In September, China celebrated the ten-year anniversary of its first ever free-trade zone, the Shanghai Free-Trade Zone.
The Shanghai Free-Trade Zone was deemed a new milestone in China’s journey in opening up its economy and implementing political and economic reforms in order to increase China’s competitiveness in global markets.
In order to assess if this is accurate, we’re going to talk about the Shanghai Free-Trade Zone, explain what it is, why it was established and what it has achieved so far.
In the end, we’ll tell you what the future holds for the free-trade zones in China, and the role Shanghai’s Free-Trade zone will play to help China out of its current economic recession.
Shanghai FTZ’s Beginning
The Shanghai Free-Trade Zone was the first ever free-trade zone to be established in China. It launched on 29 September 2013 as a step towards economic reform and opening up Chinese markets to foreign businesses and investors.
This project was backed by the former Chinese Premier Li Keqiang, who took office in the same year of the free-trade zone’s establishment, promising bold economic reforms that would increase China’s global competitiveness.
It was founded by merging four different yet intertwined areas under the special administration of Shanghai Customs, namely Waigaoqiao Free-Trade Zone, Waigaoqiao Free-Trade Logistics Park, Yangshan Free-Trade Port Area, and Pudong Airport Free-Trade Zone.
This formed an area of 28.78-square-kilometer for the Shanghai Free-Trade Zone, and it became China’s experiment field to test out policies for government, financial and tax reform, business innovation and foreign investment. It also allowed Shanghai to develop its trade with the rest of the world. The free-trade zone expanded again in 2015 and 2019, doubling in size.
A good example of those testing experiences would be the sale of video game consoles, which were banned in China since 2000, was allowed within the free-trade zone in 2014, and a year later in 2015, the ban on selling video game consoles was lifted in the entirety of China.
The Challenges
Even though the Shanghai Free-Trade zone was good for increasing traded commodities between China and the world, one of the main problems it faced was the Chinese yuan’s convertibility, something that China has yet to fix.
China’s yuan is not a fully-convertible currency and its onshore exchange rate is a managed floating rate mechanism, and China disappointed many foreign investors with zero progress done on loosening capital control or interest rates when the Shanghai Free-Trade Zone was first established.
Another problem that hindered the free-trade zone when it first started was the long ‘Negative List’ for foreign investment, which stated some types of industries that foreign investors weren’t allowed into, and what they were allowed and not allowed to do in case they get an exception that would allow them to enter that industry.
For example, foreign investors aren’t allowed to invest in the mining industry, and are only allowed to invest in agriculture projects if China’s stake in the project is no less than 34%.
However, as the Chinese government realizes its need for foreign investors, the ‘Negative List’ keeps getting shorter. Since the establishment of the Shanghai Free-Trade Zone, the number of items on the list has decreased to 27 from 190.
Shanghai FTZ’s Impact
Back to the present in 2023, 10 years after the Shanghai Free-Trade Zone was established, it’s important to look at the feats it managed to achieve despite a slow start among skeptical foreign investors.
First of all, 20 new free-trade zones were established following Shanghai’s, and they helped facilitate global trade, with Chinese exports of goods increasing by 62.7% from 2013, when Shanghai Free-Trade Zone was first established, to 2022. That is from $2.21 trillion to $3.6 trillion.
The trade-zone also helped boost regional trade, with its import and export volume accounting for nearly 30% of the country’s total 21 free trade zones.
The Shanghai Free-Trade Zone also promoted foreign investment, acquiring more than $58.6 billion in actual foreign investment in the past decade, nearly 30% of the total foreign investment in the city of Shanghai.
Driven by the Shanghai Free-Trade Zone, Pudong New Area achieved a regional GDP of 1.6 trillion yuan ($223 billion), bigger than its regional GDP in 2013 by 1.5 times. Pudong now is home to 432 regional headquarters of multinational companies and over 250 research and development centers funded by foreign investors.
Free-trade zones all over China also contributed greatly to China’s real GDP, helping it increase from $9.62 trillion in 2013 to over $16.28 trillion in 2022.
The free-trade zone also helped contribute to financial innovation by attracting multiple international companies and different financial institutions, helping Shanghai to become a global investment-hub. This is evident in Shanghai’s ranking in the Global Financial Center Index at the seventh place, when it was the sixteenth place in 2016.
And finally, the establishment of Shanghai’s Free-Trade Zone began a new era of opening up and relaxing trade regulations for China. The evidence for this is the ‘Negative List’ for foreign investors, which was shortened more than seven times since 2013.
The Future
After talking about the free-trade zone’s impact on China’s economy for the past decade, it’s important to talk about what the future will look like for this type of establishments, especially since China is going through what could be considered the worst economic crisis in the country’s history.
In fact, foreign direct investment in China came to a negative $11.8 billion for the first time in 25 years, with more foreign companies and investors taking their money out of the country instead of reinvesting, making it worse for the economy already hurt by a real estate crisis and elevated debt.
Chinese officials realized the role free-trade zones would play in the future, and set out to trial new international trade regulations that would make it easier for foreigners to trade in China.
As many foreign companies and investors began to lose their trust in China because of its harsh counter-espionage laws that led to government raids on multiple foreign firms, President Xi Jinping and Premier Li Qiang delivered multiple speeches on China’s commitment to opening up and promised to protect and welcome foreign investors.
To demonstrate that, they introduced new measures that would ease the financial operations of foreign investors in the country, including allowing foreign financial institutions in free-trade areas to provide new services to their Chinese counterparts. In addition to that, companies and individuals in the free-trade areas would be allowed to buy financial services from foreign financial institutions.
Other important measures to reassure foreign companies and investors included allowing re-manufactured product imports for key industries, extending the temporary period of stay for company executives, and banning the government from asking for software source code from developers.
In the midst of its economic crisis, China decided to boost the growth of emerging markets, and opened the International Data Economy Industrial Park in the Shanghai Free-Trade Zone in 2023. The park was established in order to bring in 100 leading data firms with a combined output of over 100 billion yuan ($13.6 billion) by 2025.
The park is one of China’s plans to increase Shanghai’s digital trade and economy, tasked with implementing safe and orderly flows of international online data. It also serves as a test for China’s goal to join international trade pacts, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, one of the world’s largest free-trade areas by economic output, according to a policy document released by officials in Shanghai.
In addition to data operations, the industrial park will focus on tech sectors like the design and manufacturing of humanoid robots and developing internet data centers.
All of this aligns with the Chinese government’s plans for the future, which are to turn emerging digital sectors into a new growth engine for the country, in order to replace the exhausted real estate market, as revealed in the 2023-2025 digital economy master plan in August.
However, it’s hard to see this becoming true in the short-term, as strategic emerging sectors generated only around 13% of GDP in 2022, a very small percentage compared to the property sector’s 30%.
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