Enhancing China’s Pilot Free Trade Zones

The China (Shanghai) Pilot Free Trade Zone (hereinafter “Shanghai FTZ”) was the country’s first FTZ. From its initial establishment to the systematic reforms and improvements of its institutions, in just 10 years the Shanghai FTZ has achieved remarkable results. On the new journey ahead, it will continue to strive for high-standard opening up and focus on institutional innovations. We will coordinate development and security considerations, ensure close alignment with international economic and trade rules, and increase institutional openness. We will also strengthen overall reform planning and system integration, promote innovation of China’s industrial chains, better serve as a comprehensive experimental platform for reform and opening up, and strive to make new and greater contributions to Chinese modernization.

I. Testing institutions and exploring new methods

The establishment of the FTZs was a proactive choice taken by China in response to changes to, and challenges posed by, international economic and trade rules. Over the past decade, the Shanghai FTZ has served as a national testing ground, rather than a local protectorate; a breeding ground of innovation, rather than a bastion of preferential policies; and a functional space, rather than an ornamental one, for development. Working to the highest standards, we have boldly carried out trials, made breakthroughs, and driven changes. We have launched many fundamental and innovative reform and opening up initiatives and produced many landmark and creative institutional innovations. We have been a testing ground for deeper all-around reform and opening up, a pioneer of institutional opening up, and an important platform for intensive involvement in economic globalization. In doing so, we have effectively fulfilled our mission to experiment and offer demonstration and guidance.

Leveraging the pioneering role of the Shanghai FTZ in institutional innovation

We drew up the country’s first negative list for foreign investment, promoted managing foreign investment on the basis of pre-establishment national treatment plus a negative list, and took the lead in extending the negative list management model to other fields, including financial services, cross-border trade in services, and market access. We devised a new regulatory model for facilitating trade that reflects international standards, pioneered a new model that allows companies approved by customs to pick up imported goods before declaring them, self-regulated transportation of imported goods within the FTZ, and declarations of batches of imports and exports for more efficient processing. We developed a “single-window” system for international trade in Shanghai, introduced the model of accepting the inspection and certification results of a third party for certain imported goods, and implemented categorized regulation. We created a free trade account system for domestic and foreign currencies and launched a pilot project for the centralized operation and management of cross-boundary funds. We further reformed commercial systems for the entire life cycle of enterprises, pioneered the implementation of a subscription system for registered capital, and launched reforms on the issuance of business licenses before administrative permits, separating permits from business licenses, and streamlining licensing within industries. We also implemented a simplified deregistration system and introduced a deregistration commitment system, mandatory striking off, and mandatory deregistration. Of the 302 institutional innovations of FTZs replicated and promoted at the national level, 145 (48%) were pioneered or piloted in Shanghai.

Creating a dynamic example of open development

The Shanghai FTZ has realized a series of national firsts through its pioneering projects across 60 fields, including automobile manufacturing, financial services, medical services, value-added telecommunication services, and testing and certification, as well as concentrated foreign investment in areas such as finance leases and engineering design. We launched the international board of the Shanghai Gold Exchange, the Shanghai International Energy Exchange, and an international reinsurance trading platform as part of the Shanghai Insurance Exchange. We have also introduced international-style futures and options products for crude oil, TSR 20 rubber, low-sulfur gasoil, and copper. We established a leading demonstration zone and a service center for offshore trade, and developed a platform to utilize both domestic and foreign data to assist banks in conducting trade authenticity checks, the first of its kind in China. We scaled up offshore trade and made it a more regular and standardized practice. By the end of 2022 in the Shanghai FTZ, more than 84,000 new enterprises had been established, more than 14,000 new foreign investment projects had been launched, newly registered foreign capital totaled US$186.3 billion, and actually disbursed foreign investment totaled US$58.6 billion.

Promoting the complementary functions of major economic strategies

Nighttime view of the Lujiazui Finance and Trade Zone in the China (Shanghai) Pilot Free Trade Zone. Financial opening up and innovation are integral to deepening reform and opening up in the China (Shanghai) Pilot Free Trade Zone. PUBLICITY DEPARTMENT OF THE CPC COMMITTEE OF PUDONG NEW AREA, SHANGHAI / PHOTO BY HUANG WEIGUO

We established an open innovation model connected to the objective of expediting Shanghai’s development as an international economic, financial, trade, shipping, and sci-tech innovation center, implemented the Global Operator Plan, and established a rich and diverse system of financial institutions. We cultivated and expanded the high-end shipping services industry, fostered a new type of international trade, promoted links between FTZs and innovation demonstration areas, and strengthened Shanghai’s core functions related to its role as an international economic, financial, trade, shipping, and sci-tech innovation center. We improved the overseas investment service platform and established the Belt and Road Initiative service center to help Chinese companies go global, and developed an international cooperation center for BRI technological exchanges to encourage Chinese products and standards to go global. We embedded the Shanghai FTZ in the integrated development of the Yangtze River Delta, took a leading role in the development of the Yangtze River Delta Pilot Free Trade Zone Alliance, and established the Yangtze River Delta Capital Market Service Base. We also assisted 242 companies from the Yangtze River Delta region in listing on the STAR market and promoted cooperation on market regulation in the region.

Loading and unloading operations are conducted on ultra-large container ships at Yangshan Port, Shanghai, September 9, 2023. Lingang New Area of the China (Shanghai) Pilot Free Trade Zone has leveraged Yangshan Port to establish China’s only special comprehensive bonded area. CNS / PHOTO BY ZHONG XINWANG

China has embarked on a new journey toward building a modern socialist country amid arduous domestic reform and development tasks and an increasingly challenging and complex external environment. It is vital that at this moment, we maintain strategic resolve, expand opening up to strengthen international economic and trade cooperation, create closer bonds with countries around the world through shared interests, and boost reform and development by opening further to the world. On the new journey ahead, FTZs will continue to play a pivotal role. The Shanghai FTZ, in particular, must ensure it is aligned with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Digital Economy Partnership Agreement (DEPA), as well as conduct associated risk stress testing. We must make better use of domestic and international markets and resources, determinedly promote deeper reform and greater openness, and strive for new institutional innovations. We must endeavor to make new progress in opening up and to enhance development planning. Internationally, we must serve as a positive demonstration area, relish the task of being the pioneer and test case for China’s accession to the CPTPP and DEPA, and show the world China’s commitment to openness through our proactive efforts. Domestically, we should courageously blaze a trail and advance into uncharted areas of reform, fully leverage the decisive role of the market in allocating resources, and give better play to the role of the government, so as to address problems by expanding high-level opening up, explore ways to create a new development dynamic, and facilitate high-quality development.

II. Improving FTZs from the new starting point

We will implement the strategy of upgrading FTZs. The keyword for the strategy is improvement, the main approach is to align rules, the focus is on increasing institutional openness in areas including rules, regulations, management, and standards, and the objective is to drive reforms in relevant domestic areas. The Shanghai FTZ must implement the Measures to Promote Institutional Opening Up by Introducing International High Standards in Eligible Pilot Free Trade Zones and Free Trade Ports issued by the State Council, ensuring organizational compliance and detailed execution. To this end, we shall use the openness and markets of OECD countries as our benchmarks, ensure that we are systematically aligned with CPTPP, DEPA, and other international economic and trade agreements, and experiment with all sorts of rules and clauses that accord with China’s reform and opening up.

Maximizing the pioneering role of the Shanghai FTZ

We will select key areas that are vital to our national strategy and have significant international market demand, high requirements regarding openness, and a good foundation in Shanghai to implement opening up policies and systems that strengthen our international market competitiveness as well as increase risk stress testing regarding the open economy, in order to lay a solid foundation for long-term development. We will explore how to develop a new model of cross-border data management, as cross-border data flows are an important basis for further deepening international economic and trade cooperation. Taking advantage of Shanghai FTZ’s wealth of application scenarios, we will formulate detailed regulations and standards on the classification, evaluation, and management of data, so as to explore security and compliance mechanisms to conduct assessments in advance of, data backup during, and supervision after data exports for China. We will align ourselves with behind-the-border regulations, as many high-standard international economic and trade rules are behind-the-border regulations, which are consistent with China’s approach to reform and opening up. Focusing on issues of great concern to enterprises, we will improve the system for protecting trade secrets, expand applications of intellectual property protection, help to foster harmonious labor relations, improve biodiversity and sustainability, make government procurement more transparent and efficient, and increase information transparency of state-owned enterprises. We will also accelerate the creation of a world-class, market-oriented, and law-based business environment.

Implementing a higher standard of opening up

Opening up to the rest of the world is a basic national policy of China. Our new development dynamic is not a closed domestic loop but, rather, it is composed of more open domestic and international flows. To enhance FTZs, we must open even wider to attract more global resources and factors, such as capital, information, technology, talent, and commodities, and we must encourage Shanghai to become a strategic link between domestic and international economic flows. We will strive to increase the liberalization and facilitation of trade in goods. To this end, we will further optimize the implementation of rules on country of origin and share and exchange international trade-related documents and data on port logistics to expedite customs clearance for cargo. We will focus on developing emerging trade formats, including cross-border e-commerce and bonded maintenance, as well as trade in specialty goods, such as remanufactured raw materials, biomedical research items, and other specialty biomedical items, and optimize management of imports and exports. Using targeted and precise measures, we will endeavor to achieve overall progress in trade liberalization and facilitation. We will guide the innovative development of the service trade. We will gradually ease and remove restrictive measures related to cross-border supply, overseas consumption, and movement of natural persons, implement more open entry-exit and residence policies for people of talent, and make it easier for overseas professionals to gain employment in China. We will develop the negative list system for managing cross-border trade in services in the Shanghai FTZ and share our experiences to help formulate respective negative lists for managing cross-border trade in services in FTZs and across the country. We will open key fields wider to the outside world, such as service industries including telecommunications, education, and medical care. We will also improve mechanisms for settling international investment disputes.

Implementing the unique approach of differentiated exploration

As the center of economic, financial, trade, shipping, and sci-tech innovation activities in the city, the Shanghai FTZ should explore its unique strengths to achieve distinctive development and conduct differentiated exploration. We will facilitate the development of Shanghai as an international economic hub. We will develop a “headquarters economy” with greater functionality, support organizations that offer legal, accounting, auditing, consulting, and other professional services in going global, and improve our international service capabilities. We will facilitate the development of Shanghai as an international financial center. We will build an open and efficient financial market system and take the lead in finding a way to achieve capital account convertibility. We will make cross-border collections and payments of funds easier for honest and compliant companies, develop offshore transactions, cross-border trade settlement, and overseas financing services using RMB, and build an international financial asset trading platform. We will create new RMB-denominated financial products aimed at the international market and expand the range of financial products for domestic investment of overseas RMB. We will facilitate the development of Shanghai as an international center of trade. We will implement in depth the Global Operator Plan, coordinate the development of onshore and offshore commerce, and launch pilot zones for “Silk Road e-commerce” cooperation. We will promote the construction of the Oriental Hub International Business Cooperation Zone, and explore ways to develop offshore commerce. We will facilitate the development of Shanghai as an international shipping center. We will promote close links between river, maritime, overland, air, and rail transit. We will explore innovative integrated management systems and mechanisms, optimize international transshipment, and enhance shipping service capabilities. We will promote the expansion of air traffic rights between Shanghai Pudong International Airport and relevant countries and regions, further relax airspace regulation, and increase the supply of airspace resources. We will facilitate the development of Shanghai as an international sci-tech center. We will pilot regulatory innovations that facilitate breakthroughs to ease technology bottlenecks. We will enhance collaborative innovation capabilities in biomedicine, accelerate trial commercial applications of intelligent connected vehicles, and create new institutional mechanisms to attract people of talent in science and technology from China and abroad.

Staff members at an administrative service center in the China (Shanghai) Pilot Free Trade Zone help a customer use a smart service assistant, October 9, 2023. The China (Shanghai) Free Trade Pilot Zone has made sustained efforts to enhance the business environment and make services more convenient for enterprises and residents using AI technology. PUBLICITY DEPARTMENT OF THE CPC COMMITTEE OF PUDONG NEW AREA, SHANGHAI / PHOTO BY ZHENG FENG

Achieving higher-quality industrial development

The Shanghai FTZ is home to a cluster of enterprises of various types, has a fairly complete industrial structure, diverse economic forms, and strong value creation capabilities, and its effectiveness ultimately comes down to its development achievements. We need to better leverage the role of high-end industries in driving development; strive to upgrade our industrial base, modernize our industrial structure, and make industrial innovation more eco-friendly; accelerate the development of a modern industrial system underpinned by the real economy; and promote the digitalization and ecological transformation and upgrading of traditional industries. We will focus our efforts on establishing world-class industrial clusters for the three major industries of integrated circuits, biomedicine, and AI. We will enhance our capabilities in the six core industries of Chinese chip manufacturing, innovative drugs, advanced airplanes, vehicles of the future, intelligent manufacturing, and data and information services. We will make every effort to gain traction in the four new areas of the digital economy, green and low-carbon industries, the metaverse, and intelligent terminals. We will make forward-looking plans to cultivate competitive industries of the future, including future health, future intelligence, future energy, future space, and future materials.

III. Raising the quality of our FTZ work

The development of FTZs is a systems engineering project as well as a process of dynamic evolution. We must strengthen leadership over FTZs, identify key areas, focus on major tasks, and establish closed-loop working mechanisms to ensure results.

Maintaining a correct approach to reform and opening up

Reforming FTZs is a vital element of socialist market economic reform. We must adhere to and strengthen the CPC’s leadership, ensure that the CPC fully exerts its core role in providing overall leadership and coordinating the efforts of all sides, and maintain a correct approach toward and stance on reform. We must also ensure that reforms are not modified or distorted, so that reform and opening up progress in a manner that is conducive to the development of the cause of the CPC and the people. We must conduct bold explorations into improvements to the socialist market economy and have the courage to explore uncharted waters, tackle tough problems, navigate potential dangers, and face new issues and challenges, in order to enable the market to play a decisive role in resource allocation and the government to better play its role, as well as to constantly enhance the vitality of the socialist market economy.

Boosting alignment with international rules

To promote a high level of institutional openness, it is first necessary to ensure that we are aligned with international rules by familiarizing ourselves with, mastering, and applying them. We must also fully understand the underlying logic of international rules so that we not only know what is there but why they are there, thereby enhancing our awareness of alignment and the use of such rules. Based on this, we must try to be better at anticipating changes in rules as a result of technological advances as well as understanding which rules will change and which will remain, in order to improve our ability to align ourselves with, and implement, them.

Focusing on the systematic integration of reforms

We must plan and design reforms based on the whole process of the development of our endeavors, the whole chain of industrial development, and the whole life cycle of enterprise development. We must implement integrated reforms and improve supporting policies from the perspective of seeking to boost an industry as a whole by accomplishing something specific. We should also ensure that our reforms are coordinated with one another in terms of policy orientation, that they are mutually reinforcing during the implementation process, and that their effects complement one another. All this will also enable us to systematically solve weaknesses and obstacles that affect enterprises and the public and maximize the effectiveness of reforms. We must strengthen links between different levels, act on authorizations of departments of the CPC Central Committee and the central government, and integrate multiple lines of reform in FTZs. We should also develop systematic plans and strengthen synergy between measures.

Providing a stronger legal basis for reform and innovation

The CPC Central Committee has called for the establishment of a system of law-based safeguards to support experimentation, breakthrough, and independent reform in Pudong. The Standing Committee of the National People’s Congress has authorized the Shanghai Municipal People’s Congress and its standing committee to formulate regulations for the Pudong New Area, including alternative provisions of laws, administrative regulations, and departmental rules. The Pudong New Area People’s Congress and its standing committee as well as the government of the Pudong New Area may formulate relevant management measures in areas where there are currently no laws, regulations, or clear provisions. These allowances provide a solid law-based guarantee for the role of the Shanghai FTZ as a pilot area. We will continue to coordinate and align reform decisions and legislative decisions and ensure that reform and the rule of law develop in tandem. We will boldly and proactively adapt to circumstances and be creative as well as make breakthroughs in reform. We will also set in stone positive experiences and practices through legislation so as to enhance the authority and penetration of reforms.

Guarding against systemic risks

In the course of experimenting with reform and opening up, FTZs must also firmly guard against systemic risks. We will always prioritize risk prevention, apply risk management throughout the process of institutional innovation, and strengthen risk analysis in the design of reforms. We will strengthen the monitoring, assessment, and early warning of risks in the process of reforms and properly defuse risks in a timely manner. We will accelerate the development of a regulatory system that is compatible with high-standard opening up, continue reform of ongoing and ex post oversight, and improve regulatory connectivity and cross-departmental synergy. We will promote the shift from traditional supervision to digital, risk, and credit supervision, so as to accurately monitor and comprehensively guard against risk.

Replicating and promoting achievements in reform

As we advance reform and boost innovation, we should ensure that our experience is transferable and can be replicated so that we can roll out successes in FTZs to the rest of the country. Building on pioneering and leading cases, we will continue working to accelerate the transformation from whitelists to standardized management and from positive lists to negative lists, and seek to turn breakthroughs in specific localities to institutional arrangements across the country. We will produce abundant precedents for enterprises and encourage practices and experiences that can be applied at larger scales, thereby providing a solid foundation for replication and extended application.

(Originally appeared in Qiushi Journal, Chinese edition, No. 20, 2023)