The Ministry of Commerce of People’s Republic of China announced on August 22, 2013 that the State Council officially approved establishing the China (Shanghai) Pilot Free Trade Zone (known in short as the Free Trade Zone). This Free Trade Zone was unveiled on September 29. It covers four districts of 28.78 square kilometers, composed of Waigaoqiao Bonded Area, Waigaoqiao Bonded Logistics Zone, Yangshan Free Trade Port Area and Shanghai Pudong Airport Comprehensive Bonded Area, all of which are under the administration of the Custom’s special supervision.

Expert says the establishment of the Free Trade Zone is as significant as that of the Shenzhen Special Economic Zone. It will speed up reform with opening policies and bring about breakthroughs in investments in the service industry. Also it is likely to help China participate in the regional market, such as the Trans-Pacific Partnership (TPP). Considering local advantages and specialties are much varied around China, Shanghai may set up an example of a free trade zone to others in the future.

Free Trade Zone harvests achievements and challenges

Generally, experts express their optimism that the establishment of the Free Trade Zone will push forward Shanghai to become an international shipping center. It is expected that Shanghai port will stand out and spur the development of other ports along the coast of East China. But it creates a new challenge to the port industry on how to use the right policies to further increase the competitiveness of the port.

As the first de facto pilot zone to join the globalization with comprehensive opening-up policies, the Free Trade Zone means more preferential and opening-up policies. How to deepen and implement these policies is a pressing issue in need of an immediate solution.

The framework Plan for the China (Shanghai) Pilot Free Trade Zone (in short, the Plan) makes it clear the need to improve the international shipping service, which attracts most attention from the port industry. First, the Plan wants to explore and form a new shipping development mechanism and operational patterns of international competitiveness via the cooperation of Shanghai Waigaoqiao Port Area, Yangshan Deep-Water Port Area and Pudong Airport International Transportation Hub. Second, it requires the development of industries such as shipping finance, international ship transportation, international ship management and international shipping brokerage. The third need is to speed up the development of freight index derivatives trading. The fourth requirement is to promote Transit and Less Container Load businesses, allowing non-five-star flag vessels owned or indirectly owned by Chinese-funded companies to pilot the coastal container shipping between domestic coastal ports and Shanghai port. The fifth demand is to support Pudong Airport to increase transfer flights for international shipments, to utilize Shanghai’s regional advantages and the preferential tax policy of Chinese-funded “Ship of Flag of Convenience”, to promote eligible ships’ registration in Shanghai. The seventh need is to implement international ship registration policy in the Free Trade Zone, which has already been a pilot project in Tianjin. The eighth is to simplify the procedure of issuing international shipment transportation business licenses, for a new efficient ship registration mechanism.

In addition, innovation and opening-up in finance is another hot point within the port industry. Experts say that financial reform is the biggest challenge for the Free Trade Zone.

In the Plan, although not much detail explores the opening of a Renminbi capital, it indicates that it is acceptable to try and pilot Renminbi capital exchange projects in the Free Trade Zone under a controllable risk. Also, it is acceptable to try and pilot the trans-border use of Renminbi. The Plan encourages the exploration of the reform of international-oriented foreign currency management and the building of a foreign currency management system suited to the Free Trade Zone. In addition, the Plan suggests that eligible foreign financial institutions would be allowed to set up foreign-invested banks, and Chinese-foreign equity joint banks could be co-funded by Chinese private firms and foreign financial institutions. And piloting the setting up of restricted license banks in the Free Trade Zone at appropriate time is welcomed.

Offshore finance is an important part of the Free Trade Zone. Shanghai should build an offshore financial market along with the establishment of the Free Trade Zone. The Free Trade Zone will trial the risk management of domestic commercial banks’ offshore business and improve the offshore business mechanism. It is suggested eligible Chinese-funded banks should be allowed to run offshore business.

In respect of enlarging the investment field, it is stated the piloting of the Pre-Establishment National Treatment in the Free Trade Zone to give full play to the fundamental role of the market in resource allocation. The Free Trade Zone will take the lead in reforming in three respects: investment project management, foreign investing firm establishment and alteration administration, as well as industry and commerce registration.

Financial leasing companies or their project-based subsidiary companies registered in the Free Trade Zone may be applicable to the pilot export tax refund policies. The Plan suggests no minimum registered capital shall be required for a project-based company (that is a single-ship/aircraft company) set up by financial leasing companies in the Free Trade Zone and financial leasing companies will be allowed to conduct commercial insurance related to their primary businesses.

Meanwhile, the Plan suggests the overseas companies gradually be allowed to engage in commodity futures trading, and overseas commodity futures exchanges be allowed to assign or set up transaction warehouses. Once the transaction warehouses are built, they will partly replace LME Warehouse in Busan of South Korea and Singapore, reducing the trading cost for the domestic companies.

But it is a shame that preferential tax policies are being tightened up. No approval is given to that 15 percent enterprise income tax by reference to technically advanced service industry applicable to eligible project-based companies registered in the Free Trade Zone engaged in overseas equity investment as it is to qualified firms engaged in offshore business.

Also, it is worth mentioning that the Free Trade Zone sets forth a “Negative List” for the first time. This negative list can be seen as a “black list in the investment field, classifying those administrative measures aimed at foreign investors who fail to conform to National Treatment and Most-Favored-Nation Treatment, or the restrictive managing measures, such as performance requirements and executive requirements etc. The negative list is a worldwide investment access system. Until now, more than 70 countries have adopted the Pre-Establishment National Treatment or Negative List. “With the dividend of the system innovation, we can stimulate the vitality of the market. This is the biggest advantage of the reform and innovation this time,” said Dai Haibo, deputy secretary-general of Shanghai Municipal Government and executive deputy director of the Free Trade Zone Management Committee. He also said that with innovation in policies, such as the negative list, classifying what doesn’t meet the requirements will harden the confidence of foreign investors who want to invest in China.

The Free Trade Zone brings about new changes

Ever since the reform and opening-up policies were published in the late 1970s, port logistics have been playing an important role in economic development. To be a part of the entire logistics system and spur its integrating and radiating function are the role of the ports. That is to say that the ports should assume a leading position of international logistics and their function is supposed to organize, coordinate and integrate logistics. This matches up with the resources congested in the ports. However, along with the establishment of the Free Trade Zone, can the ports meet the developing requirements in the new environment？How do the ports undertake integrating and radiating effects?

To solve the problems above, we need to understand the possible new changes brought about by the Free Trade Zone.

At the China Port and Shipping Development Forum & China Ports, Shipping and Logistics Exhibition, Professor Wang Xuefeng, deputy director of the International Shipping Department of Shanghai Maritime University, explained as follows.

First of all, the structure of commodity types will be changed from massive import and export of processing supplied materials to the increase of high value-added products. International trading structures will also see changes, which means that supplied material processing business may turn to transit trading; Transit goods will increase, bringing in change in transportation structures. Second, in respect of forms, the Free Trade Zone will promote the upgrading of the current trading pattern, which is the transformation and upgrading of trade. Such change, if completed, is both an opportunity and a challenge for port logistics. The change will also give birth to new trading models and types, such as bulk commodity trading and futures delivery.

Under the changes mentioned above, service targets of ports logistics will also change accordingly to better serve the joint development within the Free Trade Zone, the integrated trading development between the Free Trade Zone and other regions at home and abroad, as well as the coordinated development between the Free Trade Zone and the shipping industry clusters outside.

As for how to seize opportunities raised by these changes, Prof Wang calls for the port industry to keep seeking for chances to bring about new development via innovations in technology, management, procedure and policy.

Opportunities have already opened up for the improvement of international shipping services, which has attracted the industry’s focus. For example, the development of Transit and Less Container Load businesses will be further promoted; non-five-star flag vessels owned or indirectly owned by Chinese-funded companies are allowed to pilot the coastal container shipping between domestic coastal ports and Shanghai port.

Transit and LCL business is always a hidden scar for Chinese ports. At present, international shipping transit in Asia largely relies on the traditional container terminal ports in Singapore and Busan in South Korea, etc. In the Chinese mainland, the ports are weak in terms of competitiveness in international transit. Now, the Plan is expected to accelerate the Transit and LCL businesses at the initial stage. Meanwhile, new functions of Shanghai port are expected to be improved, paving the way for Shanghai to be an international shipping center. At present, the Free Trade Zone’s administration committee proposes speeding up the planning of the Yangshan Islands International Transit and LCL Center, and to realize paperless customs declarations and bulk cargo landing as soon as possible, in the hope of achieving the goal of large-scale operations in international Transit and LCL businesses.

Port officials say that the Transit and LCL businesses in the plan of the Free Trade Zone aim at “non-five-star flag vessels owned or indirectly owned by Chinese-funded companies”. Therefore foreign shipping companies are not allowed to conduct coastal container shipping businesses between Chinese domestic coastal ports. If the policy of container shipping between coastal ports can be adjusted to suit the foreign companies, then, Shanghai will attract at least 80 per cent to 90 per cent of the total transit containers shipped from the Bohai Gulf to Busan Port — a considerable quantity.

Since the Free Trade Zone was approved by the State Council, second-tier cities, like Chongqing, Tianjin, Zhoushan and Xiamen, are experiencing an enormous urge to set up free trade zones. The applications are being filed in one after another. Some sources indicate that the next free trade zone will be established in Tianjin, while others say that Shanghai, Tianjin, Xiamen and Nansha will be four “golden flowers” with free trade zones in the future. No matter how things are going, Shanghai has already stood as an experimental field of reform and opening-up the economy. Opportunity is right ahead. As to how to seize it, let’s wait and see.