Shanghai Lingang Free Trade Zone Clearing Exports & Arranging Finance For Belt & Road Trade

Export orders, capital transfers and insurance for cross-border trade can now be arranged in Lingang New Area Of The Shanghai FTZ.

Op/Ed by Chris Devonshire-Ellis

Updated Friday May 29

Donald Trump is poised to announce some form of sanctions today (Friday May 29) on either Hong Kong, China, or both, following Mike Pompeo’s announcement a couple of days ago that he no longer considered Hong Kong to autonomous from mainland China, and therefore the preferential trade nature of the US-Hong Kong Special Policy Act would be reconsidered.

I discussed this in the article Pompeo’s Hong Kong Threats Won’t Damage China, But They Will Hurt The US which laid out how withdrawing support for US business interests in Hong Kong would lessen US influence over China trade, and actively support a relocation of American businesses to Shanghai, where they would be subject directly to Chinese, rather than Hong Kong law.

In this article, I look in greater detail as to how China has already begun positioning Shanghai and the Lingang New Area as a potential successor for Hong Kong as an International Financial Hub. China is ahead of the game here and if sanctions on Hong Kong become a reality, Beijing has an immediate, ready made solution at hand.

New policies introduced by China in the Shanghai Free Trade Zone to expedite foreign trade, including financial arrangements, customs and improved administration procedures are helping foreign investors in China sell their China manufactured products to Belt & Road markets. So much so that the FTZ allows products manufactured elsewhere in Asia to be exported via the zone to the buying destination.

One example is Volvo Construction, who recently shipped two excavators from its South Korea Factory to Nigeria as part of China’s “Belt & Road Initiative.” The machinery itself did not go through Shanghai, but all the paperwork, including orders, capital transfers and insurance, were arranged in Shanghai.

“Previously, Policies here meant that we had to do offshore trade through Volvo Asia in Singapore” said Zhan Xu, Vice Chief Executive of Volvo Construction Equipment in China.

Cross-Border Trade Services In The Lingang New Area
The Lingang Special Area was set up last year as part of the Shanghai Free Trade Zone and is designed to create a cluster of multinational headquarters to develop deeper international trade. In essence the new development is offshore trade, with corporate headquarters integrated with international finance. For Shanghai, the aim is to attract multinationals to establish headquarters in Shanghai and conduct supply chain management there.

This means that the Shanghai FTZ is an attractive option to relocate corporate back office service functions, including legal affairs, tax and audit operation to Shanghai from other Asian locations, as it is now capable of offering more inclusive and less costly solutions to trade administration.

New Local Financing Opportunities
Chinese and International commercial banks are now permitted to establish financial asset investment companies in Shanghai. Such financial asset investment companies will be enabled to established specialized investment subsidiaries in the city to invest in equities of key programs in the Lingang New Area and the Yangtze River Delta.

Financial institutions and large technological enterprises are now encouraged to start or invest in fintech companies in the Lingang New Area to explore the application of new technologies, such as artificial intelligence, big data, cloud computing, and blockchain in the financial sector.

Cross-Border RMB Finance & Trade
Banks operating in the Lingang New Area may directly handle RMB settlement in cross-border trade. The cross-border RMB income obtained from foreign direct investment (FDI), cross-border financing, and overseas listing may also be directly used for payment within China.

Developing Cross-Border Finance & Developing Shanghai’s Financial Sector
Selected foreign institutions can partner with Chinese commercial banks to set up wealth management joint ventures (JV) in Shanghai.

Foreign companies will be supported to set up wholly foreign-owned life insurance firms and establish or control securities brokerages and fund management firms in Shanghai. Mature overseas financial institutions can be approved in investing and holding shares in pension management companies in the city.

Asian Treasury Management Services
MNCs are now encouraged to set up global or regional fund management centers in Shanghai. The fund management center may, upon approval, trade in the inter-bank foreign exchange market, while Shanghai also intends to further liberalise its bond market, facilitating the registration process for overseas investors, and developing foreign exchange derivatives, including the RMB interest rate options.

Liberalizing China’s Financial Services Industry
China is pledging to open its US$44 trillion financial industry, likely in response to criticism for it having been a one-sided beneficiary of global commerce. Over the last two years, Shanghai has reported 48 opening-up projects to the state financial supervision and regulation departments – covering banking, securities, funds, insurance, and asset management. Among them, a batch of landmark projects have been launched in Shanghai:

• The first wholly foreign-owned insurance holding company – Allianz (China) Insurance Holding Company Limited;
• The first foreign-owned securities JVs – Nomura Orient International Securities Company Limited and JP. Morgan Securities (China) Company Limited;
• The first foreign-owned wealth management JV established by Amundi Asset Management and Bank of China Wealth Management;
• The first foreign-owned investment management JV – Vanguard Investment Management (Shanghai) Limited; and
• The first foreign-invested banking agents being granted type-A lead underwriting licenses – Deutsche Bank (China) and BNP Paribas China.

Immediate Foreign Trade Impact
China’s official statistics show that last year (2019), Shanghai added 6,800 new foreign investment projects, up 21.5% on the previous year. The contractual foreign capital amounted to US$50.25 billion, up 7.1 percent. Actual realized foreign investment reached US$19.05 billion, an increase of 10.1 percent year-on-year.

This year, under China’s new Foreign Investment Law Shanghai released 36 additional measures to open up financing services to foreign investors. Some have gone under the radar due to the Covid-19 outbreak, however to date these have realized an additional 81 foreign investment projects have been signed off in Shanghai, with a combined FDI value of over US$9 billion.

Shanghai Trade Advantages In A Competitive 2020 Environment
The Lingang New Area is having a profound effect on repositioning the focal point for cross-border finance and trade across Asia to Shanghai. Far more access to Chinese finance, coupled with a solid and comprehensive understanding of how international trade administration works along all elements of the transaction process are finally allowing China to move beyond the old Soviet-era systems and into a modern cross-border trade administration. Foreign investors should be contacting their Shanghai based consultants for examination of potential cost and time savings in their cross-border business and supply chain modelling.

Related Reading

• Why the Shanghai FTZ Will be Key to the City’s Post-COVID Recovery
• Shanghai Moves to Attract Foreign Investment, Open Up China’s Financial Sector
• The New Foreign Investment Law in China
  China has faced a deluge of international criticism over its treatment of foreign businesses and the perceived slow pace of market opening over the past year. Looking to restore the confidence of foreign investors, China passed a new Foreign Investment Law in March this year. The law establishes a new framework to govern foreign investment in China and addresses a number of common concerns among overseas businesses.