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China opens new inland free trade zones

Areas designed to attract foreign investment, spur economic growth

The Shanghai pilot free trade zone

SHANGHAI -- China's State Council has officially unveiled seven new pilot free trade zones, five of which are in inland locations.

A pilot free trade zone is an experimental trade area where government control -- the issuing of licenses and permits, for instance -- is reduced in an attempt to increase economic efficiency. Trade, financial and other regulations are relaxed on a test basis. The central government intends to increase the number of FTZs across the country, while also evaluating how effective existing areas are.

The four previously established FTZs can be found in Shanghai and other coastal areas. The latest additions, in places such as Henan and Hubei provinces, are aimed at spreading economic activity inland.

Plans to set up more FTZs were announced by the council last summer. Some foreign businesses are skeptical about their effectiveness, but the government is intent on shifting the country's hubs for international trade inland.

The seven new zones, which began operating on April 1, have been set up in Sichuan, Hubei, Henan, Shaanxi, Liaoning and Zhejiang provinces and in the city of Chongqing. With the exception of those in Liaoning and Zhejiang, all are located away from the coast. 

China opened its first FTZ in September 2013 in Shanghai. The aim was to create new services and jobs in industries like finance and trade through deregulation, as well as attracting foreign investment.

In April 2015, China added three more -- in Guangdong and Fujian provinces and the city of Tianjin. It also quadrupled the area of the Shanghai zone. 

Former Commerce Minister Gao Hucheng explained the purpose of the latest expansion was so that China could "proceed to open up its inland to the outside world as well as make a bid to achieve economic development."

Parts of inland China have been registering high growth in recent years. But their economy as a whole remains relatively small compared to coastal cities like Shanghai and Guangzhou.

The country hopes that attracting investment to and nurturing startups in inland FTZs will lead to sustainable growth.

In late 2014, China embarked on the "Belt and Road" economic initiative. By funding infrastructure in Southeast and Central Asia, among other things, Beijing has strengthened political ties in the regions. Newly established FTZs in inland areas are also designed to serve as regional hubs for trade with countries that fall on China's envisaged modern-day Silk Road.

Each new zone will have unique characteristics. In Hubei Province, there will be sub-free trade zones, together measuring 120 sq. km, in three locations including Wuhan and Yichang.

The new FTZs will be at the geographical center of the country and serve as logistics hubs. In those areas, the government will relax regulations on cutting-edge logistics technology in particular and focus on the development of technology.

Hubei Province is a manufacturing cluster that is home to China's auto industry. The government aims to turn the province into a smart manufacturing hub producing things like industrial robots.

In Sichuan Province, an FTZ opened in Chengdu. In anticipation of a rise in trade with Central Asia and Europe thanks to the initiative, the government plans to build a large-scale bonded warehouse and relax regulations for the aviation and cargo transport industries.

China's FTZs were first established partly to counter the Trans-Pacific Partnership free trade pact, which encompasses 12 other Pacific Rim countries. China appears to have pushed for trade liberalization on its own to avoid being left out of the global trade order and to use it as a tool in future negotiations with other countries, including talks on China's possible participation in the TPP, said the Japan External Trade Organization's Shanghai office.

But with the global trade framework now uncertain following U.S. President Donald Trump's withdrawal from the TPP, the role China's FTZs play could also change.

Under President Xi Jinping's Belt and Road initiative, China is increasingly pursuing utilitarian diplomacy. Inland FTZs will be a trade gateway to Central Asia and Eastern Europe.

The idea of setting up the zones began with much fanfare, with Premier Li Keqiang describing it as an icebreaker for China's reform and opening up policy. Progress has since been made in part, such as declines in customs clearance time and waiting time for anyone wishing to start a business.

However, an official of a foreign trading company said, there is no reason to enter an FTZ because similar deregulation is also underway outside the zones. A financial company official said proceedings are incoherent from one zone to another, making them inefficient. The Japan Chamber of Commerce and Industry's local office in china has submitted a petition calling for further deregulation.

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