May 18, 2017 2:00 am JST

China's vaunted free trade zones lose their sheen

Foreign investors fear policy shifts, while Beijing offers no new incentives

A new free trade zone in Liaoning Province, home to major port city Dailan, has drummed up little foreign interest.

TOKYO -- The fever has faded for China's pilot free trade zones, as would-be investors skeptical of policy changes balk at setting up shop amid the lack of recruitment efforts by the government.

Free trade zones enjoy looser trade and financial regulations on a trial basis, in order to lure foreign investment and grow imports and exports, thereby stimulating economic growth. China opened its first such zone in Shanghai in 2013, and expanded the program to three more areas soon after. Last month, seven more zones went into operation.

When the first zone opened, "everyone thought Shanghai would be the new Hong Kong" in terms of deregulation, recalled one official from a Japanese bank that established a base in the new free trade area. At the time, many saw the program as a milestone in Chinese economic liberalization, akin to the special economic zones established in Guangdong Province and elsewhere starting in the 1980s. Domestic and foreign businesses scrambled to seize the opportunity.

The Shanghai zone eliminated bottlenecks for customs and quarantines, as well as for monetary transactions with foreign counterparts in a country where getting permits and licenses involves navigating an intricate web of bureaucracy. These measures soon produced results: businesses could start operating freely there as long as they did not run afoul of a "negative list" of barred or restricted business activities.

But the old vigor is absent in a new free trade zone in Liaoning Province, one of the seven opened last month. The province's port city of Dalian, a trade gateway for such countries as Japan and South Korea, intended to build up sectors such as marine shipping. Yet at present, no Japanese businesses have moved to set up shop there, said a source familiar with the matter. Around 30 Chinese companies plan to invest there, but "most of that is to make nice with the local government," said a trade source.

Potential investors are wary of sudden changes to the policies that make the free trade zones attractive. Shanghai's zone, for instance, initially covered only four bonded areas. Financial institutions rushed to set up in those areas. But a year and a half later, regulations were loosened in the regions where those institutions had original locations. Many businesses now plan to sit out the first round to wait for policy shifts again.

As often happens with easy-money opportunities, interest has faded since the mechanism became evident. The only path forward for the vaunted free trade zones is to find some new way to appeal to potential investors.

(Nikkei)

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