Launch zone challenges

Some have argued that regional CEOs would be put off moving to the mainland because of higher tax rates compared with Singapore or Hong Kong, particularly on their own personal remuneration packages.

In his office in 21st Century Tower in Pudong, David Wu, general manager and managing partner of GMP Talent International, doubts whether that would be a deterrent.

He recruits executives from 600,000 yuan ($98,000) a year to some on 3 million yuan.

"Most companies offer a tax equalization calculation. They look at the net salary after tax and might add some housing or children's education allowances so that people will take a China package. It is quite a common benefit in today's market," he says.

As well as multinationals, the FTZ could be an ideal location for Chinese companies looking to expand their international activities.

Kevin Chen, principal of international management consultants A.T. Kearney, speaking from his office in Hang Seng Tower in Pudong New Area, says many are now at the stage at which the FTZ would be a useful platform.

"At the beginning many Chinese companies had just one investment in a foreign country which was just about doable with having an existing base in China and the current currency restrictions," he says.

"We have advised one company that has an existing German operation but is now looking to add another in Brazil. It really needs the ability to move money around globally and being located in the free trade zone could be the solution for this."

Chen says the zone is not just proving attractive to these larger globally ambitious companies but also entrepreneurs who think something good might come.

"There are a number of entrepreneurs from Zhejiang and Jiangsu (two provinces that are known throughout China for their entrepreneurs) who are registering in the zone. They don't know what is going to happen there but they think it might be an opportunity to make money."

Mark Purdy, chief economist and managing director of economic research for management consultants Accenture, who was visiting his company's Shanghai Central Plaza offices, believes the FTZ might even prove to be a China Silicon Valley.

"If it works, you will get these

network effects of bringing in and encouraging some hopefully highly innovative private sector companies. So you can create a mini Silicon Valley."

Because businesses in the medical sector are allowed to set up in the zone, there has even been speculation that foreign-owned hospitals will sprout up on the green areas around the existing warehouses. If not hospitals, the zone could be an unlikely center for cosmetic surgery and other specialist procedures.

"I actually don't see where in the zone they could set up hospitals. It is a bit far away from the major population centers," says Gleave at KPMG.

The authorities are keen that the FTZ is not becoming a new Lujiazui, Shanghai's financial district with skyscrapers that draws people away from the main city area. It is anticipated many companies will just rent a room or a floor within the zone. The FTZ regulations and benefits will only cover their activities within the zone and not those in the rest of China.

Steven McCord, local director of China retail properties research at Jones Lang LaSalle, based on the 25th floor of Plaza 66 with a dramatic high view of the city, says the establishment of the FTZ is not necessarily going to change the landscape of the areas involved in the pilot.

"They are not going to build any Grade A office towers like this. It is clear to us that so-called high-end office areas are on the negative list and will not be permitted. This is to ensure that the good development goes into the Central Business District," he says.

"There won't be a huge demand for office space within the free trade zone. Most companies will set up a representative office, perhaps just a room of several hundred square meters."

McCord adds that when subway line 16 is completed some areas of the zone will be within an hour of the city center and some people may want to commute, but he doesn't believe it will be an attractive place for further development.

"Some of it is on reclaimed low lying land and if you had a category three typhoon the sea might inundate some of the land. I wouldn't want to live there personally," he says.

But whether the FTZ proves to be a success or not does not revolve around these largely secondary practical issues.

"It is about the upgrading of the Chinese economy and the move away from manufacturing to service sector industries," says Chen at A.T. Kearney.

"The future growth of manufacturing in China is limited and we need to develop a service sector base that can take the economy onto the next stage."