Patience needed on China's FTZ

The establishment of the China (Shanghai) Pilot Free Trade Zone has met with a mixed response and some confusion but the move is a necessary step in the evolution of the country’s markets.
On a conference call to announce its participation in the scheme, DBS said it aims to launch services within six months.
On a conference call to announce its participation in the scheme, DBS said it aims to launch services within six months.

One hopes that entry to Shanghai’s new free-trade zone, which opened on Sunday, comes with a handy map and explainer, much like at a theme park.

The China (Shanghai) Pilot Free Trade Zone (FTZ) is meant to allow domestic companies to do things they cant do elsewhere on the mainland, such as buy and sell games consoles. It should also enable foreign groups to set up operations on the mainland with a minimum of red tape.  

But experts, whether initially impressed or nonplussed, appear to be at a loss as to what the establishment of the FTZ will mean in practice.

To date, 35 companies have won approval to move in, including two foreign groups – Citi and DBS.

But the devil is in the details and these remain scarce.

As one executive of a domestic company registered in the FTZ told FinanceAsia: “What exactly we can do all depends on the details. Without details, nobody can tell what the free trade zone is going to be like.”

Analysts similarly are scratching around to make sense of it all.

Those at HSBC, writing about the benefits to financial services companies in particular, dub the measures "exciting" but keep their enthusiasm in check due to the lack of a timeline for full yuan convertibility and freer interest rate markets.

Such mixed feelings won't be new to China watchers. The country has been slowly liberalising its markets for some time now and yet some of the steps taken by Beijing have appeared more confusing than helpful.

The ban on mainland IPOs since last year is a case in point. The ban was meant to enable the China Securities Regulatory Commission to clean up the country’s markets, giving it the time to properly vet the hundreds of applications awaiting approval while drafting new rules to further improve credibility.    

An end to the ban is thought imminent but nothing has officially been said yet, leaving investors frustrated and killing off many potential company listings as issuers have altered their plans. 

Shanghai’s FTZ is seen as indicative of this well-meant yet uncertain approach, partly reflecting the competing interests within China.

“I will not be surprised to see that, in the next one or two years, various problems [will] appear, including resistance from the central ministries or the local government,” the executive said of the FTZ.

“The major problem is how to control the valve of capital flow between the outside and inside of the zone.”

Such uncertainties have typically not curtailed foreign investor enthusiasm for tapping the country’s potential.

As one of only two foreign banks to receive permission to open a branch in the zone, Singapore bank DBS - which already has branches on the mainland - is rightly thrilled at the prospect of starting new services in the FTZ.

On a conference call on Monday to announce its participation in the scheme, the bank said it aims to launch services within six months.

“We are setting up various taskforces to study products and services that we can pilot,” the bank said.

DBS aims to offer corporate clients cash-management products, debt capital markets products and, with a nod to China’s interest rate reforms, wants to help customers with interest rate hedges.

DBS nonetheless thinks it is “too early” to say what this will look like in practice. Regulators need to sign off on each product and that will take some time.

However, for both China and foreign banks like DBS the FTZ is a necessary step in the evolution of the country’s markets.

Beijing clearly doesn’t want to run before it can walk. But with the Chinese economy slowing initiatives like the FTZ at least offer domestic companies a chance to engage with the wider world while giving the world a window into the country.

Or, as DBS put it Monday:  “We hope to promote the FTZ to our broader client base and bring business to the FTZ”. So far so vague.

The message that “it’s early days” was used by DBS throughout Monday’s conference call. How early is anyone’s guess.

“What the free-trade zone regulators need to do now is to draw the boundary, set the frame and to list out what can’t be done. The less the regulators do in the free zone the better,” the company executive said.

In the meantime, investors must make do with the promise of future benefits. As the executive added: “If China’s economy wants to go on the right track, it must conduct substantial reform. And the free trade zone is the only glean of hope."

Now for the resumption of IPOs.

Additional reporting by Jing Song

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