FTZ ‘Negative List’ Positively Disappoints Analysts; It’s too long, critics say, and worse yet a Shanghai official admits it is to some extent a copy of an existing catalog on foreign investment

10.21.2013 17:17

FTZ ‘Negative List’ Positively Disappoints Analysts

It’s too long, critics say, and worse yet a Shanghai official admits it is to some extent a copy of an existing catalog on foreign investment

By staff reporter Yu Hairong

(Beijing) – A closer examination of the Shanghai Free Trade Zone (FTZ) “negative list” in comparison with the policy that guides foreign investment elsewhere in the country has left many observers disappointed. Supposedly a big step toward greater openness, the list has aroused criticism for containing too many items – 190 special regulatory measures for roughly 17.8 percent of all industries in the country.Foreign investors involved in industries outside the list will be granted pre-establishment national treatment, meaning that they will not face requirements any tougher than domestic companies while preparing to start a business in the FTZ.

Hailed as innovative, analysts say the list has fallen short of market hopes because it hardly reflects any improvement on existing foreign investment restrictions. Detractors argue that it is more restrictive than the Foreign Investment Industrial Guidance Catalog, which divides foreign investment into encouraged, restricted and prohibited categories that apply in general nationwide.

The government admits the shortcomings. Wang Xinkui, director of the Shanghai Councilor’s Office, said at a press conference that the list, which he helped draft, is “of poor quality” at this moment and “to some extent a replica” of the catalog. Revisions will be made, he said.

That would give the public renewed hope. Many say they were frustrated to learn that the current list reproduced all the restrictive and banned measures in the catalog, some in greater detail. One example would be that the legal representative of a company specializing in air transport of cargo and passengers must be a Chinese national. The catalog does not specify required nationality.

Items that are not addressed in the catalog but are off limits to foreign investors on the list include running Internet data centers, operating games and organizing auctions of antiquities.

Certain restrictions in the list are apparently a blend of requirements in the catalog and other industry-specific regulations. One stipulates, for example, that foreign investors must cooperate with Chinese companies or form a joint-venture with a local business to invest in crop seeds. This represents a combination of requirements in the catalog and a narrowly focused administrative policy that governs the review and approval procedures of foreign investment into crop seeds.

Starting Small

Some measures in the list are behind times and should have been reformed, said Ma Yu, a research fellow at the Ministry of Commerce’s research center. He cited as an example a provision that says the Chinese investors must hold at least 50 percent of the shares in a joint venture company that manufactures complete automobiles, special purpose motor vehicles and agricultural vehicles.

Guangzhou’s export-processing zone has made greater efforts to break this restriction than the Shanghai FTZ, he said. In that southern city, the Japanese carmaker Honda has been permitted to hold a majority stake in the company it co-founded with local companies.

There are also concerns about the list being unclear. Compared with a ban, restrictions mean it is often up to the discretion of implementers to decide whether an investment proposal fits descriptions and how it should be conducted, said Chen Bo, deputy director of Shanghai’s FTZ research center.

“There is a lot of wiggle room for management and interpretation” when an investment is treated as acceptable under restrictions, he said. This is not what a negative list should do.

Clarity is hard to achieve because for a long time government authorities have been used to managing the economy with measures that vary widely across regions and sectors, Wang said. It takes time to sort out these differences and any revision to the old requirements needs to be in line with the central government’s reform agenda, he said.

In July, Beijing agreed to negotiate investment treaties with the United States on the basis of managing through a negative list. That implies it intends to roll out the Shanghai FTZ negative list nationwide if it is proven successful, said He Weiwen, a research fellow of the China Association of International Trade, an academic institution under the Ministry of Commerce.

For a government that has no experience in regulating with a negative list, it is normal to tread extra carefully in the initial stage, he said. Starting small is fine, but improvements should be made fast.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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