The next big thing

New free trade zones are at the vanguard of changes in nation's development strategy

Yang Shuo wants to be an entrepreneur who plays a role in China's economic future.

The 25-year-old owner of Bo Shi Wen Chang, an artists' materials business, was among hundreds wanting to register their businesses in the Governmental Affairs Center of the Shenyang Area of the China (Liaoning) Pilot Free Trade Zone.

"We have a five-year plan to be one of the top artists' materials companies in China," he says.

Whether he realizes his ambition for the business he started with just 100,000 yuan ($14,868) and which currently employs just five people remains to be seen.

Yang, however, is one of those attracted by the China Government's initiative to launch seven new FTZs across China.

Apart from the one in Liaoning province in Northeast China, the others are in Zhejiang in eastern China, Henan and Hubei provinces in central China and Sichuan, Shaanxi and Chongqing in the west.

They bring the total of FTZs in China to 11 with the first, in Shanghai, designed to open up China's capital markets and increase the liberalization of the Chinese yuan, launched with great fanfare in 2013. The other three, which came along two years afterward, are in Tianjin, Guangdong and Fujian.

The new zones are designed to be at the vanguard of China's efforts to upgrade its industry, meeting the objectives of the Made in China 2025 manufacturing strategy.

They are also to act as magnets for inward investment from foreign companies with expertise in new sectors such as robotics and advanced manufacturing.

In addition, they are intended to be key hubs along China's Belt and Road Initiative being centers for international trade and investment.

Over in Shenyang, as of July 31, 8,131 Chinese From page 1 and 53 foreign-invested enterprises have already registered in the zone. The Chinese companies have registered capital of 61.87 billion and the foreign-invested ones $436 million.

Shenyang is one of the three areas of the Liaoning zone, which also includes the ports of Dalian and Yingkou.

The registration center is a hive of activity, with many of those registering businesses seemingly in their 20s.

Yang Fan, a coordinator at the service center, says many young people in Liaoning are attracted to the idea of setting up a business.

"The people who come here are of all age ranges, but a lot of young people leaving college now want to set up their own business. Many don't want to go into a conventional job. They want to do something that interests them," she says.

The parents of some of those registering businesses would have contented themselves to work, often for their whole careers, in one of the heavy industry State-owned enterprises that dominated the province.

Many of these companies are now shedding labor as the economy of the region is being forced to restructure and the FTZ in itself brings hope of a new future.

Bright, clean and modern, and with around 60 employees in smart uniforms, the service center is almost the embodiment of a more modern China.

Yang says the aim is to get away from some of the bureaucratic culture that might exist outside of the zone.

"The important thing here is to have a "cando" culture. If the staff don't know something, they will find out. We find answers for people. We don't say no or any other negative word when we are dealing with people."

Yang Shuo, whose company makes pens for which it subcontracts the manufacturing, studied art design at Shenyang Urban Construction University, says he was impressed with the ease of registering.

"My business is now registered within the zone, although not physically located there. It enables me to take advantage of some of the favorable policies, which include less regulation and tax advantages."

China has seen such zones as central to its economic development since Deng Xiaoping's reform and opening-up in the late 1970s.

The Special Economic Zones along its southern and eastern seaboard - most notably that in Shenzhen, which started out as a fishing village - effectively kick-started China's march toward becoming the manufacturing workshop of the world.

The new generation of development zones - starting with the much-heralded Shanghai one in 2013 - are intended to propel China to its next phase of development.

Shanghai itself has come in for some criticism for not being quite the laboratory for financial reform it was originally intended to be.

Businesses within the zone, however, have more freedom to make foreign currency exchange transactions and capital account settlements than in the rest of China.

Shanghai also came up with the much talked about negative list which prevented wholly foreign-owned enterprises (WFOEs) in such areas as real estate and manufacturing, although allowing it in new areas like healthcare and other services.

The zone has also been operating at a time when there was pressure on the Chinese currency after a reform of the exchange rate mechanism in August 2015, which has since seen an imposition of stricter capital controls across the whole country.

Wu Jiangang, research fellow at Lujiazui International Finance Research Center at CEIBS in Shanghai, believes some of the criticism is unfair.

"Perhaps the steps are not so big, but steps have been made; there has been some good practice and it has so far been a worthwhile experiment," he says.

"We cannot just open the capital account, particularly when there have been pressures on the yuan over the past two years."

He believes FTZs provide a solution for China because it would be difficult to experiment with policy on a national level.

"China is a very big country and therefore it is more difficult to reform. It is also not like the United States where every state has its own laws. China's provinces operate under national laws and regulations," he says.

"The FTZs give China the opportunity to develop innovative policies and to see if they work in practice."

Falk Lichtenstein, a partner at international law firm CMS in Beijing, says the FTZs are almost a response to the China government putting an end to local preferential policies in 2008.

"Until then many local governments tried to attract foreign investment with local preferential tax policies and other kinds of special features which were not fully in line with the national law. The foreign investment guideline catalogue applied all over the country. And then in 2013, somewhat to our surprise, the Chinese government started these preferential policies again with the Shanghai FTZ."

Huang Meibo, director of the Institute for International Development at Xiamen University, believes such zones offer lessons for other developing countries, particularly those in Africa.

"China has set up these zones and attracted foreign companies to come in and invest. I think it is one way to foster development, it is difficult to say whether it is the best."

Back at the headquarters of the Shenyang Area of the China (Liaoning) Pilot Free Trade Zone, Zhang Shicheng is gearing up for an influx of companies and investment into the zone.

He is director of laws and policy and is responsible for making sure all the regulations are implemented efficiently.

"It is not that the rules and regulations outside the zone are wrong or not working. We just want to adapt them so they fit better with international regulations," he says.

"Because a lot of international regulation is new to us, we need to understand it more to fit in with the existing mechanisms of our laws."

Zhang says it was still important for the zone to protect domestic industries, hence it will have the same negative list as Shanghai in banning wholly-owned foreign companies in certain sectors.

"The Shanghai negative list is a national level list, but we are making every effort to shorten it. This means that foreign investment in a wide variety of areas will become much easier over time."

Zhang says one of his main aims is to ensure the zone is an easy place for everyone to do business, whether they are local Chinese companies or foreign-owned ones.

"We make sure the staff are well trained before they take up their positions. They need to develop a different ways of thinking and behavior to adapt themselves to the free trade zone style," he says.

"The service we want to offer is to make the approvals process efficient and convenient and save time and costs for people who come here. The fee for the approval process here is actually zero."

On Harbin Street in Shenyang's Shenhe district, Munuo Ecology is one local business that wants to take advantage of the free trade zone on its doorstep.

The company was founded just two years ago by now 35-year-old Wang Shengjun, who has tapped into the market of an ever-increasing number of middle class consumers wanting healthy agricultural products.

It currently sources its agricultural products from a network of around 20 suppliers. The FTZ provides the company with the opportunity to do international trade for the first time and so it has now registered a subsidiary within it.

It plans to import seafood through the port of Yingkou, which is part of the Liaoning FTZ and also sell its own domestically produced produce.

"The launch of the zone actually give us a window to this. It has given us a window to contact with the outside world," he says.

Before the FTZ came into operation, his only option for importing seafood was through it being airlifted into Beijing or through the Liaoning port of Dandong. Customs clearance will be facilitated much more easily within the FTZ and the costs will also be much reduced. The FTZ, in fact, is a bonded zone where imports are not deemed to have entered China so can be processed and re-exported without import duty being imposed.

Wang, who graduated from the Agricultural University of Shenyang in 2008, believes it could also create demand internationally for locally grown produce.

"The Northeast region of China is famous for its black rich soil and we produce very good agricultural produce, better than in the south of the country," he says.

"I want to promote the agricultural produce of my home region around the world and this is one of the reasons why I started the company."

Fantian Industrial Design is a business that the new FTZ would like to encourage to develop.

It started out as an advertising company but moved into manufacturing design in 2007.

It has since won 12 Red Star Design Awards, the prestigious China design awards.

Its designs include the Robotin, which is a robot the size of the average 7-to 11-year-old that can act as a guide at exhibitions and shows showing people around exhibits.

Li Chunwei, the company's 46-year-old chief executive officer, is looking whether to relocate the company, which employs more than 60, into the zone.

"It is something we are considering. Our company is still growing and we wouldn't let go any chance to grow if it had a chance of boosting the development of the company. We are looking at what sort of supportive policies that will be introduced."

Li, however, is not convinced that establishing a FTZ is necessarily the right way to help restructure the economy of Northeast China and move it away from heavy engineering toward more advanced manufacturing.

"I think creating a better environment for businesses to operate in generally might do more for regional development. We would like to see a business environment where there are fewer limitations, regulations and rules, especially for private companies so they can develop more freely and be more creative."

Zhang Shu, 36 and the company's brand director, says that if the FTZ is to focus on robotics it should build on the region's existing industrial strength.

"I certainly hope that Shenyang could be a center for the robotic industry in the future, but there are many types of robots and I think Liaoning as an industrial area should focus on industrial robots and leave the humanlike service robots to places like Shanghai, whose strength is in the service sector."

For now, however, the FTZ is going to be a boost to service sector businesses in Shenyang as the city receives an influx of people who are to work in the zone - many from abroad.

Syntio Camilleri, the 53-year-old Maltese general manager of the Wanda Vista Shenyang, one of four Wanda hotel properties in Liaoning, is gearing up for extra business. His hotel on Yingpan West Street is the closest to the FTZ.

"We are very optimistic about the launch of the new FTZ, which will bring in more companies to the region, and hence there will be a multiplier effect that hotels will benefit from."

He says two large branded hotels will open near his hotel as competition this year and that there are there more in the pipeline.

"We expect a mix of short and long-term stays. We already have a good number of BMW guests (the German car company has a major base in the city) and many of them stay for more than six months at a time."

So far the FTZs have been an indication of the future direction of policy. There has been a reduction of the number of sectors on the so-called negative list and there has been a similar reduction of sectors in which foreign companies can operate nationally.

Lichtenstein from law firm CMS says foreign companies there are risks in this for policymakers.

"Foreign companies were allowed to do motorcycle manufacturing in 2014 in the Shanghai FTZ, but within less than 24 months, they were then allowed to set up anywhere in China and somewhere that may suit them better logistically. In future they may just look at the policy regulation operating in the zones and expect there to be a similar change in national policy a few years later."

The Chinese government gave another nod to future policy direction when, at the end of last year, it allowed foreign arbitration under the jurisdiction of such courts as the London Court of Arbitration and the International Court of Arbitration in Paris within the FTZs to resolve disputes between foreign and Chinese companies. Many would see this as a major reform.

Edward Tse, founder and chief executive office of Gao Feng Advisory, the management consultants, thinks the government is right to continue with the model and roll out the new FTZs this year.

"The Chinese government has done this really well over the past few decades. It has experimented with policy by launching these pilots and it has been a good model for Chinese development."

Wu at CEIBS says the FTZs should be seen in context.

"They will not be the only factor driving development in China and will certainly not be the most important but they definitely have a role to play."

Cai Shiyu also contributed to this story.

(China Daily Africa Weekly 08/18/2017 page1)