As the China (Shanghai) Pilot Free Trade Zone approaches its one-year anniversary, Han Zheng, member of the Political Bureau of the CPC Central Committee and Secretary of the CPC Shanghai Municipal Committee accepted a joint interview by the People’s Daily, the Xinhua News Agency, the Jiefang Daily, Wenhui Daily and Xinmin Evening News. Here’s the transcript of the interview.

The People’s Daily: People from home and abroad are paying close attention to the “achievement list” of the first-year operation of the Shanghai Free Trade Zone. Building the FTZ is not only a national strategy, but also a new mission assigned by the central leadership to Shanghai. General-Secretary Xi Jinping said that the Shanghai FTZ is a big test field and he expects a harvest. Premier Li Keqiang recently gave high marks to the Shanghai FTZ, hoping it to play the role as a leader in reforms and to set a new benchmark for the opening-up policy. These requirements are all very high. We’d like to ask you, Secretary Han, that what has the Shanghai FTZ achieved in the past one year with regard to these requirements. How do you define the relationship between the trial of the Shanghai FTZ and the comprehensively deepened reform on the national level?

Han Zheng: Your first question is about how I view the first-year achievements of the zone.

Building the China (Shanghai) Pilot Free Trade Zone is a significant policy decision by the CPC Central Committee and the State Council. It’s a major step to further promote reform and opening-up under the new scenario. The first year of operation fully verifies the accuracy and scientificness of the decision made by the central leadership.

Generally speaking, the first-year trial and practice of the Shanghai FTZ have gained major breakthroughs and key achievements with the support of various government departments while tightly focusing on system innovation. These achievements can be summarized into four aspects: the investment management system based on a negative list has been formed; a trade monitoring system focusing on trade facilitation has been operating effectively; innovation of financial systems with the goal to promote capital account convertibility and financial opening-up has been implemented in a orderly manner; and the in- and after-event supervision system that focuses on the transfer of government functions has been established. In other words, with regard to the system innovation in four aspects required by the CPC Central Committee and the State Council on the Shanghai FTZ, they all made significant improvement although progresses vary. Currently, the third-party evaluation from different angles, which is conducted by Chinese and foreign institutions including the Development and Research Center under the State Council, PwC and the Shanghai University of Finance and Economics, is near completion. These evaluation reports will be unveiled soon.
Your second question is about the relationship between the trial of the Shanghai FTZ and the comprehensively deepened reform on the national level. I will share with you some of my feelings and thoughts.

First, the FTZ is a national test field; it’s not a local private plot. General Secretary Xi Jinping has made important directions and requirements on the Shanghai FTZ. He pointed out that the Shanghai Pilot Free Trade Zone is a test field for the central leadership to boost opening-up and to promote reforms via opening-up so that China can better respond to the changes and challenges in the rules of international economics, trade and investment. He asked us to take good care of the field and expected to reap a harvest. Therefore, we believe that building the pilot FTZ is a national strategy based on the requirements of the General Secretary. In the test field under the national strategy, all tests should serve the basis for the country to further boost opening-up and to deepen reforms. They are also what we should explore according to the new international trade and investment rules as well as international common practice. For example, with regard to liberalizing the market, the market should play a decisive role in allocating resources while the system should be improved to boost opening-up. For example, domestic and foreign companies should be equally treated and state-owned enterprises and private enterprises should be equally treated so as to create a fair, unified and efficient business environment that is internationalized, market-based and law-based. The first-year operation and trial are all based on these requirements. They entirely serve the national strategy and are totally different from the previous preferential policies we’ve seen in development zones, bonded zones and local special areas. In other words, all trials and tests in the FTZ are not for the local development. They all serve the national strategy. It’s a national test field. We can’t make it a private plot.

Second, the key of the pilot FTZ is that it’s a highland for system innovation. It mustn’t be developed as a low-lying land featuring preferential policies. Only by becoming a highland for innovation can it meet the national strategy. The General Secretary and the Premier have repeatedly stressed that the core mission of the pilot FTZ is system innovation, which means we should seek new channels and ways for the comprehensively deepened reform on the national level. Premier Li Keqiang required us not to make efforts in studying preferential polices, but to continue to be a leader in reform, to set a new benchmark for opening-up and to explore new ways to deepen the reform of the government’s administrative management system with the courage to be a pioneer and the wisdom to be an innovator. In the past year, all tests and trials are based on the requirements of the CPC Central Committee and the State Council. We’ve been endeavoring to make the pilot FTZ a highland for innovation, and we will never make it a low-lying land featuring preferential policies. In fact, we’ve had a batch of innovative systems in the past year with regard to the implementation of the negative list management model, the reform in foreign investment management system, the business registration system and reforms to facilitate trade. These system innovations have effectively created a very good environment for business operations in both systemic and management mechanisms, especially improving efficiency, spurring market vitality and reducing corporate operation costs. These systems ensure the level playing field for domestic and foreign companies, and for state-owned and private enterprises.

Third, all the system-related achievements in the FTZ must be duplicable and expandable. It should be a nursery for young plants instead of a potted landscape. The requirements of the CPC Central Committee and the State Council are apparent. After obtaining initial success in the pilot FTZ, the system innovation should be copied and expanded to a large scale nationwide. To some extent, whether the pilot FTZ can be deemed as successful depends on the amount of system-related achievements which can serve the national strategy and can be copied and promoted nationwide. It’s an important gauge. With the support of government departments, in the past year, especially in the recent half year, a total of 21 systems have been promoted nationwide, including 6 in investment management, 9 in trade supervision and 6 in financial innovation. The expansion of the 21 systems was conducted in a case-by-case way based on their maturity during the management of the pilot FTZ and they didn’t come all of a sudden within the three-year plan. We are studying the systems we can promote on the next stage and will launch a batch of them on the one-year anniversary of the pilot FTZ. Currently, under the guidance of government departments, we are evaluating on another batch of 30-plus mature system innovations. When the condition permits, we will apply to expand them to the whole nation in a batch-by-batch basis.

Xinhua News Agency: Compared the first-year achievements with the targets set at the launch of the FTZ, what are your feelings?

Han Zheng: The results of the reforms in the pilot FTZ in the first year are better than expected. Why did I get such a conclusion? Building the pilot FTZ is the mission assigned by the central leadership. We have been enhancing and improving our understanding of it during the process of managing the FTZ. A year before, our understanding of the development of the pilot FTZ and the importance of system innovation far lagged behind that we have today. The reforms in the pilot FTZ are thorough, covering a variety of aspects and touching the core parts of those industries. I have a clear feeling that the challenge in our reform, which is also the key part we should focus our efforts on, is the innovation in government management.
In the past, we already noticed the problems in innovation of government management and noticed that we should further let the market play its role and should coordinate the relationship between the government and the market. However, we still didn’t manage to step out. What do I mean by “stepping out”? In past reforms, we pointed out that we should simplify the administrative procedures and deregulate power. But once we encountered problems, we boosted management. We were in a circle of promoting regulation and deregulation on the same flat level. The reforms in the pilot FTZ have changed the pattern to an upward spiral. Unlike the previous efforts, by stressing the simplification of the administrative procedures and deregulation of power, we changed the previous management model of pre-event approval to in- and after-event supervision management model. It’s the pattern we were not familiar with and didn’t try in the past. Previously, we did have in- and after-event supervision, but we mainly focused on pre-event approval and didn’t set up a scientific system. Currently, the challenge for the government is how it should conduct supervision without the approval system. Previously, we had the pre-event approval system. But now how should the government conduct in- and after-event supervision without the approval system? The negative list and in- and after-event supervision system explored by the pilot FTZ provide excellent answers to the question.

How did companies respond to it? In the negative list model, companies can do everything that is not prohibited by the law. The negative list stipulates the things companies can’t do. That could give enterprises clear expectations. In the past, because of the pre-event approval model, companies had very vague expectations as everything needed to be approved. Now, the negative list has made it clear. Initially, the negative list had 190 items and it has 139 items now. It will be further cut short. Apart from the items on the negative list, companies can decide on their own based on their needs.

How should the government conduct supervision? It involves the whole system and mechanism for in- and after-event supervision. Currently, we’ve established six in- and after-event supervision systems. Some of them were explored before and were summarized during one-year operation in the FTZ; others were explored from scratch within one year of innovation. These six systems include: safety inspection system; anti-monopoly inspection system; social credit rating system; a system for companies to disclose annual reports and to set up a name list for companies with abnormal operations; information sharing and coordinated law enforcement system; and a system to allow the private sector to participate in market supervision. All the six systems cover many details. Some involve national power while some involve local power. With the six systems, the government functions should be transformed to prevent risks and ensure a fair market order. Only in this way can the deregulation be further carried out.

Apart from the negative list, we should set up a “power list”. It’s a very important part for the government to transform its functions. What’s a power list system? It means that you can’t proceed without the authorization of the law. If the law doesn’t permit, you can’t proceed with the approval system. If you seek to install the approval system, then you violate the law. Also, you must do what the law stipulates you should do. In the pilot FTZ, the three aspects were fully demonstrated: you can do everything that is not prohibited by the law; you can’t proceed without the authorization of the law; and you must do what the law stipulates you should do.” The negative list covers corporate behavior while the power list tends to rein in government power. It’s the challenge, but also the spotlight. It’s also the reason why we believe the one-year achievements are better than expected. It is well-placed to be copied and promoted.

Xinhua News Agency: During the one-year operation of the pilot FTZ, Shanghai also promoted reforms in the whole city in an all-round manner. These included reforms in state-owned assets and state-owned enterprises, judicial reforms and education reforms. Would you like to elaborate on the relationship between the innovation in the FTZ and the city’s deepened reforms.

Han Zheng: The Third Plenary Session of the 18th CPC Central Committee raised the overall target of comprehensively deepening reforms nationwide. That’s improving and developing the socialist system with Chinese characteristics, promoting the national governance system and realizing the modernization of governance abilities. The economic system reform is the key among the comprehensively deepening reforms and serves as a driver in reforms in other aspects. It’s a leading factor. Shanghai has been comprehensively deepening reforms based on the requirements of the central leadership and has been innovating in the economics aspects. The core aspect is the pilot FTZ. From Shanghai’s perspective, the reform in the pilot FTZ is to try its best to reform the government itself? What’s the reform of the government?

The Third Plenary Session pointed out that in order to have a solid relationship between the government and the market; we should fully tap the decisive role of the market in allocating resources and better tap the government’s role. How to deal with the relationship? I believe we should obey law of the market. The core aspect to deal with the relationship is to transform government functions. The most important issue is to improve the government’s management system and supervision model. It’s also the key to promote national governance system and to realize the modernization of governance abilities. We can’t say we should let the market act while government doesn’t act. The law of the market exists and the government must reform itself. What’s the self reform? It means that we should change the previous government management model focusing on approval, especially pre-event approval. It must be changed. The reform in the pilot FTZ is a ground-breaking innovation, deviating from the approval-based management model. We will have deeper feelings of the reform in the future. Without the pre-event approvals, it will be harder for the government to conduct supervision and the requirements are higher. Therefore, we must shift from the approval-based management model to in- and after-event scientific supervision. It’s a significant reform and innovation.

As the economic sector led in the comprehensively deepened reform nationwide, Shanghai immediately launched reforms in state-owned assets and state-owned enterprises because it involved the role of state-owned enterprises as key market players. In order to have a solid relationship between the government and the market, we must have breakthroughs in reforms of state-owned assets and state-owned enterprises. The core part of Shanghai’s reforms of state-owned assets and state-owned enterprises lies in that it should further boost the vitality of the enterprises via conducting reforms in the management of state-owned assets. Previously, it was called management of state-owned assets and state-owned enterprises. Such an expression was not scientific. In fact, enterprises are key market players. The characteristics of state-assets means that the government should only manage state assets but don’t intervene in business operation. Meanwhile, the markets for state-owned enterprises are different. Some are fully competitive; some offer public services while some are functional.

Therefore, we divided state-owned enterprises into three categories during this reform. The results are good. Why do we offer such great importance to reforms of state-owned assets and state-owned enterprises? That’s because the total amount of state-owned assets in Shanghai is relatively big. And state-owned assets and state-owned enterprises play an essential role in the country’s development and in Shanghai’s development.

Besides, based on the unified arrangement on the national level, we’ve also been conducting tests on a series of key reforms, such as judicial reforms, reforms of college entrance examinations among comprehensive education reforms, as well as reforms to innovate social governance and to strengthen grassroots-level construction. All of these are being carried out in an orderly manner. It fully reflects the city-level efforts to deal with the relationship between comprehensively deepened reforms and tapping economic reforms as a leading factor.

Jiefang Daily: Concluding the achievements in the pilot FTZ in the past year, you just mentioned four aspects. Some are breakthroughs and some are temporary achievements. In your opinion, what is the biggest highlight in the past year and what is the biggest challenge?

Han Zheng: The biggest highlight in the FTZ is the negative list. A series of new institutional innovations and system innovations were brought about from the launch of the negative list. That's why it's a leading system. Because of the negative list, companies are more active, government controls are relaxed, the approval system must go through a groundbreaking reform, and an in- and after-event regulatory system must be established. Because of these, the negative list is a basic system.

The biggest challenge is the government’s in- and after-event supervision model that comes with the negative list. That is brand new for us. I’ve been working in the government for many years and I deeply feel that many in- and after-event supervision measures the government previously used are not applicable in the FTZ under the negative list. We must set up new measures and government management system. This is difficult. Because of this, the six innovations of in- and after-event supervision regulations are very big breakthroughs. Of course this is a process. I believe many new innovation methods will come along with future development. For example, with the development of services industry, we need further in- and after-event supervision regulations along with information technology, the Internet, and new companies. Another example is new regulatory requirements stemming from further opening up in the financial system and RMB internationalization. How to deepen and extend the current regulatory framework is the difficult part.

Jiefang Daily: The Shanghai pilot FTZ is not only the test field of Shanghai government. State departments were also making experiments in the zone and they offered strong support. How do you feel about the state's support in FTZ development in the past year?

Han Zheng: All institutional innovations, breakthroughs in regulatory innovations, and resolution to all bottlenecks were realized under the help and guidance of state government departments. The duplicable and extendable experiments will also be initiated by state departments. That is to say, the temporary achievements in FTZ are the product of Shanghai and state departments working together under the General Secretary’s requirements on this test field.

Wenhui Daily: During the one year since FTZ was launched, Shanghai has done a lot of work according to the national strategies. Are there any spontaneous reforms Shanghai has conducted? Reforming in the deep-water zone requires courage. How is Shanghai overcoming the difficulties?

Han Zheng: General Secretary Xi Jinping has asked us to attempt with courage, test with courage, and make changes independently. The central government gives us three years to promote experiments in the pilot FTZ. The National People's Congress also gives us three-year authorization to change laws in the zone. We will put forward duplicable and extendable institutional systems from the zone in three years. A period of three years is both short and long. From the aspect of deepening reforms and accelerating development, we can do a lot in the three years. It is a long period of time because we have many tasks to complete. Reform tasks put forward by the Third Plenary Session are envisioned to be completed by 2020 -- that is seven years ahead. The three years we have take up a considerable proportion of the seven years. But from the aspect of important reforms, three years is only a short period for systems to mature. We are adding pressure on ourselves in two ways.

First, we set a target to put forward institutional innovations in batches within the three years. Generally we introduce a batch of them when conditions mature, and we make three steps for the three years-- that is one step each year. The first batch has been put forward at the first anniversary, and has received recognition and encouragement from the central government leaders.

Second, we feel the need to put forward supporting reforms on a larger scale to assist development of the FTZ. For example, we should have a power list of municipal and district governments. This is not restricted to the area of FTZ. For example, we should standardize the approval procedures citywide. This comes together with the power list that dictates what the government can do and how it should do it. Other examples are reforms of state-owned enterprises and comprehensive law enforcement reforms. These are what we feel should be carried out and deepened along with our development of the FTZ. Categorized comprehensive law enforcement reforms have been tested in the Pudong New Area. By the end of October this year, we will introduce market regulatory reforms in eight downtown districts of the city. It uses a “3 in 1 plus 1” model that integrates commercial administration, food inspection and quality inspection, plus price management. Next year the model will be extended to other districts. Categorization means combining administrative management and law enforcement under big categories such as market inspection and urban management. Later, it will include culture.
Are these spontaneous pressures relevant with the FTZ? Of course they are because these accelerate transformation of the government's functions.

Xinmin Evening News: Premier Li Keqiang has seen many young entrepreneurs striving to set up a business during his visit to the pilot FTZ. He proposed that the FTZ should be a gathering place of Chinese wisdom. Previously we always felt that the companies in the FTZ are all big and prime ones, but this time the Premier encouraged mass innovation. This makes people feel that the FTZ is closely related to the public. What will the government do to make public innovation flourish in the zone?

Han Zheng: Public innovation is a new driving force for China's economy to grow and upgrade. On one hand, we will give the market a full play in allocating resources and will improve the functions of the government. The essence is to deal with the relationship between the government and the market. That is to say, under protection of laws and regulations, we will allow innovative entrepreneurs to enter the market with more convenience and lower costs. Public innovation can boom if the government's regulations treat businesses big and small, foreign and domestic, state-owned and private-run all equally. On the other hand, many supporting conditions, such as legal protection, financing guarantee, and risk sharing, are needed to realize full potential of public innovation. Currently, the system has loopholes. When the system improves further, the potential will be inspired. The reason why we have so many young entrepreneurs and small businesses registered in the FTZ is that they have seen big progresses in these aspects. If we have more innovative financial products to serve innovative entrepreneurs, the situation will improve further. I believe this will be the highlight in the FTZ's next stage of development.
On the 28 square kilometers of the FTZ, the Waigaoqiao area has been set up for more than 20 years, and other areas have a history of longer than a decade. In the recent year, the area was not expanded as infrastructure stayed almost the same, but why did the number of newly registered companies exceed the total in previous years? Why are there a number of large businesses and many small and medium sized ones? Why did the number of workers in the zone double from a year ago? I think there are many lessons we can learn from this.

The People's Daily: Many foreign and domestic financial institutions have entered the FTZ during its one-year operation. Some people feel financial reforms in the zone are proceeding fairly fast, and there are people having a wait-and-see attitude, saying the financial innovation can be more aggressive. What's your opinion on the speed of reforms?
Han Zheng: Financial reform in the FTZ lures the most attention of the public, especially the international communities, who say this is the biggest highlight in the zone. The central bank and three financial regulatory bodies are fully supporting financial innovations in the zone. So far, 51 new financial measures have been put forward in four aspects including RMB internationalization, interest rate liberalization, cross-border trade of RMB, and foreign exchange management regulations. A regulatory framework that opens the zone with the offshore market and strictly manages the inland border has been basically set up.
People are most concerned about two aspects: the first is the establishment of a free trade account management system, which is an institutional innovation. The account functions as an electronic fence from risks, and it's easy to transfer funds in and out. The establishment of the account finds a management method which is consistent with our reality and requirements for opening-up. Meanwhile, the system efficiently finds an innovative institutional regulation to inspect cross-border use of the RMB in the currency's internationalization. The second aspect is that the system sets up an operational mechanism for capital account convertibility in a categorized and manageable manner. Convertibility under the capital account does not equal to full convertibility under the capital account. These are different concepts. Categorization means that we are opening up capital account operations directly serving the real economic growth, instead of finance for the finance's sake. Being manageable means the central bank has set up an effective risk management system with real-time, 24 hour monitoring. The set-up of these regulations laid a sound foundation for further opening up. Financial liberalization is based on risk management, and the prowess of risk management determines the extent of opening up. Ultimately, we will further open up the capital accounts that can help economic development, and meanwhile establish an effective regulatory system.

Han Zheng: The core reason for piloting reforms the FTZ is China's mission in deepening reforms. That is to improve the relationship between the government and the market as put forward in the Third Plenary Session of the 18th CPC Central Committee. The biggest national strategy is to generate such a system in the FTZ through reforms and tests. This depends on our capabilities, and whether we can accomplish what the central government asks from us. We do not use numbers to testify our reforms, but we need to find a new way that can improve effectiveness of the government and can fully empower the market to allocate market resources. This is our mission in piloting reforms in the FTZ.
Thank you!