FTZ viewed with hope, skepticism

Blueprint for change

A government blueprint of the FTZ shows more than 90 policies. The policies, which cover five major areas, are:

Transforming government functions

Easing restrictions on foreign investment

Facilitating international trade by further opening the service sector

Deepening financial reform

Improving the regulatory and taxation systems

"While previously other similar zones, including the Shenzhen Special Economic Zone, focused on ‘incentives' by adopting favorable income tax policies, customs and (value-added tax) breaks, the Shanghai FTZ is intended to be a testing ground for a largely free and open economy as measured by international standards," said Steven Zhang, managing director at New York-based Fund Tax Services LLC.

But Zhang, a Shanghai native, said the FTZ's tax policies will be "expected to be in line with the direction of overall tax reform in China and international practice.

"They will remain subject to study and adaptation, so as not to erode the tax base and to align with China's overall tax system for foreign investment," he said.

Norm Page, a partner at Davis Wright Tremaine LLP, a US business and litigation law firm, and chair of the firm's China practice in Shanghai, said that financial leasing companies will be encouraged to start up in the FTZ. That will include factoring activity (selling of accounts and collecting debt).

"China wants to help small and medium-sized enterprises (SMEs) get more access to financing. SMEs are the biggest source of job growth in both China and the US," said Page, who has lived in Shanghai for seven years.

In one major difference from China's other economic zones, which emphasize manufacturing, the Shanghai FTZ focuses more on the finance industry. That's an area that Chinese and Western economists have argued should be liberalized to boost the economy.

Banking regulators have already moved to allow 11 financial institutions, including the Industrial and Commercial Bank of China, Bank of China, Citi (China) and DBS (China), to set up branches in the zone.