MULTINATIONALS: Free Trade Program Gets Boost From Japan, Thailand
Bottom line: A new e-commerce joint venture by Japan’s Itochu and Thailand’s CP Group marks the latest major advance for China’s fledgling free trade zone program, whose policies should eventually expanded to the entire country.
China’s fledgling Free Trade Zone (FTZ) program got a new boost last week when a group of corporate giants from Japan, Thailand and China announced a major new retailing joint venture in the original zone in Shanghai. That news came just a week after a major expansion of the Shanghai zone, and the announcement of a plan for 3 additional FTZs in other parts of China.
This sudden expansion of the FTZ program is a welcome development for the many private companies whose growth plans have been stymied for years by China’s huge bureaucracy. That group includes not only big multinationals like Amazon (Nasdaq: AMZN) and HSBC (HKEx: 5; London: HSBA), but also a growing number of homegrown private giants like JD.com (Nasdaq: JD) and Alibaba (NYSE: BABA), which also harbor global aspirations.
Both Beijing and Shanghai should be commended for their efforts so far, which have laid a solid foundation for aggressive new financial and trade reforms that can be rolled out to other parts of the country. Now the goal over the next decade should be turning all of China into one massive “free trade zone,” where goods and money can move freely based on market demand.
Beijing launched the experimental Shanghai FTZ in the fall of 2013, with an aim of liberalizing the country’s strict controls on the financial and trade sectors. Details slowly emerged in the program’s first 6 months, including preferential policies that significantly reduced the cost of trade and loosened tough restrictions on currency movements both inside and outside of China.
After getting off to a slow start due to lack of specific details, a steady stream of actual new projects began to give the Shanghai FTZ new momentum. Those included initiatives by some of the world’s top multinationals, ranging from traditional retailers like US grocery giant Costco (Nasdaq: COST), to global e-commerce leader Amazon and top game console makers Sony (Tokyo: 6753) and Microsoft (Nasdaq: MSFT). More recently some of China’s own top companies have joined the movement, with e-commerce giant JD.com announcing a new global trading platform in the zone in March.
Last week saw the announcement of the zone’s latest major retailing venture, whose partners included Japan’s largest trading house Itochu (Tokyo: 8001), Thailand’s biggest conglomerate Charoen Pokphand Group (Bangkok: 1215) and Chinese partners Citic Group, China Mobile (HKEx: 941; New York: CHL) and Shanghai Information Investment. (English article) The group will invest $500 million in the venture, called Face to Face, which will tap the FTZ’s preferential policies to sell imported products to Chinese for up to 30 percent less than they would currently cost.
This latest major initiative came amid a broader expansion of the FTZ program that saw Shanghai’s original zone expanded four-fold in area last week, including the important Lujiazui financial district in addition to several manufacturing areas. Around the same time, Beijing announced that 3 new FTZs will soon be launched in Tianjin and Fujian and Guangdong provinces. Earlier reports indicated the plan could be extended to a total of 12 other cities nationwide, meaning as many as 9 more zones could be launched by the end of the year.
In most cases so far, companies are taking advantage of lower import tax rates in the zone that let them bring foreign products into China more cheaply and efficiently. Looser financial restrictions mean they can more easily convert money back and forth between yuan and foreign currencies, which makes moving goods, payments and profits across borders much easier and more efficient.
These early steps are certainly positive, and should encourage both foreign and Chinese companies to set up new initiatives not only in Shanghai but also the other new zones. But Beijing shouldn’t pause after this latest expansion and new venture announcements, and should continue moving aggressively to expand the program beyond the simple foreign trade realm.
Financial services is one area where many have big hopes for these new FTZs, even though actual initiatives have been relatively few so far. That could change soon, with the new inclusion of the Shanghai’s fast-rising Lujiazui financial district as part of the city’s expanded FTZ.
When the history books are written, the launch of the FTZ program in 2013 could easily become a major turning point in China’s economic reform, ushering in an era that moved the country towards its goal of becoming a more services- and consumption-oriented economy with less reliance on exports and manufacturing. To make sure that happens, leaders need to stay focused on continuing the current pace of expanding the FTZ program, with an ultimate aim of extending new free trade policies to all of China.
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