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Shanghai free trade zone: Opportunities for commerce


Photo: China (Shanghai) Pilot Free Trade Zone: China’s latest reform attempt.
China (Shanghai) Pilot Free Trade Zone: China's latest reform attempt.

The much-anticipated General Plan for the China (Shanghai) Pilot Free Trade Zone finally got the green light from the State Council a short while ago. The Shanghai free trade zone was officially launched and the so-called negative list (of sectors that are off-limits to foreign investors in the zone) was also published.

The free trade zone has grabbed the attention of all quarters both at home and abroad although some people think that the General Plan does not include certain hoped-for reforms. However, liberalisation and regulatory measures should proceed side by side and liberalisation should be progressive. The experience of the pilot must be replicable and suitable for promotion on an extensive scale in China. The impact of the establishment of the Shanghai free trade zone on commerce will likely be indirect, progressive and long-term.

I. Pilot will take a progressive course

In commercial services, the provision of value-added telecommunications services and the sale and services of games consoles and arcade games will be permitted in the free trade zone. With the further liberalisation of value-added telecommunications services, global cloud computing heavyweights are expected to rush into the zone. The liberalisation of the sale of games consoles and arcade games and the provision of related services imply the lifting of the ban previously imposed on these products and services. This will not only spur the growth of those industries but will also further stimulate innovation in the development of smart TVs which have witnessed rapid growth in recent years.

The outside world has pinned much hope on permission to operate duty-free shops in the free trade zone, but there was no mention of this in the General Plan. The fact is, industries will be the dominant function in the zone, while residential and livelihood functions only play a supporting role. Moreover, it is reckoned that duty-free shops will form a price trough, causing purchasing power to move in from outside the zone. As such, it will not have much effect in bringing back the purchasing power for luxuries that has drifted offshore (because prices at the duty-free shops will have no advantage over prices in Hong Kong). Thus, they are of little help to the growth of the domestic market and economy.

On the negative list for the wholesale and retail sectors, there are not many categories that are subject to special control. The list only covers important commodities like grain, cotton, vegetable oil, tobacco, salt, chemical fertilisers, agricultural films, and crude oil and finished products that have a vital bearing on the national economy and the people's livelihood, some audio-visual products and relics, as well as direct selling, mail order selling and online selling. Foreign direct selling and mail order businesses like Amway and Mecoxlane have in fact been operating in the Shanghai market long before this.

Of course this is just the negative list for 2013. The list is expected to be trimmed rather than expanded in 2014 and 2015. The scope and content of liberalisation in the Shanghai free trade zone are expected to gradually expand based on progress in such areas as implementation of liberalisation pilots, improvement of management and adaptability of companies.

II. Opportunities for commercial services

1. Expand the scale of consumption and boost consumer demand

As far as market demand is concerned, the establishment of the Shanghai free trade zone will attract the entry of foreign companies and bring more mid- to high-end consumers. The zone will also lure domestic companies from other parts of the country. These will greatly increase the volume of Shanghai's commercial activities as well as the size of its businesspeople population. The growth rate of Shanghai's resident population will soar, and so will the tourist population. The scale of consumption will expand and consumer demand will grow.

In terms of market supply, more new business operating formats, types and practices will be brought in and new categories, varieties and brands will enter the market, giving consumers a wider choice.

In terms of commodity price, commercial enterprises will be able to lower their transaction cost thanks to a reduction of intermediate links, convenient settlement and faster circulation. Keener market competition also assures consumers better quality at a lower price as well as a faster turnover of goods.

2. Promote integration of domestic and foreign trade

In the General Plan, promotion of the transformation and upgrade of trade was a major highlight. At the core of the transformation and upgrade of trade is the integration of domestic and foreign trade. Encouraging companies to engage in both domestic and international trade will facilitate their further development.

Shanghai started its pilot reform for the liberalisation of commerce more than 20 years ago and foreign commercial enterprises have ventured into the city one after another during this period. Today, foreign firms account for over 20% of Shanghai's retail trade. However, not much breakthrough has been made on how to help domestic enterprises go global. Chinese companies that have made it big on the international market are few and far between. The General Plan provides for the easing of restriction in a series of policies, including the deepening of the pilot for international trade settlement, the launch of leasing services both inside and outside of the country, and the expedited promotion of cross-border e-commerce services. These provisions should be of great help to Chinese enterprises going global.

Earlier, the General Office of the State Council had circulated the opinions of the Ministry of Commerce and other departments on the policy of supporting retailing and export in cross-border e-commerce. This policy, which includes supporting the normal collection and settlement of foreign exchange, encouraging banking institutions and payment institutions to provide payment services to cross-border e-commerce, implementing relevant taxation policies (such as exemption and rebate of VAT and consumption tax on goods exported via e-commerce), and establishing an e-commerce export credit system, has been put into trial application in Shanghai and four other cities which have been approved for pilot customs clearance services for cross-border e-commerce and will be implemented in other cities where conditions permit.

Photo: Zone bodes well for opportunities in commercial sector.
Zone bodes well for opportunities in commercial sector.

Domestic trade and foreign trade have been separated all these years. Domestic trade enterprises, which only engage in domestic trade, understand consumer demand within the country but lack buyers (merchandisers) who are familiar with the international market and do not have international marketing channels. Foreign trade enterprises only engage in foreign trade. They have foreign clients, access to information abroad, international trade expertise and a good understanding of the international market, but are not familiar with domestic consumer demand and lack domestic retailing channels. The integration of domestic and foreign trade can fully combine the advantages of both sides so that domestic companies can import readily marketable goods according to domestic market demand to enrich the market, guide consumer demand and foster new consumption hotspots. This also makes it possible for them to implement the strategy of "going global" and create conditions for expanding the international market.

In order to integrate domestic and foreign trade, expedited efforts are needed to train people on domestic and foreign trade skills, nurture seasoned traders with management experience, enhance the personnel structure of commercial enterprises, and boost the competitiveness of enterprises in the international market.

3. Promote transformation and upgrade of commercial enterprises

Pilot commercial reforms in Shanghai over the last two decades have narrowed the city's gap with developed countries (and regions) and greatly raised the energy level of its commerce. Shanghai's commerce is now virtually on a par with the developed countries in terms of "hardware" like shopping venues. However, there are still considerable gaps to be filled in terms of brand portfolio and the categories and types of commodities. The gaps are even wider as far as "software" items like management, marketing and services are concerned. Domestic commercial enterprises mainly attract consumers by offering price cuts and cash coupons, but the effects are not quite satisfactory. Lack of product varieties and categories and homogeneity of operation are the main reasons why they fail to attract consumers.

As regards chain-operated businesses, domestic enterprises have done very well in the operation of supermarkets, convenience stores, hypermarkets and fast food restaurants but have yet to come up with success stories in the operation of department store chains. They have big shortfalls in private labels and own brands, whereas foreign firms are well-experienced in these respects. The establishment of the Shanghai free trade zone and the further liberalisation of commercial services will be a big help to mainland commercial enterprises in dealing in private labels and own brands, running department store chains and enhancing their soft power.

4. Promote upgrade of operating format

Shanghai is one of China's first pilot cities to open to the outside world. The retail and wholesale sectors were among the first sectors approved by the State Council to set up Sino-foreign joint ventures. The catering industry had its first pilot joint venture (KFC) in 1989; the retail sector had its first joint venture pilots (Shanghai No. 1 Yaohan and Orient Shopping Centre) in 1992; while the wholesale sector had its first of such pilots (Baihong Trading Co) in 1999.

The entry of foreign supermarkets, convenience stores, shopping centres, department stores, specialised stores and discount stores into Shanghai provides ample examples for domestic enterprises to learn from. Following their entry, new operating formats have emerged one after another in the city and modern means of circulation became available. Seeing that their market share is gradually nibbled away by foreign rivals, domestic commercial enterprises have been trying hard to catch up and made progress in the course of competition.

Thus, the establishment of the Shanghai free trade zone will facilitate the entry of new operating formats of international commerce and produce a catfish effect. The operating formats, management and business operations, marketing practices and business concepts of international commerce will provide models for the transformation and upgrade of commerce in Shanghai.

In the financial sector, innovation in the forms of liberalisation, financial leasing and the development of foreign-funded investment companies will facilitate the integration of financial and commercial investment and contribute to the sustained and steady development of commercial financing and commercial real estate. It will also help commercial enterprises lower the cost of financing and make it less difficult for small and medium-sized enterprises to seek loans. The liberalisation of cultural, recreational and other undertakings will also help boost commerce for the benefit of all.

In short, the impact of the establishment of the Shanghai free trade zone on commerce will be indirect, progressive and long-term.

Qi Xiaozhai, Special Correspondent, Shanghai

Content provided by Picture: HKTDC Research
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