, realistically this doesn’t make much of a difference, but the reversal shows a bit of the government’s attitude towards regulations in the industry – it’s much easier to take something off the list than it is to add it on. Although it’s subtle – we see this being as a key indicator of the government’s intent and interest, essentially saying that things will open up in the future. Although the key national leaders and instigators of the FTZ didn’t make a showing at the opening, we do believe that the Shanghai FTZ will be a test-bed for future China reform.

Ok, I got it – now what?

So with that in mind, what should you do? Well, Citi and DBS as two examples, have already made a commitment, and to us, this makes sense. The cost for entering the zone currently is still relatively low. Registration fees are as low as US$1 as an incentive and renting an office will set you back another US$1-3k / year depending on what you go for.

That’s not to say that things won’t be just as easy or cheap in the future, but right now, for a small investment, you can make sure you’re part of the zone as it does start to open up. Someone who enters a year or even 6 months from now may not have that opportunity.

Of course the opportunity and what you should do really depend on your company’s individual position. There are some Chinese government agencies and organisations that have been setup to help companies navigate entrance into the FTZ, but we’ve found that the best sources of information on the zones, at least for foreign companies, are the different Chambers of Commerce. The Shanghai American Chamber of Commerce, British Chamber of Commerce and European Chamber in Shanghai have all had extensive conversations with the government and the FTZ zone managers so typically have a pretty clear idea on the current status.

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