Achievements and Problems of Reform of Investment Management System for Shanghai Pilot Free Trade Zone

Chengrong PAN

1.The Research Center for International Business and Economy，Sichuan International Studies University，Chongqing 400031，China；2.School of Economics and Business Administration，Chongqing University，Chongqing 400030，China

1 Introduction

With constant deepening of global economic integration，trade competition between countries becomes intense and intense.To fight for global capital and market，many countries keep their competitiveness through seeking economic unions.For example，the United States，European Union and Japan established new generation global trade and service industrial rules through Transatlantic Trade and Investment Partnership（TTIP），Trans-Pacific Partnership Agreement（TPP），and Plurilateral Services Agreement（PSA）.To further integrate into international market and promote development of international trade，China has set some special economic zones.For example，the State Council approved to establish Shanghai Pilot Free Trade Zone on August 22，2013.The establishment of new investment management system of Shanghai Pilot Free Trade Zone opens a new road for China's economic system reform.

In recent years，domestic and foreign scholars have made extensive researches on free trade zones and their investment management system.The researches can be divided into two types.The first is about actual significance and operation and development of free trade zones.For example，Yu Muzhan（2013），ShangMaoqu（2013）and Ni Jinjie（2013）made detailed analysis on background，reasons and mission of free trade zones，which lay solid foundation for in-depth researches of free trade zones.Sun Lijian（2013）analyzed significance and development prospect of free trade zones.He stated that the establishmentof Shanghai Pilot Free Trade Zone is the maximum system bonus of current market reform.He proposed new mode of financial services for five free trade zones focusing on the entire industrial value chain，and analyzed strengths and threats of Pudong and Lin'gang in development of free trade zones from the objective perspective.The second is about the reform of investment management system based on the environment of the whole country.Zhang Wei（2013），Zong He（2013），Zhong Lei（2013）and Yan Yue（2013）make further outlook of the management system of free trade zones and discussed management system of free trade zones at macroscopic level.However，generally，since Shanghai Pilot Free Trade Zone was not established for a long time，relevant researches are still not perfect and systematic.Based on this，we made an in-depth study on preliminary achievements and system defects of the new investment management system of Shanghai Pilot Free Trade Zone，in the hope of providing ideas for various problems in the reform.

2 Comparison of the investment management system of Shanghai Pilot Free Trade Zone and traditional investment management system

2.1 Traditional investment management systemChina's traditional investment management system has two major characteristics.The first is classified management.To stimulate enthusiasm of local areas，the State Council and relevant functional departments are responsible for researching and formulating policies related to foreign investment，examining and approving specific investment projects with amount above the limit，and provide guidance for local areas in management of foreign investment.Local government should be responsible for examination and approval and management of foreign investment.All areas should take classified management in accordance with local situations.Generally，the examination and approval power is transferred to cities，districts and counties according to the investment scale.The second is approval one by one：mainly reflected in project approval，investment guidance and foreign exchange control.Organizations responsible for checking and approving foreign investment include National Development and Reform Commission（NDRC），Ministry of Commerce，State Administration for Industry and Commerce，and other departments（such as environmental protection，and land authorities）and local government.

2.2 The investment management system of Shanghai Pilot Free Trade ZoneThe investment management system of Shanghai Pilot Free Trade Zone has two major characteristics.The first is pre-esta blishment national treatment.National treatment is a principle in international law vital to many treaty regimes.It essentially means treating foreigners and locals equally.Under national treatment，if a state grants a particular right，benefit or privilege to its own citizens，it must also grant those advantages to the citizens of other states while they are in that country.The second is negative list manage ment mode.The negative list is a list prohibiting foreign investment or limiting proportion of foreign investment.It means that foreign investment in all sectors should be allowed unless listed as prohibited or restricted under the negative list.It is like black list of investment field.It contains management measures for inconsistency between national treatment and most favored nation treatment，or management restrictive measures in performance requirement and high management requirement.The negative list of Shanghai Pilot Free Trade Zone subdivides18 main sectors into1 069 subcategories，among which manufacturing sector accounts for 11.6%and service sector accounts for 23%.Investment under the negative list will be managed by the original method，while investment beyond the negative list will be managed on the principle of national treatment.The negative list management is dynamic management and will be adjusted with development of the reform.

2.3 Advantages of the investment management system of Shanghai Pilot Free Trade Zone

2.3.1 Simple and convenient examination and approval procedures.The investment management system of Shanghai Pilot Free Trade Zone practically simplified enterprise registration procedure.For sectors beyond the negative list，foreign investment projects will change from approval system to filing system（with the exception of sectors specifically defined by the State Council）.Approval system on foreign investment contracts and Articles of Association are replaced by filing procedures.The investment management system of Shanghai Pilot Free Trade Zone greatly increases working efficiency of government departments and enterprises，administrative resources are fully utilized，and optimum allocation of resources is realized，thus it greatly raises macro-management and regulation capability of the state.

2.3.2 High transparency of supervision.In traditional foreign investment management system，the foreign investment management organization assumes development and supervision functions.Since supervision function and policy making roll into one，management department of ten falls in to mis cell aneous approval and coordination works.Non-continuation and lagging of administrative law enforcement are very obvious，leading to occurrences of unlawful practice.In addition，transparency and efficiency of foreign investment supervision are low，and cooperation and information sharing of foreign exchange，industrial and commercial，taxation，environmental protection，and land departments are insufficient.In the new investment system，through the negative list，the state is clear of supervision methods of all sectors.Thus，itnotonly improves supervision transparency but also increases working efficiency of all parties.

2.3.3 High international adaptation.In the context of global economic integration，the influence power of WTO gradually drops，so China needs further integrating into international market and making reform.According to statistics，at least 77 countries adopt the pre-establishment national treatment and negative list approaches to manage the foreign investment.Such mode has gradually become new development trend of international investment management.Besides，China is gradually losing low cost advantage in manufacturing sector.Faced with intense competition of developed countries and other developing countries，China needs improving soft environment of investment and strengthening attraction to foreign investment.Furthermore，China's investors hope to enjoy citizen treatment and equal and fair investment environment when making investment in foreign countries，we also should provide foreign enterprises with equal treatment.Of course，when providing pre-establishment national treatment，we can build risk prevention system through financial supervision，environmental protection，labor rights protection，technical regulations，and anti monopoly review.However，at the same time of providing preestablishment national treatment，we should also take appropriate safety examination measures，to smoothly implement the new foreign investment management system.

3 Achievements of the investment management system of Shanghai Pilot Free Trade Zone

3.1 Situation of enterprises entering Shanghai Pilot Free Trade Zone According to statistics，at the beginning of formal operation of Shanghai Pilot Free Trade Zone on September 29，2013，36 enterprises entered the trade zone，including 11 joint ventures（accounting for31%）and 25 domestic investment enterprises（accounting for 69%）.For foreign investment joint ventures，the business scope covers finance，trade and business，communication，and cross border e-commerce fields.After establishment，the number of enterprises entering the zone rapidly increases from 36 to 1 434 and keeps increasing，fully showing that the new investment management system of Shanghai Pilot Free Trade Zone can attract huge investment.There are 38 new foreign capital enterprises accounting for 3%and 1 396 new domestic capital enterprises accounting for 97%.The average registered capital is15million USD and 25million USD respectively for foreign capital enterprises and domestic capital enterprises.The highest registered capital is5 billion yuan and the lowest registered capital is30 000 yuan.New enterprises are mainly trade and service type enterprises（accounting for 69%and 26%separately）and there are 40 financial institutions and some logistic enterprises.

3.2 Positive effect of negative list of Shanghai Pilot Free Trade Zone

3.2.1 Favorable for opening more areas and increasing working efficiency.Compared with the past positive list，the negative list covers finance，shipping，trade and business，specialized service，culture，and society，etc.It is favorable for speeding up transformation of government functions，reducing corruption in foreign investment，and increasing working efficiency of government.

3.2.2 Favorable for giving full play to functions of government to optimum allocation of resources.Implementing the negative list management mode，government only needs controlling sectors involving national economic safety.The investment in general industries can be regulated by the market in accordance with the principle of survival of the fittest.This not only reduces burden of government，but also increases investment risk awareness of enterprises，makes enterprises carefully selecting investment projects，so as to reach the purpose of optimizing resource allocation and increasing investment benefits.

3.2.3 Favorable for simplifying approval procedure and attracting foreign investment.Foreign investment into the areas beyond the Negative List will only have to go through record-filing procedures with the relevant authorities，rather than seeking approval as in the past.This makes the access of foreign investment more transparent and investment and trade more liberal.Therefore，it is favorable for strengthening confidence of foreign investment and plays a positive role in encouraging and attracting foreign investment.

4 Problems in the investment management system of Shanghai Pilot Free Trade Zone

4.1 The negative list exceeds Catalogue of Industries for Guiding Foreign Invest ment In China，the management of market access of foreign investment is based onLaw of the People's Republic of China on Foreign-funded Enterprisesand other two laws，and the basic policy is based onCatalogue of Industries for Guiding Foreign Investmentjointly formulated and implemented by the National Development and Reform Commission and Ministry of Commerce.This catalogue includes three parts：Catalogue of Encouraged Foreign Investment Industries，Catalogue of Restricted Foreign Investment Industries，andCatalogue of Prohibited Foreign Investment Industries.On surface，the negative list includes 190 items，accounting for 17.8%of the 1069 national economic sectors，showing high openness.But the actual data indicates that there are 38 prohibited items and 152 restricted items in 190 special measures in the negative list.In the Catalogue，there are 36 prohibited items and 78 restricted items.Even in the encouraged items，there are 43 restricted measures.From comparative analysis，we found that the coincidence nearly reaches 100%.

4.2 Low openness in important areasFrom summary and analysis of the negative list，we found that provisions on agriculture，forestry，animal husbandry and fishery，manufacturing，and service industries related to national economy run counter to demands and requirements of opening more areas in the free trade zone.

4.2.1 Prohibited items.In the catalogue，there are 36 prohibited items.In addition，on this basis，we found new provisions，including prohibiting wholesale of salt，prohibiting investment in auction of historical relics，prohibiting investment in historical relic shops，prohibiting directly or indirectly engaging in or participating in operation service of cyber games，prohibiting investment in business of Internet data center，prohibiting investment in operation of preschool education，secondary vocational education，ordinary high school education，and higher education.

4.2.2 Restricted items.In the catalogue，there are 78 restricted items and nearly all items can be found inCatalogue of Industries for Guiding Foreign Investment.The negative listhasa total of152 restricted measures，muchmore than 121 items in the catalogue.In the catalogue，there are about 43 items of measures restricting stock right of foreign capital.Nearly all of these are reflected in the negative list.For example：

Agriculture，forestry，animal husbandry and fishery：apart from all the same items，there is onemore provision that＂enterprises investing in crops and seeds should be joint ventures，and enterprises investing in grain，cotton，oil crops should have registered capital not lower than 2million USD and the investment proportion of Chinese side should exceed 50%，enterprises of other crop varieties shall have registered capital not lower than 0.5million USD＂.

Manufacturing sector：in the catalogue，there are 31 restricted items；in the encouraged items，they are 23 items restricting stock right.All of these can be found in the negative list and the control standard is basically the same.For example，the law has abolished the provision of＂share of foreign capital in the automobile production enterprise should not exceed 50%and a foreign automobile production enterprise should setup only two automobile joint ventures in China＂，but it still appears in the negative list.

Service sector：in the catalogue，there are 35 restricted items；in the encouraged items，they are12 items restricting stock right.All of these can be found in the negative list.Only the＂wholesale of readymade oil＂is not included in the negative list.In addition，the negative list also includes prohibiting investment in business of Internet data center，prohibiting wholesale of salt，prohibiting investment in auction of historical relics，prohibiting investment in historical relic shops，prohibiting directly or indirectly engaging in or participating in operation service of cyber games.

From the above analysis，it can be known that the content of negative list is the basically same as provisions of the catalogue.The negative list adds many new items not included in the catalogue，so the openness of the free trade zone is questioned；manufacturing，service and finance sectors where high hope is placed are not found in the negative list.The openness of Shanghai Pilot Free Trade Zone is not fully implemented，so it is difficult to make clear which areas reflect the open measures.

4.3 Fundamental defect in policy design mode

4.3.1 Limitation of local government.The negative list is a new exploration of China.It involves a wide area and has high influ-ence power.The negative listof Shanghai Pilot Free Trade Zone is formulated by Shanghai Municipal Government and guided and supported by the National Development and Reform Commission and the Ministry of Commerce.Because local government has poor coordination and weak macroscopic control ability，it has great limitation in control of information，manpower，resources，and authorities.All of these make the feasibility of negative list give a great discount.Besides，at the starting stage，the free trade zone has undertaken important functions of foreign investment in safety review and ant imonopoly review，and its ability of review exerts great influence on the review effect.

4.3.2 The＂gold content＂of investment approval system is low.Domestic and foreign investment projects beyond the negative list implement filing system.Howmany sectors having investment value and investment advantages based on open market is not reflected in the negative list.

4.3.3 The investment approval system is not practically operable.Transferring of approval power to local areas will be favorable for increasing working efficiency.At the same time，if it strictly implements provision of approval power，the approval of investment projects in the free trade zone will greatly increase.This not only increases workload of the state，but also reduces working efficiency of government，and restricts development of enterprises and the free trade zone.

5 Policy recommendations for improving the investment management mode of Shanghai Pilot Free Trade Zone

5.1 Simplifying the negative list to ensure feasibility of provisionsAlthough the negative list increases openness in certain areas to a certain extent，it is nearly the same as the Catalogue of Industries for Guiding Foreign Investment.Therefore，government should make practical observation，delete certain items in the existing negative list，and improve the opera bility of the negative list，to ensure conforming to requirement of market openness of the free trade zone.Secondly，it is required to carry out field survey，make corresponding statistics of items in the negative list，and formulate proper negative list in a qualitative and quantitative way，to ensure feasibility of all provisions in the negative list.

5.2 Increasing areas to open and giving prom in ence to advantages of the free trade zoneAt present，the achievements are not prominent in the reform of the investment management system of Shanghai Pilot Free Trade Zone.To a certain extent，the negative list approach needs further improvement in increasing areas to open.For example，in the manufacturing sector，China should transform the role in production and change from labor intensive to capital intensive type，to really speed up the process of China's economic development.For service sector，China's service sector still remains at the rising stage，but it is still not perfect，and there is a big gap with developed countries，especially in specialized services，such as law，human resources，and investment management.Historical experience proves that reform and opening-up is the only way.In finance sector，the key issue also lies in the openness.Therefore，to further increase opening areas will practically ensure guidance in the development of Shanghai Pilot Free Trade Zone.

5.3 Improving government concern and correcting fundamental defect of the investment management modeThe reform of the investment management system of Shanghai Pilot Free Trade Zone shoulders great mission.Thus，central government should place higher concern.For example，it should take back the power of formulating the negative list to let the government look at the new investment manage mentmode from the more macroscopic perspective，and input more research talents to study this mode.It is recommended to establish a suitable investment management mode with Chinese characteristics in combination with basic environment of Shanghai Pilot Free Trade Zone in accordance with basic national conditions of China's development.Besides，the state should make corresponding empirical study on this new investment management mode to prove feasibility of this mode.Those impractical provisions should be abolished in time.In addition，it is required to verify the new investment management mode，ensure the new mode suitable for development demand of Shanghai Pilot Free Trade Zone，and rectify existing defects fundamentally.

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