The Shanghai Free Trade Zone is opening up business opportunities in China across a range of sectors, especially within financial services, writes Sophie Loras.

The Shanghai Free Trade Zone, which opened in September 2013, is laying the foundations for hina’s next round of economic reforms – especially in the areas of the liberalisation of exchange control and the internationalisation of the renminbi.

Lewis Lu, KPMG’s Partner-in-charge, Tax Eastern and Western China Region, has been working closely with the Shanghai Free Trade Zone’s authorities from both a financial institution and policy aspect.

Mr Lu says China already has a number of trade zones and industrial parks with preferential policies. “The difference with the Shanghai Free Trade Zone is that it is an experimental ground for policy initiatives before they are rolled out to the rest of the country.”

“Clearly [the Chinese government] has wanted to introduce innovative financial policies which includes the cross border use and internationalisation of the renminbi and the relaxing of foreign exchange policies,” says Mr Lu.

The other major benefit has been reducing the approval processes and entry barriers for new businesses. This will see set up times in China for regulated businesses operating within the SHFTZ, reduced from one month to just four days.

The zone also makes it easier for Chinese companies to engage in outbound investment.

Considered a pilot free trade zone, it has the backing of Chinese Premier Li Keqiang and is being used as a testing ground for a number of economic and social reforms.

The SHFTZ presents many new opportunities and flexibility for financial institutions, multi-national corporations, domestic Chinese companies investing aboard as well as for trading companies and trading related vendors.

“Compared to other free trade zones or special zones in China, the SHFTZ will be a pioneer of new economic policies and will focus on systematic innovation instead of piece by piece special treatment or tax incentives,” says Shanghai-based King & Wood Mallesons Partner, Stanley Zhou.

“Leveraging the SHFTZ, Shanghai is in the process of building up an international financial center, as well as trading centre, shipping centre and logistic centre, and an innovative government administration system here will create a better commercial environment for foreign investors, of an international standard.”

ANZ China is the first Australian bank to open a sub-branch in the free trade zone. Launching the sub-branch in April, ANZ Chief Executive Officer Mike Smith said Asia was well on track to dominating global financial markets by 2030 with Shanghai fast becoming a global financial centre.

*Pictured right: ANZ China is one of the first Australian banks to open a sub branch in the Shanghai Free Trade Zone. From L-R: Mark Yang ANZ SHFTZ Sub-branch Manager; Mike Smith, ANZ Chief Executive Officer, Andrew Robb, Australian Minister for Trade and Investment, Jian Danian, Deputy Director of China (Shanghai) Pilot Free Trade Zone Administration, Charles Li, ANZ China CEO.

He said ANZ was well positioned to participate in China’s financial market deregulation through its positioning in the SHFTZ.

“This new branch will help our customers in China access international trade finance services with tax and tariff advantages,” Mr Smith said.

Under the SHFTZ’s current regulatory framework, the sub-branch will offer a range of banking products and services including trade finance, foreign exchange, commodity finance and cash management in both foreign and local currencies to ANZ China’s customer base of large, Chinese and multinational companies.

Westpac has also established a sub-branch in the Shanghai Free Trade Zone, after receiving approval from China’s Banking Regulatory Commission.

The approval marks a significant milestone in the extension of Westpac’s service offering in China across trade finance, structured commodity finance, debt capital markets, derivatives and foreign exchange.

Gail Kelly, Chief Executive Officer Westpac, said the bank was committed to helping the bank’s customers build stronger opportunities within China. “Our presence in the Free Trade Zone marks a significant step toward providing even deeper support,” she said.

Mr Andrew Whitford, Westpac’s Head of Greater China says the Shanghai Free Trade Zone has the potential to bring large benefits to foreign companies.

“We see opportunities for customers in our home market as well as our multi-national client base that are keen to take advantage of the benefits that the Shanghai Free Trade Zone offers.”

These benefits include fewer restrictions for raising capital in China, and more simplified requirements and procedures for trade.

“A large number of our corporate and commercial customers already have business dealings with China and already demand, or expect their use of CNY-related services to increase,” Mr Whitford said.

Another significant benefit of the SHFTZ is the Negative List – a fundamental change in the zone, setting out sectors and industries that require pre-approval for foreign investment – in effect exempting all other sectors and industries from pre-approval for foreign investment.

“This will provide a transparent guideline to foreign investors, and is in line with the western regulation philosophy that you can do anything that is not prohibited by law,” says Stanley Zhou.

The 2013 Negative List remains long, however Mr Zhou says the list in itself is a positive development in China.

“The fundamental change is to have a negative list – once you have it, you can make it shorter as a next step.”

Mr Zhou’s advice to Australian businesses considering the SHFTZ is to continue monitoring developments in the zone as ongoing policy releases and clarifications are released in the process of legislation.

“We would accordingly suggest to our Australian clients to keep a close eye on the development of the SHFTZ and keep in touch with FTZ banks on any new financial services/products that they may offer,” he says.

“It is quite easy to set up a business presence in the SHFTZ. Investors need to look at the Negative List to first see if any pre-approval is required for them to start a specific business in the SHFTZ. If the contemplated business is not on the Negative List, foreign investors may go to the SHFTZ administrative hall.”

Dr He-ling Shi, President of the ACIM Group, which has been granted exclusive rights to operate the Australian National Economic and Trade Centre inside the Shanghai Free Trade Zone, says Australian companies already doing business in China are showing the most interest in the zone.

Almost two thirds of the Australian businesses already signed up with the ANETC, have existing operations in China.

Dr Shi says these companies are more aware of the opportunities the SHFTZ presents for them to better consolidate their business operations in China.

“The Shanghai free trade zone is going to open up 40 percent of the industries which have been either prohibited or restricted to foreign investments, mainly in the services sector – such as financial services, medical services, aged care, shipping and logistic services, entertainment, and professional services,” says Dr Shi.

“For Australian companies, the main benefits will come from the more transparent administrative system which will reduce the uncertainty of doing business in China, and, these industries which were once prohibited will now open to Australian companies.”

He says the Shanghai Free Trade Zone is significantly different from other free trade zones in that it is not focused on the “free trade” of goods, but rather on the liberalisation of the financial market and public administration.

The policy, which opens up some industries to foreign investment, will be exclusively implemented within the Shanghai Free Trade Zone until September 2016. After which careful evaluations of the impacts of this policy, the Chinese government will decide whether to implement it nation-wide.

“So for example, if you are a law firm, or an aged care facility, or a financial services company, you have to set up inside the SHFTZ to have access to these markets. And if you act now, you will have a three year-head start advantage over your competitors.” ■

KEY BENEFITS:

• Negative list – the 2014 Negative list will be reduced by 40 percent, mainly in the services sector
– which provides some good opportunities for Australian FDIs.

• As at March 17, 2014, of the 619 WOFEs in the Shanghai Free Trade Zone, 579 were registered without administrative approval.

• Chinese companies and people with an account in the zone (resident FTA account and non-resident FTA account) will be allowed to directly invest overseas without the need for pre-approvals or a cap on the total amount of money. However, it remains to be clarified how Chinese investors will be able to transfer the initial funds for investment from normal Chinese bank accounts and the new FTA accounts. Currently it remains subject to regulation.

• Foreign companies, with operations in the zone, can issue RMB denominated corporate bonds in the onshore market and repatriate the funds back offshore – which allows them to diversify their fundraising activities. China’s US$3,500 billion bond market is the largest in Asia, outside Japan.

• Cross-border RMB settlement for current accounts and direct investment could facilitate trades and investment between Australia and China.

• The Shanghai Free Trade Zone will open up a crude oil futures market – which provides an exciting investment opportunity for Australian speculators.

*Source: ANETC