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Free Trade Zone of Shanghai gives more opportunities to foreign investors

The 29-square kilometre Shanghai Pilot Free Trade Zone was officially opened on 29th of September 2013 with an idea to liberalise financial system and encourage direct foreign investment into China. Liberalisation in the area is achieved by more relaxed and investor-friendly reforms pursued by new Chinese leadership of President Xi Jinping and Premier Li Keqiang. Initially, 25 Chinese and foreign companies were granted a license to register in the zone with further expansion in the following years.

The central area of reformation is financial liberalisation, which mainly pursues promotion of RMB on international scale. The reform greatly improves banking system by shortening a period of foreign banks’ branch establishment. It also allows domestic private investment to set up a private bank, financial leasing or consumer financing. It allows entry of new cross-border financial services such as commodity trade financing or supply chain trade financing leading to diversification of financial business in the SH PFTZ. The zone is also aimed to promote Shanghai’s international shipping centre by encouraging the shipping finance and the freight index derivatives trading business. Service companies, which are based in SH PFTZ, have improved their regional treasury management capabilities due to financial liberalisation. Moreover, SH PFTZ  allows easier access of overseas shipments entering the area. Overall effect of PFTZ can be considered to be positive by many experts; financial liberalisation and international integration lead to expansion of cross-border use of yuan, its increasing convertibility and freeing up the interest rates, which all together created financial benefits for both international investors and Chinese economy. For example, in February, China’s Central Bank fully liberalised interest rates on foreign currency deposits within the zone giving a start to international liberalisation. However, as it is broadly accepted by many economists, financial integration is not always beneficial if it is not protected by proper regulations, which can assure its safety and stability. Therefore, international investors are cautious about the zone. Effective risk control mechanisms are crucial for preventing any financial disorder. International companies, which choose to locate their business in the free zone, are concerned whether it will really help them to reduce transitional operating costs, which is in higher priority than cheaper capital or tax allowance. Moreover, some multinational companies hesitate to actively engage in this financially liberalised market and choose to wait-and-see how the reforms will work in the future. Risk management is important for them due to increasing vulnerability of financial markets.

To conclude, Shanghai free trade zone is a Chinese government experiment of liberalisation of financial market. More and more international companies locate their headquarters there to enjoy tax allowance and financial freedom. It means that other free trade areas such as Singapore and Hong Kong need to be able to deal with increasing competition. While some foreign investors are actively taking the beneficiaries of the area, some of them are still cautious due to increasing probability of financial disorder as long as many economists argue that too much of freedom in financial markets can lead to instability.

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