Business Opportunity in China
October 31, 2013
The newly established Shanghai Free Trade Zone offers opportunities for Polish companies to step up business with China.
The zone started operating at the end of September. It aims to offer quality financial services, promote trade and attract foreign investors to select branches of China’s strictly regulated services sector. If the experiment proves successful, similar reforms are expected to be introduced in other parts of the country.
Considering the Chinese authorities’ previous reluctance to open the country to foreign companies, the establishment of the zone is a groundbreaking event, experts say. According to consulting firm Deloitte, the zone is also an opportunity for Polish companies to expand their business with China.
Managed by the local authorities, the free trade zone in Shanghai, in the district of Pudong, covers an area of nearly 29 square kilometers. It comprises four previously existing special trade zones, including Pudong International Airport.
“It is difficult to overestimate the importance of this event,” says Tomasz Konik, a partner at Deloitte and head of the company’s Chinese Services Group in Poland. “The zone is a testing ground of sorts for the Chinese authorities to try out economic reforms that might roll out across the country over the next few years. The zone should also be seen as a further step toward the country’s economic liberalization and acceptance of the presence of foreign investors.” Experts compare the zone’s establishment to the communist authorities’ experiments with capitalism in the southern city of Shenzhen three decades ago.
To begin with, 25 Chinese and foreign companies have received the green light to register their business in the Shanghai Free Trade Zone. Licenses were also granted to 11 financial institutions, among them Citibank of the United States and DBS bank from Singapore. The zone is expected to improve the quality of financial services, contribute to trade promotion and attract foreign investors to 18 service industries grouped into six categories. These include banking, legal services, medical services, leasing, tourism, human resources, education, shipping, engineering and agencies representing performing artists. Companies will also be able to sell video game consoles that were until now banned in China, but specific games and software will first have to be approved by the authorities.
Adam Wac³awczyk, a director at Deloitte and a member of the company’s Chinese Services Group in Poland, says, “In the Shanghai zone, foreign investors will be treated in the same way as domestic businesses and will be subject to the same rules. This is a major change in the approach of the Chinese government.”
The Chinese authorities say the zone will be managed according to the best international practices and standards. And this means that goods imported into the zone by businesses with operating licenses will be exempt from customs duty. Financial institutions will also find it easier to operate there because their assets will be calculated according to the market rate. There are also plans to increase the convertibility of the Chinese yuan on the capital market and make interest rates subject to market mechanisms. Experts also expect that the tax system will be simplified. Foreign investors and international companies with Chinese capital can do business in the zone. Any changes will be introduced gradually over the next three years. Ultimately, the free trade zone in Shanghai, a city of 23 million, will become a major financial logistics and commercial center.
What does this mean for Polish companies? Even though the European Union is China’s biggest trading partner, Polish companies have yet to make their mark in that country. Currently, Polish investment in China is a meager 150 million euros, with the imports-to-exports ratio at 10 to 1. In 2011, over 200 companies with Polish capital were active in China, most of them small trading companies. Polish companies thinking of investing in China are encouraged by low labor and production costs and the country’s huge market. Obstacles include cultural differences and complex legal and tax regulations governing foreign investment. This could change with the opening of the zone.
Polish business expansion in China may be helped by a new strategy for economic ties with China drawn up by the Polish Economy Ministry. The strategy aims to reduce Poland’s negative balance of trade with China. The Polish Economy Ministry wants to focus on preparing Polish businesses to operate on the Chinese market. The strategy is based on other countries’ experiences of economic ties with China. It will be discussed with the Chinese in October, and will be officially announced early next year during Polish Economy Minister Janusz Piechociński’s planned visit to Beijing.
A good sign for the development of Polish-Chinese economic relations is the recent debut of the first Chinese company, Peixin International Group N.V., on the Warsaw Stock Exchange. “Peixin’s listing is the result of a consistent and increasingly bold strategy for making the Polish capital market and the stock exchange itself more international,” says Adam Maciejewski, president of the Warsaw Stock Exchange. “Our common goal—for the stock exchange and other players on the Polish capital market—is to shape the market in such a way so as to make it more attractive not only at the local level, but also internationally.” The Peixin group is one of China’s oldest manufacturers of everyday-use hygiene products such as sanitary napkins, diapers and tissues.