What Is The Shanghai Free Trade Zone? Its Effects, and Pros and Cons

The China (Shanghai) Pilot free Trade Zone (FTZ) is the first of its kind in China. It was established in 2013 and has been a leader in the nation’s reform and adaptation of modern global economic trends.

Since its inception, the Shanghai Free Trade Zone has worked to facilitate trade and investment in the country.

Statistics show that as of the end of June 2020, over 12,000 newly established foreign enterprises, including Siemens, Itochu Corporation, and Porsche Finance Lease Co., Ltd have set up operations there.

These enterprises are the biggest beneficiaries of the zone’s efforts to reform and open-up.

More so, The Shanghai Free Trade Zone ranks first overall amongst China’s Free Trade Zone in terms of institutional reforms.

So, in this article, you will get to know more about the free trade zone – Shanghai. And its effort in promoting government functions and improving the economy of China.

Below is a table of content to guide you through this reading.

What Is The Shanghai Free Trade Zone?

The Shanghai free trade zone ( Shanghai FTZ) officially known as the China (Shanghai) Pilot Free-Trade Zone is a special economic zone where goods may be landed, stored, handled, manufactured or re-exported under specific customs regulations.

In August 2013, the State Council approved the establishment of the zone. Now, it is the first free-traded zone in mainland China and it covers an area of 240.2 square kilometers (92.7 sq. mi).

In about two months of operation, over 800 companies have registered to operate in the zone. This shows the profitability in the free zone.

Furthermore, the Shanghai free-traded zone comprises four existing bonded zones in the Pudong district. These zones are;

  • Waigaoqiao Free Trade Zone
  • Waigaoqiao Free Trade Logistics park
  • Yangshan Free Trade Port Area
  • Pudong Airport Comprehensive Free Trade Zone

Although the rules and regulations surrounding the free zone have not yet been set, several other local governments are requesting permission to start their own free trade zone.

The Shanghai free trade zone represents a major milestone in the nation’s commitment to go ahead with domestic reforms and have a wider opening to world markets, which aligns with global economic trends.

Let’s discuss what the free trade zone in Shanghai is all about.

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Details About the Shanghai Free Trade Zone

The Shanghai Free Trade Zone is utterly unique and changes the narrative for foreign investment, and the economy of China.

Here are a few outright features of the Shanghai Free Trade Zone.

  • The Shanghai Free Trade Zone is 28 square kilometers
  • The Free Trade Zone has a GDP Scale of 11000 billion
  • Shanghai Free Trade Zone has a complete and comprehensive system.
  • The Trade Zone concludes the rate marketization, exchange rate free, financial business, amongst a few.
  • The Trade Zone expanded 7.1 percent from a year earlier to US$263.9 billion in the first seven months of 2020, much stronger than the national average gain of 2 percent, in part due to the FTZ.
  • Direct foreign investment rose 9.3 percent US$10.9 billion between January and July, compared with the nation’s contraction of 0.35 percent during the period
  • The city is expected to host the China (Shanghai) International Technology Fair this year to strengthen technology trade.

The Shanghai Free Trade Zone

Since 2013, China (Shanghai) pilot free trade zone is the first bath of the only free trade zone in China, covering 8 zones.

The main purpose of establishing this area is to explore new ways and methods to ensure economic growth, fasten the transformation of government functions, and to foster economic restructuring.

The free traded zone incentivizes companies to promote more cross-border investment and trading. It is a testing area for investment finance, trade, legal and administrative changes.

Fields like Automobile manufacture and design, Cosmetics, Media, and Shipping, to mention a few are encouraged to expand their reach in the Shanghai free-trade zone.

According to Gary Liu, Executive Deputy Director of Ceibs Lujiazui Inst. of Int´l Finance, “It covers financial liberalization, an overhaul of administrative approvals, freeing up restrictions on investment and financing, it’s a big step.

Not just because it challenges those with vested interests, but it challenges our own mindset about the appropriate role for government in a market economy. When he was asked to speak about the restrictions on investment and financing in the Shanghai free-trade zone.

Although it was initially reported that the zone would also have unrestricted access to the internet (with bans on sites such as Twitter lifted), the official Xinhua News Agency reported that it is not so.

In addition, commodities/ goods entering the trade zone are not subject to customs and duty clearance, unlike in other important cases. This is a massive boost to the Chinese economy as importers now have a flexible law that allows them to import more goods into the country.

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Effects of Trading in the Free Trade Zone Shanghai With Your Business

In the past, foreign investors would have to invest in a Hong Kong company, before investing with the name of the Hong Kong company in the free trade zone.

However, this law has become invalid with introduction the Shanghai free trade zone. This is because one law behind the formation of the Shanghai free trade zone, allows foreign investors to invest directly from their country.

Chances are that the Shanghai Free Trade Zone will take over international financial trading from Hong Kong.

Some benefits of trading in the Shanghai Free Trade Zone include:

  • You can open a business in mainland China without investing in any real estate. Ideally, it minimizes your initial capital and allows you to enter a new market that may have been closed to you.
  • The Shanghai free trade Zone has fewer restrictions and requirements regarding industries that foreigners can invest in.
  • You only pay tax when you enter China. Afterward, you operate in the bonded area.
  • Your business can operate in a low-risk environment.
  • There are no restrictions on money transfer
  • It allows you to create your own WFOE (A Wholly Foreign-owned enterprise), giving you 100% ownership.
  • The Shanghai Free Trade Zone encourages foreign investment. Hence there are a lot of benefits accrued to your investment as a foreigner.
  • With the help of a PEO (Professional Employer Organization) in China, you can launch your business in a few days.

Incentives For Companies In The Shanghai Free Trade Zone

Since the Shanghai Free Trade Zone encourages foreign investments, below are some incentives for foreign investors.

#1. Tax Cuts and Tax Exemptions

Foreign investors who own their business in the Shanghai free Trade Zone get the following tax benefits.

  • Commodities between free trade zones and overseas destinations are free from custom and import duties.
  • Domestic commodities entering the bond areas, Shanghai Waigaoqiao Free Trade Zone, and Shanghai Pudong Airport Free Trade Zone will be considered as exporting. Hence, the exporters will enjoy a tax refund.
  • Registered companies in the Yangshan Deep-water Port Free Trade Zone are exempted from business tax duties.
  • International shipping, transportation, warehouse, international shipping insurance business are exempted from business tax.
  • Commodities departing other countries’ ports and transported overseas through the bonded zone (Shanghai Pudong Airport Free Trade Zone) will enjoy a tax refund upon leaving the bonded zone.

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#2. Port Supervision

Foreign investors who set up their business in the Shanghai free Trade Zone get the following port supervision benefits.

  • Companies registered in the free trade zone and commodities imposed with the requirements to be transferred through waterways, aviation and railways will enjoy optimal custom formalities.
  • Commodity inspection and quarantine are preset and are done at the time of entry.
  • The company can fully retain foreign exchange value.

Other Benefits

The other benefits your business will enjoy while operating in the Shanghai Free Trade Zone include;

  • The expansion of the scale of boned commodities: domestic and exporting commodities imported from, custom declared by Shanghai Waigaoqiao Free Trade Zone will be stored, processed, or sold together with other bonded goods.
  • Offshore account: to provide a convenient financial settlement for overseas business, companies registered in the Yangshan Deepwater Port Free Trade Zone will have the right to open offshore accounts.

More industries are opening for foreign capital, especially in service sectors. Industries such as social, financing, cultural, professional, and merchant services have all been opened up in the Free trade Zone.

This means that domestic companies can now easily invest outside of China. And on the other hand, foreign companies can now easily engage in China’s commodity futures and financial markets.

What Is Special About The Shanghai Free Trade Zone?

The Shanghai Free Trade Zone is the country’s way of adapting to modern economic trends. Hence, everything about the free trade zone – Shanghai makes it unique from the other free trade zone’s.

Shanghai is the financial center. Its banks are well experienced in Outbound Direct Investment (ODI). More so, the policies allow foreigners to invest directly, making it the base for all the Chinese companies in mainland China.

Additionally, Shanghai is the main hub for Chinese companies to invest in. Hence, all other Free Trade Zones have copied its ODI policy.

Shangai’s Policy Plans For Trade

Shangai, the financial center for all foreign investors releases its policy plans for trade at the Shanghai FTZ.

Its main policy is to build the trade zone into a global trading centre. Hence, it’ll focus on infrastructure construction.

In addition, the city plans to build international trading platforms for natural gas, iron ore, liquid chemicals, silver and other commodities.

It will also accelerate efforts on the construction of various platforms. These platforms include those for big data, commodities and mortgages. All these platforms will be at different stages to facilitate trade.

More so, the city will hasten various policy trials at the Shanghai FTZ and gradually adopt them into city-wide practices.

Ideally, more sections within the zone will be opened for foreign and private investments. And the financial sector may see more reforms such as streamlined administration for foreign currency capital pools and more flexible management in international trade settlement.

There will also be better intellectual property protection, expansion incentives for companies that move its headquarters to the city, and lots more.

Finally, Shanghai will equip its trade with more e-technology. This aims to encourage the use of electric contracts and bills to improve the efficiency of the business.

Conclusion

You can say that the Shanghai free trade zone is one of China’s biggest investments. Not only will this improve the economy of the nation, it’ll open it up to vast of global opportunities.

I hope this helps you.

Good luck!

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