Bolstering Shanghai’s value in Far East

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Shanghai remains China’s busiest hub for corporate travel and trade, and the decision to create the country’s first free trade zone is only likely to enhance this position. Surya Kannoth...

Shanghai’s size, relative wealth and position as a major port have long made it one of the most cosmopolitan of Chinese cities. As mainland China’s largest city and commercial capital, it has become arguably the most vibrant and cosmopolitan place in China during the country’s modernisation phase. As part of the industrial and social transformation of China, Shanghai has adopted a ‘four centers strategy’, which aims to develop the city as a centre of international excellence in finance, trade, shipping and general economics. The opening of the Shanghai Free Trade Zone (SFTZ) has marked one of the three most historically significant steps that China has ever taken toward a more open economy. The Shanghai free trade zone can go much beyond that being a standard free trade zone. At its outset, approaches are adopted to reduce transaction costs for firms with the goal of creating a fast track for free and efficient flow of international investment and trade in diverse areas beyond manufacturing in and out of SFTZ. These include opening up service industries such as finance, insurance, shipping, culture and legal to international investors, abolishing some administrative laws and approval regulations on businesses within the zone, adopting the negative list approach for foreign investment, etc. In addition, the SFTZ is also a chance to push for transformation of the role of government in the economy and market. Given China’s political and governance system, the success of the SFTZ relies on new administrative and legal practices by the government consistent with greater reliance on the market. While some analysts are skeptical that the government will implement the new policies that are being discussed with SFTZ, it is clear that this zone represents significant benefits to multinationals operating in China. While financial and investment benefits offered to companies registered in the zone are some of the positives, there are a number of opportunities that the zone will bring on the logistics space. Among the predictions on the benefits, it is regarded that logistics companies registered inside the free trade zone may now have a majority share, though they will still need to be joint ventures. The establishment of certain logistics companies will become more attractive. Foreign invested logistics firms will no longer be subject to a maximum equity share of 49 percent of a joint venture. Transfer of cargo by shipping companies is expected be allowed inside the SFTZ. Shanghai will become a consolidating point for goods bound for other ports. This will put pressure on ports of other countries that currently handle this transfer traffic. For example, Korea stands to lose considerable volume when goods no longer need to travel to Busan or Incheon to be transferred before going to northern China. The same principle will apply to air cargo being transferred at the Pudong airport. Foreign ships will now be allowed to ship from the SFTZ to other domestic ports. Currently, only Chinese-owned vessels can ship between domestic ports. Customs administration will be greatly simplified. Currently, border clearance is performed according to each individual waybill. Inside the SFTZ, border clearance may be done by monthly or even quarterly clearance of all waybills. Goods can be delivered directly to your warehouse in the free trade zone without waiting for clearance. This is especially important in the case of perishables. The current wait of a couple weeks will be eliminated and the goods can go directly to a temperature controlled warehouse. The goods will still need to be cleared before being shipped outside of the SFTZ, but it is expected that clearance time will be reduced to two to three days. Perhaps the biggest impact on the supply chain is that the SFTZ will now be more attractive as an international hub. Goods can be delivered to the zone and be held in inventory without paying duty. Only when an item is shipped domestically is the duty paid. Items bound for other countries will not be subject to duty or complicated customs procedures. One specific application of the last point is worth elaborating on: e-commerce fulfillment will be allowed within the zone. Foreign goods can be imported, and the duty deferred until the item is ordered. Even international orders could be fulfilled from Shanghai. It is anticipated that this e-commerce business will eventually be opened up to foreign companies, though it is still in a trial phase with local companies. The potential for multinationals is tremendous. Even though China will take a cautious, measured approach to opening up the zone, the opportunities for distribution into China will certainly take a giant step forward. If the Shanghai experiment goes well, the impact on business travel to China is likely to be significant. The value of business travel to China is already forecast to reach US$300 billion in 2023, up from an estimated US$145 billion in 2013, according to research by the World Travel and Tourism Council (WTTC). When the project was unveiled in September, there was chatter that the ‘great firewall of China’ would be lifted in the city to allow access to currently banned websites such as Twitter, Facebook and The New York Times. This now appears not to be the case – although it’s difficult to find a definitive answer. These websites are still inaccessible across the city – although they can be used through Blackberry networks and virtual private networks (VPNs), which disguise the user's location. The development will bolster Shanghai’s importance as the key corporate travel destination in China, with many in the industry believing it will help the city eventually succeed Hong Kong and Singapore as the most important business hub in the Far East. 

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