The planned addition of a new area to the China (Shanghai) Pilot Free Trade Zone is aimed at promoting a higher level of opening-up to the outside world rather than just a simple expansion in geographical size, according to a top official from Shanghai.

The new area will become a special economic function zone, with stronger market influence and international competitiveness via institutional innovation and functional reconstruction, said Li Qiang, Party secretary of Shanghai.

“It will work as an important carrier for China to become deeply integrated with economic globalization,” he said at a plenary meeting of the Shanghai delegation attending the ongoing session of the National People’s Congress, the top legislative body, in Beijing on March 6.

The zone — the first in China — was established in 2013, and initially covered 28.78 square kilometers. It was expanded to 120 sq km in late 2014.

In his keynote speech at the opening ceremony of the China International Import Expo in Shanghai in November, President Xi Jinping said the FTZ would be enlarged again.

Xi also announced two other major tasks for the city — to launch a science and technology innovation board on the Shanghai Stock Exchange in tandem with an experimental registration-based system for initial public offerings, and to promote higher-quality growth and the integration of the Yangtze River Delta as a national strategy.

Li said making the announcements during such a special occasion as the opening ceremony of the inaugural CIIE indicated the nation’s commitment to the promotion of a new round of reform and opening-up.

“It again demonstrated the clear attitude and firm determination that China will not close its doors to the world and that reform steps will never stop,” he said at the ongoing two sessions — the annual meetings of the NPC and the Chinese People’s Political Consultative Conference, the top political advisory body.

He also praised the deliberations about the draft law on foreign investment: “The law, if passed, will be conducive to the establishment of a stable, transparent, predictable and fair business environment, which will offer a legal guarantee for Shanghai to push forward the expansion of the free trade zone, construction of which will start soon.”

Speaking at the city’s annual legislative meeting in January, Ying Yong, mayor of Shanghai, said the FTZ will be comparable with other zones across the globe, offering the most competitive policies and putting forward attractive opening-up policies and systems.

Hang Yingwei, an NPC deputy and head of the government of Pudong New Area, where the Shanghai FTZ is located, said the zone’s new area will push forward innovation in terms of offshore trade and an experimental “white list” system, featuring companies and entities that will receive preferential treatment.

“The FTZ’s new area will focus on the development of the offshore economy, the innovation economy, the headquarters economy (growth based on attracting the headquarters of large companies) and the digital economy,” Hang said on the sidelines of the NPC session.

As an example, he cited the China headquarters of Volvo Construction Equipment in Shanghai, which was the first company to complete the domestic settlement of offshore trade with the separation of flows of orders, goods and capital.

“Such a breakthrough in offshore trade helps us to further explore practices to increase the growth of our international business,” Hang said.

Statistics from the Information Office of the Shanghai Municipal Government show that in the five years since the FTZ was established, the total import and export volume has reached 6 trillion yuan ($900 billion), with realized foreign investment of more than $22 billion and 57,000 registered businesses.

More important, the zone has become a test bed for new economic policies. A total of 127 systematic innovations that were first implemented in the Shanghai FTZ have been promoted nationwide in the past five years. One such innovation, the negative list system — which defines sectors in which foreign entities are not allowed to invest — was initially introduced by the zone to manage foreign capital. Last year, it was expanded nationwide.

In addition, the zone’s deepened reforms, aimed at facilitating efficient customs clearance, reduced entry and exit times in bonded areas by 78.5 percent and 31.7 percent respectively, compared with the national average. The move has been hailed as a benchmark for the rest of the country to emulate.

Meanwhile, a report by the World Bank in October showed that China’s business environment rose to a global ranking of 46 last year, up from 78 in 2017.

Tariff policy

National lawmakers and political advisers have also suggested a zero-tariff policy to better promote free trade.

Xu Juehui, an NPC deputy and deputy Party head and managing director of Shanghai Port International Cruise Terminal Development, said tariffs at many FTZs across the globe are zero or almost zero. However, the current tariff policy at the Shanghai FTZ means it echoes the duties imposed on specific goods overseas, so there are no advantages to attract trade and logistics resources from other countries.

“Based on the principle of trade reciprocity, I suggest promoting a zero-tariff policy in the new area of the Shanghai FTZ,” Xu said.

Jiang Ying, a CPPCC member and deputy CEO of Deloitte China, suggested that optimization of the tax system in the Shanghai FTZ should begin with fields related to the headquarters economy, the trade in goods and services, and finance and capital markets, which would demonstrate the zone’s forward-looking approach.

Denis Simon, executive vice-chancellor of Duke Kunshan University in Jiangsu province, said Shanghai has been seeking to strengthen its role as an innovation hub, and the expansion of the city’s FTZ would be an opportune time for this to happen.

“By freeing up the local economy from pre-existing constraints on capital flows and having an improved climate for the development and protection of intellectual property rights, the FTZ can serve as an important catalyst for driving indigenous innovation,” he said.

Moreover, if the zone can attract ample high-end talent, it may serve as a magnet to attract foreign research and development centers to the area, according to Simon.

He added that the presence of local and multinational companies engaged in R&D and knowledge commercialization could create a new set of agglomeration dynamics — cost savings — to drive a great technological leap in Shanghai.

“The new, more-open business environment fostered by the FTZ can energize the economic and technological drivers needed to help Shanghai play more of a leadership role in China’s overall technological development,” he said.