What Impact Will the SFTZ Have on Trade?

As of September 29, 2013, the Shanghai Free Trade Zone is now open for business, but what impact will it have on trade? Opinions are mixed.

CNBC states that the Shanghai Free Trade Zone is No Match for Hong Kong, even though it is a 28.8 square kilometre district that many hoped would rival Hong Kong. Why? For starters, there will be no special tax treatments while Hong Kong’s 16% personal income tax will continue to retain talent and headquarters of global banks. Secondly, many much-needed* reforms in China, such as reforms on state-owned enterprises, public finance, land ownership, and the Hukou system won’t be part of the FTZ.

KPMG issued a special tax alert when the China (Shanghai) Pilot Free Trade Zone was Officially Launched with their observations. KPMG’s opinion on the zone that was designed to improve investment facilitations to meet international standards, deregulate currency exchange controls, and improve efficiency and flexibility in terms of government regulatory controls and legal environment specification include the following:

  • financial institutions will develop innovative financial services and products to allow China to be more competitive on a global basis once further reforms w.r.t. the convertibility of the RMBi is improved
  • allowed industries will have simplified administrative procedures to provide greater convenience for investors once the filing mechanism is implemented
  • the government may develop preferential policies towards promoted industries
  • breakthrough reforms are required in terms of foreign exchange control

In other words, they expect that, in time the zone, for preferred industries, will simplify and enhance trade while providing companies access to new, and innovative, financial services. However, for now, the benefits are limited.

Time, said that Shanghai has a Free-Trade Zone, so Now What?, noting that there is great concern among Chinese policymakers about opening the inexperienced domestic financial sector too quickly to the global marketplace. As a result, it is therefore hard to gauge at this point how far and how fast the Shanghai free-trade zone will be allowed to develop, and there’s even more uncertainty about when any reforms attempted there will be introduced on a wider scale. In addition, many analysts expect the reforms to come slowly and have doubts about how readily they could be applied to China as a whole.

Conclusion, the zone has great potential, but at the present time, it’s not likely to take off too fast until the reforms are decided and made known. Any differing opinions?

* In the opinions of some.