An Integrated Approach to Developing Pilot Free Trade Zones...

Title:An Integrated Approach to Developing Pilot Free Trade Zones and Opening up in the Financial Sector at a High Level

Author:PAN Hongsheng and WANG Ting

Building pilot free trade zones (hereinafter referred to as pilot FTZs) is an important strategic measure for advancing reform and opening up in the new era under the leadership of the CPC Central Committee with President I Jinping at its core. After a decade of development，the establishment of pilot FTZs in China has synergized with high-level financial opening up. This has resulted in closer ties between domestic and international markets and resources，higher quality trade and investment cooperation，and catalyzed further high-level opening up and high-quality development.

Integrating Pilot FTZs and Financial Opening Up

An FTZ is an area within a country or territory that is designated for special regulatory policies and tax incentives. According to the World Bank，export processing zones and free trade ports are all classified as special economic zones. As international experience shows，FTZs often have a number of developmental benefits，including greater trade，investment and financial freedom，tax incentives and a business-friendly environment. They play a crucial role in promoting regional economic and financial development as well as stimulating industrial transformation. For example，the establishments of FTZs in Singapore and Dubai were vital to the economic transformation of both countries into more outward-looking economies. Unlike FTZs in other countries，China has added the word “pilot” to its FTZ measures，with the aim of exploring institutional innovation and enabling model projects to play a leading role in advancing further high-level reform and opening up.

Establishing a Network of High-Quality FTZs

Since the 18th CPC National Congress，China has actively participated in reforming the global economic governance system by adhering to genuine multilateralism and making efforts to establish a global network of high-quality FTZs. Internationally，the number of China’s trading partners has risen steadily. According to the Chinese Ministry of Commerce，China has signed 19 free trade agreements with 26 countries and regions spanning Asia，Oceania，Latin America，Europe，and Africa. With the Regional Comprehensive Economic Partnership (RCEP) officially taking effect in January 2022，China has been increasingly open in terms of trade and investment in goods and services as well as government procurement. Domestically，China has intensified efforts to establish pilot FTZs and accelerated the transformation of government functions in this regard. China has also enhanced trade and investment facilitation to explore new pathways and accumulate new experience in further advancing reform and opening up. In September 2013，China’s State Council approved the establishment of the China (Shanghai) Pilot Free Trade Zone (SPFTZ)，which was a milestone event. After a decade of development，there are 21 operating pilot FTZs distributed in throughout China at this stage. As the data from China’s Ministry of Commerce indicate，pilot FTZs have accumulated 278 institutional innovation achievements over the past decade，serving as bases for comprehensively expanding reform and opening up.

Innovative Pilot Schemes for Financial Opening Up as A vital Aspect in Establishing Pilot FTZs

Pilot FTZs serve at the forefront of promoting financial reform and opening up. They constitute explorations in areas such as enlisting foreign financial institutions，developing cross-border commercial activities and optimizing the management of foreign exchange.

In terms of market access，the SPFTZ was the first pilot FTZ to establish national pre-entry treatment and negative list systems for foreign investment management consistent with internationally accepted practices. Prior to the relaxation of foreign equity restrictions on securities and fund management institutions，Qianhai took the lead in allowing foreign investors to control securities and fund companies in line with the Closer Economic Partnership Arrangements (CEPA) and its supplements that the Mainland has with both China’s Hong Kong and Macao. In 2016，the Hang Seng Qianhai Fund was established. With the Hang Seng Bank holding 70% of the shares，it was the first foreign onshore public fund. In 2017，HSBC Qianhai Securities officially began operations. With HSBC holding 51% of the shares，it was the first foreign-controlled onshore securities company.

In terms of cross-border business development，the international business segment of the Shanghai Gold Exchange was officially launched in 2014. This initiative has been instrumental in facilitating cross-border business development. In 2016，cross-border bonds (Mingzhu Bonds) were permitted in pilot FTZs，which enriched offshore financing channels for pilot FTZ enterprises. In 2021，the Cross-boundary Wealth Management Connect (Cross-boundary WMC) pilot scheme in the Guangdong-Hong Kong-Macao Greater Bay Area was officially launched，allowing residents of the Greater Bay Area to directly invest in financial products across borders. Various models have been implemented in areas with pilot FTZs and then gradually expanded. These include the Qualified Foreign Limited Partner (QFLP) and the Qualified Domestic Limited Partner (QDLP). In terms of foreign exchange management and the cross-border RMB use，certain measures have been implemented to facilitate operations. Initially，Pilot FTZs were instrumental in formulating innovative commercial solutions such as RMB offshore borrowing，two-way RMB cash pooling，unified cross-border cash pooling for RMB and foreign currencies，and simplified quotas for non-financial corporate foreign debt. These measures have expanded the use of RMB across borders and improved the convertibility of capital accounts. In 2015，the SPFTZ established a separate accounting system by introducing free trade accounts (FT accounts) to achieve integrated management of accounts in both RMB and foreign currencies. The SPFTZ has also continuously expanded its investment and financing capabilities as well as the scope of FT account trials，which gradually extending them to other pilot FTZs.

Distinctive Features of Pilot FTZs

Currently，a total of 21 pilot FTZs are operating nationwide，each playing a distinct strategic role. In terms of opening up the financial industry，pilot FTZs in Shanghai，Guangdong，and Beijing are more prominent. Pilot FTZs in Sichuan and Shaanxi，as well as the Hainan Free Trade Port，are critical in supporting the Belt and Road Initiative. The SPFTZ focuses on deepening innovation in opening up the financial industry and expanding the use of RMB in cross-border transactions. As the first pilot FTZ，the SPFTZ has been exploring new pathways to expand economic liberalization and accumulating new expertise. The SPFTZ was the first to establish FT accounts，adopt a negative list for foreign investment，and pilot the  QFLP and QDLP systems. The Guangdong pilot FTZ which includes the Nansha New Area，the Shenzhen Qianhai-Shekou Area and the Zhuhai Hengqin New Area focuses on expanding cooperation between Guangdong，China's Hong Kong and Macao. The Qianhai and Hengqin are adjacent to China’s Hong Kong and Macao respectively，these regions have become integral components for facilitating the integration of the economies of these special administrative regions with China's national development strategy. The Guangdong pilot FTZ has successfully attracted the first national approval from banks，securities，and fund institutions with China’s Hong Kong or Macao ownership or sole investments. It launched the Cross-boundary WMC and achieved new breakthroughs in enabling direct cross-border investments for individual investors in financial markets. The Beijing pilot FTZ focuses on supporting trade in services and developing science and technology innovation in the finance industry. Establishing a globally influential tech innovation center，pioneering a zone for further liberalizing the service industry，and setting up an experimentation zone for the digital economy are key elements of the Beijing pilot FTZ’s strategic plans. Although the Beijing pilot FTZ was established relatively late，it was the first to implement a negative list management system for cross-border trade in services nationwide. Moreover，the Beijing pilot FTZ offers more cross-border financial choices to innovative high-tech enterprises in Zhongguancun and has taken the lead in recognizing international qualifications in various financial fields such as banking，insurance，securities，funds and futures.

Financial Opening Up is Vital for the Development of Pilot FTZs

From an international perspective，financial liberalization has a unique impact on FTZs. FTZs in Singapore and Dubai have realized currency convertibility and achieved a high degree of capital and financial convertibility. They have maintained high levels of openness in capital markets，and facilitated cross-border financing and investment for both domestic and foreign companies. This has resulted in facilitating the movement of investment and profits across borders. Singapore has offered certain tax incentives such as stamp duty exemptions for real estate investment trust (REITs) transactions.

Since the 18th CPC National Congress，China has implemented a more proactive and inclusive strategy of steadily advancing high-level financial opening up. This approach has achieved consistent progress and breakthroughs，and injected fresh impetus into the high-quality development of FTZs.

First，there has been great development in China’s real economy. With the continuous refinement of two-way opening up，pilot FTZs have become pivotal hubs connecting China to overseas markets，and attracting both domestic and international resources to support the development of China’s real economy. At the national level，measures such as unified filing systems for overseas issuance and listing，the expansion of interconnected depositary receipt services，and other cross-border financing initiatives，as well as Mingzhu Bonds，have been implemented in pilot FTZs. As a result，financing channels for enterprises within FTZs have expanded markedly. Innovative services such as two-way RMB cash pooling help multinational corporations manage funds and reduce their financial costs. The pioneering of pre-entry national treatment and negative list management systems for foreign investment，coupled with the creation of a high-quality system supply and business environment，has lowered institutional transaction costs for market entities both within and outside pilot FTZs and contributed to high-quality development of the economy. According to the Chinese Ministry of Commerce，in the first quarter of 2023，foreign trade and investment in the 21 pilot FTZs grew rapidly. The actual utilization of foreign investment reached 71.9 billion yuan，a year-on-year increase of 22.1%. This figure exceeded the national average by 17.1%，accounting for 18.1% of the total of the 21 provinces (autonomous regions and municipalities directly under the central government).

Secondly，the service capacity and efficiency of China’s financial industry have improved significantly. Since 2018，restrictions on foreign ownership in sectors such as securities and funds have gradually been eased or removed，attracting numerous foreign financial institutions to launch operations in pilot FTZs.

Lastly，China has experimented with financial reforms successfully. The high-level two-way opening up and prudent advancement of the convertibility of capital accounts have ensured the smooth implementation of trial schemes including the Mingzhu Bonds in the SPFTZ and the Cross-boundary WMC in the Greater Bay Area. The experience of pilot FTZs has been replicated nationwide. The “pre-entry national treatment” plus “negative list management” system for foreign investment，first implemented in pilot FTZs，has been expanded across China and has now been granted legal protections under the Foreign Investment Law. In an effort to further optimize experimental strategies，various pilot FTZs have been studying and applying successful practices such as the FT account and the two-way RMB cash pooling.

Continuously Advancing the Integration of Pilot FTZs and High-Level Financial Opening Up

In the new stage of development，major changes in the domestic and international environments have presented new opportunities and challenges to China’s high-level opening up. In recent years，new patterns have emerged in the restructuring of global economic and trade regulations. Regional multilateral trade negotiations centering on the RCEP and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) have attracted increasing international attention. These new international economic and trade partnerships not only require the reduction of tariffs and non-tariff barriers，but also necessitate a closer alignment between domestic and foreign systems，which elevates the need for enhancing institutional openness. The report of the 20th CPC National Congress stressed the need for steady expansion of institutional opening up in terms of regulations，management，standards，and so on. It also proposed boosting efforts for the establishment of the Hainan Free Trade Port，upgrading pilot FTZs，and expanding the global network of high-quality FTZs. Institutional opening-up means benchmarking and aligning relevant systems，mechanisms，and international practices and high-standards，and then implementing innovative institutional measures to promote the integration of China’s economy with the international economic system in a more efficient，stable，and orderly manner.

Expanding the global network of high-quality FTZs is a strategic measure for China to achieve a higher level of opening-up and drive further institutional reforms. As a pioneer of reform and opening up，FTZs are capable of promoting high-level institutional opening up in the financial sector and facilitating greater integration of trade and investment with financial services.

First，in order to promote institutional innovation in the financial sector，a comprehensive summary of pilot achievements needs to be conducted and disseminated nationwide. A systematic approach is critical in formulating effective policies for the opening up of financial services in pilot free trade zones. The aim is to ensure the coordination of various innovative initiatives，thereby enhancing the overall benefits of reform and opening up. This will involve taking a comprehensive approach that takes into account the unique needs and opportunities of each FTZ.

Second，it is crucial to note the major national strategies aimed at enhancing the service capabilities of pilot FTZs. Regions，where pilot FTZs are located，undertake the development of high-level opening up such as the Belt and Road initiative，cross-strait economic cooperation，and the Guangdong-Hong Kong-Macao Greater Bay Area. Through the harmonious integration of pilot FTZs and the liberalization of the financial industry，China is better able to strengthen its major national strategies through the pursuit of international cooperation and competition.

Third，institutional innovation must be emphasized to better position China as a mediator and practitioner of advanced international rules. By focusing on marketization，the rule of law and internationalization，key efforts have to be made to benchmark high-quality economic and trade rules such as the CPTPP. China has achieved considerable progress in effectively establishing high-level pilot FTZs and conducting pilot schemes in the financial sector，which is of great significance in promoting economic development. It is expected to explore ways to conduct a new negative list pattern in pilot free trade zones or free trade ports，and combine the negative lists for foreign investment and trade in services.

PAN Hongsheng is chief economist at the China Institute of Finance and Capital Markets

WANG Ting is an associate research fellow at the China Institute of Finance and Capital Markets