One of the biggest steps in China’s economic liberalization was formalized last week when final approval was granted for a new free trade zone in Shanghai. This pilot program for creating a less regulated economy is aimed at boosting China’s growing services sector, and allowing cities like Shanghai to compete with regional centres such as Hong Kong and Singapore.
While free trade zones have existed in China for decades, the degree of freedom granted to foreign companies in this latest iteration promises to open the door for development of the finance sector, and this potential is already encouraging the real estate market.
Although the final approved statement by the government lacked the details that many expected, the stated purpose of the new free trade zone, which covers 28 square kilometers in Shanghai’s Pudong district is to:
- Explore new paths and models for liberalizing China’s economy
- Accelerate the streamlining of government regulation
- Promote administrative reform
- Provide a path for further economic development
How the Free Trade Zone Will Work
As officials develop the detailed guidelines for implementation, the zone is expected to allow open investment by foreign companies within the zone, without need for following the usual restrictions on foreign investment in China, except for in some restricted industries.
The zone is expected to be the proving ground for the open convertibility of China’s yuan with other currencies, as well as the aggregation and consolidation of many existing liberalizations such as reductions of personal income tax, streamlining of corporate establishment procedures, and removing restrictions and taxes on import and export of goods.
In explaining the need for the free trade zone, Ge Shunqi, deputy head of the Institute of International Economics at Nankai University in Tianjin said in an interview,”Many parts of the foreign investment laws, passed in the 1980s, are obsolete. But it is a complex procedure to amend the laws.” The free trade zone will provide a testing laboratory for China to amend or remove obsolete regulations and allow it to create a viable finance industry.
The free trade zone also has the objective of attracting further foreign investment into China, as the nation has struggled in recent years as higher costs have driven out manufacturers. Last year, FDI in China declined 3.7 percent to $111.7 billion from a record $116 billion in 2011, according to the Ministry of Commerce.
Shanghai’s Free Trade Zone and the Metals Exchange
The free trade zone is entirely within Shanghai’s Pudong district, which is already the country’s major financial hub, and incorporates the existing Waigaoqiao Free Trade Zone, Waigaoqiao Free Trade Logistics Park, Yangshan Free Trade Port Area, and the Pudong Airport Comprehensive Free Trade Zone.
On July 3, the same day when the State Council announced its approval of the onshore free trade zone plan, a nearby plot of land was bought for the highest price so far this year.
A syndicate led by domestic property developer China Vanke bought the plot in Pudong for 4.87 billion yuan ($793.8 million), at a premium of 88.6 percent above the initial bidding price.
The land has a planned gross floor area of 227,400 square meters, which translates into a price of 21,400 yuan per square meter, the highest this year, news portal china.com.cn reported at the time.
With many reports indicating that the zone will become a centre for China’s first international metals exchange, as well as the potential for development of international exchanges for other commodities, real estate near the free trade zone area can be expected to continue climbing.
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