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August 1, 2014

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Home » Opinion » Opinion Columns

Pushing firms to expand global footprint

By Ni Tao | August 1, 2014, Friday | Print Edition

WITH the disclosing in early July of a new “negative list,” which frees up more sectors for investment in the Shanghai Pilot Free Trade Zone, the business world is rife with talk of a new round of growth spurred by institutional liberalization in the 28-square kilometer plot this year.

Does that development suggest a breakthrough in deregulation, and what challenges and opportunities will it herald? Economists and financial experts discussed these issues at the Fudan International Forum on Management, held on July 20 at Fudan University in Shanghai.

Interim and post supervision

While the popular focus now is on the “negative list,” relatively little attention is given to the reform of so-called interim and post supervision, something the municipal government is tackling in earnest, said Xu Mingqi, general secretary of the Shanghai FTZ’s Study and Coordinaton Center.

Supervision will be stepped up in such areas as review of investments concerning national security, anti-monopoly, social credit system, and information-sharing and coordinated law enforcement, said Xu, also deputy head of the International Economic Institute, Shanghai Academy of Social Sciences.

Xu noted that in a broad sense, liberalization in the FTZ is actually closely intertwined with the reform and opening up of China’s economic and financial system. Without the overall reform, it will be difficult for the FTZ to make headway in terms of institutional liberalization, said Xu.

He pointed out that although 400-plus firms in the FTZ had opened a free trade account, which, theoretically speaking, allows unregulated capital inflows and outflows, the fact is that the account isn’t entirely free.

And to obtain this account takes time, because regulators are concerned about a heightened risk of arbitrage caused by an influx of flight capital.

However, Xu was hopeful that policy makers can draw on the FTZ’s reform experiences and replicate them elsewhere. While it would be a tall order to expect Shanghai to lead the national reform efforts, “my view is that if Guangdong and Tianjin can have their own FTZs, Shanghai’s 28-square-kilometer zone will hopefully be expanded to all of Pudong,” said Xu.

Shi Lei, Party secretary and professor at Fudan University’s School of Economics, stressed the importance of institutional innovation over business potential within the boundary of the FTZ. He was critical of a misinformed emphasis on physical changes inside the zone.

“Many local officials came all the way here, only to see where buildings were located in the FTZ. This is totally missing the point, for the FTZ’s reform was not about engineering or zoning plans, or parlaying itself into a source of policy dividends,” said Shi.

The success of the FTZ cannot be judged solely on the outcome of the financial experimentation. Establishment of a free trade account is fine, but far from enough, according to Shi.

Its smooth functioning requires a set of elements: a business plan, the capability to enforce the plan, and the availability of good “pillar” mechanisms, Shi told the forum.

Lower costs

China is in great need of the FTZ initiative to foster its “going global” strategy. So far, overseas adventures of Chinese companies have largely ended in failure and heavy losses. Using the pilot FTZ — with its lower costs and easier access to the world — to nudge competitive domestic businesses to expand their global footprint will be a very far-reaching national strategy, Shi argued.

In his speech, Sun Lijian, deputy dean of Fudan’s School of Economics, said the FTZ’s biggest highlight lies in the prospect of taking advantage of the business platforms and financing opportunities to drive reform of private financing at home as well as stimulate growth of numerous small- and medium-sized enterprises.

As labor costs surge and dent the competitive edge of China’s private sector, the country should be aware that the loss of that advantage will be more than made up for by the growing army of overseas returnees and well-trained domestic talent.

Their potential contribution to the innovation drive in the FTZ will elevate and ameliorate the whole value chain, promising an investor-friendly environment over the long run.

What’s more, given the ever higher resource prices, a market that truly promotes fair competition and survival of the fittest is needed, for the sake of weeding out inefficient “zombie firms” living off government support, said Sun.

Once the market rids itself of these parasites, resource scarcity will be less of a problem. Resources will go to those who possess the greatest vitality. So will financial services that used to discriminate against the private sector, Sun said.

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