In the zone

When the Chinese Government creates a ‘zone’ it’s worth taking note particularly, and unusually for China, when it includes the word ‘Free’. The one to watch at the moment is the newly-created Waigaoqiao (pron: why-gow-chow) Free Trade Zone about 20km north-east of Shanghai’s Pudong district.

 

Zones have played a significant part in China’s emergence as a commercial power. The first “Special Economic Zone” (SEZ) was created in late 1979 by Chinese leader Deng Xiaoping in what was then little more than a sleepy fishing village in Southern China’s Guangdong province. Thirtyfour years on, Shenzhen is rated as one of the fastest-growing cities on the planet and is China’s tenth mostpopulous urban area, according to the 2010 census. 

 

It’s hard to think of a more appropriate word than phenomenal to describe what happened to Shenzhen. Pictures taken pre-80s show a marshy wasteland with dilapidated sheds, rotting boats and assorted donkeys and other wildlife. Visitors now are confronted with masses of high-rise buildings, major highways, manufacturing plants that churn out a sizeable portion of the world’s consumables, and not a donkey in sight. Conservatively, US$30 billion has been invested by local and foreign companies in Shenzhen since 1980. The actual amount may well be much higher. Shanghai’s Pudong district is was designated an SEZ and which,

very rapidly by any European standard, transformed from swamp to metropolis. Located on the Eastern bank of the Huangpu River, looking back over the famous Bund area of Shanghai, the Pudong New Area, as it became known, is now host to the major financial institutions of the world and, in the near future, China’s tallest building – the 632-metre Shanghai Tower.

 

An observer in the early 80s or 90s would likely have never been able to visualise the transformation that has occurred to these two areas. Even with the evidence in front of you it’s hard to imagine that so much could have been achieved in such a short time. Vision is, of course, a significant strength of the Chinese, along with the ability to more or less dictate what is going to happen and when. The Five Year Plans published by the Party usually have much longer timeframes in mind and they deal with big topics – such as the increasingly sophisticated and global approach to international business. 

 

With these precedents in mind the Waigaoqiao initiative takes on an importance to anyone doing business in China that can’t be ignored. More importantly, it will likely make doing business with China significantly easier if the many utterances from Chinese leaders are to be believed. Notably, Waigaoqiao has been designated a Free Trade Zone as opposed to a Special Economic one. 

 

This is not just semantics. There is, or perhaps more accurately there may be, a significant difference between the two. The reason for the caveat is that there is still much to be determined with this latest step towards easing trade with the Middle Kingdom. There are a few things we can be certain about. This is the first comprehensive and multifunctional free trade zone in China. There is nothing else like it anywhere in the country although, if it’s successful, there may be many more in quick succession.

 

It is already operational, to a point, and there is a massive amount of activity occurring throughout the 10 square kilometres that make up the zone. Based on activity levels alone it would seem that things are progressing quickly. There are still many ‘ifs, buts and maybes’, however, which need to be addressed before anyone can say

categorically just how straightforward it will be to operate a business from within the FTZ. 

 

The rationale for a ‘zone’ is essentially to create an area that can be clearly defined and which has borders within which you can control what goes on. Within the zone you can try things out that would be unacceptable anywhere else. In the case of the FTZ many ideas have been floated in that uniquely Chinese way of hoisting a flag to see who shoots at it and, frankly, it can be difficult to determine what’s real and what’s not.

 

So, for example, it was declared early on that within the FTZ there would be no censorship of the Internet. In theory at least if you want to read the New York Times or post

your latest achievements on Facebook you can do it from within this area. The consensus on this appears to be ‘maybe’ or perhaps more accurately ‘sometimes’.

Chinese citizens can, apparently, purchase up to CNY20,000 worth of duty free goods per person within the zone over a 12-month period. Details of just how that works and how its administered seem a little vague and, in any event, its not that clear just what can be purchased. A recent visit noted an upscale wine outlet (no New Zealand wine) but not much else in the way of retail. Expositions, however, are one of the core planned activities in the zone so this may evolve quickly.

 

There is certainly free swapping of the CNY for other currencies within the FTZ that even the most casual observer would see as a precursor to the eventual use of the CNY as a major international trading currency. Registering a WFOE (Wholly Foreign-Owned Enterprise) within the FTZ is reportedly much more straightforward than doing it conventionally (it could hardly be more complex in its non-FTZ form) and the reporting requirements relaxed somewhat. Interestingly you can register a company within the zone but actually operate it elsewhere.

 

Many more reforms have been mooted and they may well appear in more substantive form in the years to come. There is a great deal of talk and some worry from the Special Autonomous Region south of the border that this is a step towards shifting the regional international business focus away from Hong Kong and closer to the seat of power. Perhaps so, but there is still much to be done to achieve that. 

 

Nevertheless, as is the case with the super highways being built throughout China that are carless one day and traffic jams the next, things can change very rapidly – and they do. The hype around the Waigaoqiao Free Trade Zone suggests that there is a vested interest somewhere in the Party echelons that will ensure that this venture is a success. Given the way things work in China I’d say that was a certainty.