Shanghai free trade zone sputters

A closed ATM machine is seen at the Shanghai Free Trade Zone in Pudong district, in Shanghai, China. (Reuters)
Updated 02 September 2019

Shanghai free trade zone sputters

  • While the Shanghai FTZ, opened in September 2013, has long struggled to live up to its initial promise of free-flowing currency and easier international trade

SHANGHAI: When China launched the expansion of the Shanghai Free Trade Zone (FTZ) recently and announced six new zones in July, officials touted the efforts to attract foreign investment and deepen trade ties with neighboring countries.

Yet, for many businesses the FTZs have simply failed to live up to their hype, undermined in part by Beijing’s capital controls as an escalating trade war with the US slows China’s economic growth to 30-year lows.

Back in Shanghai, in the first FTZ area, chairs lie overturned and desks sit empty behind padlocked glass office doors. Food courts that once overflowed with business diners have seen small eateries steadily shut up shop this year, leaving used chopsticks and plastic packaging scattered on the ground.

While the Shanghai FTZ, opened in September 2013, has long struggled to live up to its initial promise of free-flowing currency and easier international trade, more businesses are increasingly deserting the 28.78-square-kilometer Waigaoqiao zone.

China Merchants Bank, now the country’s fifth largest by assets and profits, disbanded a 10-strong FTZ corporate business team at the end of last year, said two people with knowledge of the situation, spreading the staff among other branches after the lender found that the FTZ’s promised benefits were rendered useless as capital controls tightened.

Moreover, according to several bankers, hundreds of specialized accounts lie untouched across the FTZ as capital controls and regulatory scrutiny make free movement of currency — the hot selling point of the zone — untenable.

The people could not be identified by name as they were not authorized to speak to the media.

CMB said the bank has restructured its team in Shanghai because it attaches great importance to FTZ business, adding that assets in free trade accounts have increased by 67 percent at the end of August from the start of this year.

A spokeswoman for the Shanghai government said the authority was not aware of the capital control snags.

“The FTZs have reduced opportunities for local government taxes and also contradict Beijing’s attempt to reduce capital flight,” said Andrew Collier, managing director of Orient Capital Research.

“There are many conflicting desires in the FTZ — and they can’t be as effective ultimately as Beijing would hope,” he said, adding that the same issues will affect the new FTZs.

The idea in 2013 was that an onshore yuan account opened in a free trade zone bank branch could be used as if it were already offshore, meaning it could be exchanged, or used in payment free of domestic restrictions.

But bankers found the reality far from the hype and as concerns over capital flight led regulators to clamp down on yuan leaving the country from 2015, usability deteriorated further.

Users of an FTZ account “have to tick more than 40 boxes before they conduct one transaction. After all the due diligence, the FTZ account is no longer convenient,” said Ding Jianping, professor at Shanghai University of Finance and Economics.

“Convenience, and the concept of auto transaction used to be the selling point,” he added.

And even though Beijing plans to expand the zones, capital controls will remain strict for the foreseeable future, meaning the FTZ is unlikely to improve for lenders.

There are currently 119 finance firms in Shanghai with a registered office including the words “free trade zone,” according to a data grab on Qichacha, an information provider that uses official company registration sources.

Out of the 119 finance firms, only 3 currently have a Waigaoqiao area address.

Shanghai Huarui Bank shut its Waigaoqiao branch back in 2015, only to open another in a different part of the free trade zone when the government expanded the pilot area. While the new branch is still handling FTZ business, the prospect for growth is losing steam, said a person with direct knowledge.

The Bank of Ningbo currently has four branches in the FTZ, but while they’re still expanding, most of the work done is normal banking business.


Make or break days for global oil ahead of OPEC crunch meeting

Updated 08 April 2020

Make or break days for global oil ahead of OPEC crunch meeting

  • OPEC, led by Saudi Arabia, were on Thursday scheduled to take part in virtual discussions with non-OPEC members, led by Russia, about a possible deal to revive the OPEC+ alliance
  • On Friday, energy ministers from the G20 nations, under the presidency of Saudi Arabia, will convene in another digital forum that will bring in the third part of the global oil equation – the US

DUBAI: The global energy world, in the midst of crisis as demand slumps to unprecedented levels due to the coronavirus disease (COVID-19) pandemic, faces two days that could make – or break – the oil industry for months to come.
Leading producers from the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, were on Thursday scheduled to take part in virtual discussions with non-OPEC members, led by Russia, about a possible deal to revive the OPEC+ alliance that fell apart in Vienna at the beginning of last month.
Then, on Friday, energy ministers from the G20 nations, under the presidency of Saudi Arabia, will convene in another digital forum that will bring in the third important part of the global oil equation – the US, currently the biggest oil producer in the world.
If no deal is reached from the two days of oil summits, the immediate prospect looms of a further fall in crude prices and, with global storage facilities already filling rapidly, the possibility of major exporters “shutting in” oil fields, jeopardizing future production.
Energy experts say the purpose of the meetings is two-fold: To reach agreement on how to limit the vast quantities of oil that are still being produced even as demand collapses; and to present some kind of united front in geopolitical terms in the face of the biggest economic recession since the 1930s.
The most visible immediate sign of any success from the meetings will be an increase in the price of crude oil on global markets. Brent crude, the Middle East benchmark, has lost nearly half its value in the past month.
The first aim – to try to balance oil supply and demand – is the more difficult. Global demand has fallen by at least 20 per cent from the usual daily consumption of around 100 million barrels, oil economists have calculated.
But, following the collapse of the OPEC+ deal that was putting a lid on supply, all producers have been pumping more crude. Saudi Arabia is producing more than 12 million barrels per day (bpd), a bigger volume than at any time in its history. All OPEC members, as well as Russia, have said they will increase output.
In this stand-off, US President Donald Trump intervened last week to say that he had spoken to Saudi and Russian leaders and that he “expected” a cut of 10 million, possibly even 15 million, bpd.
That looks like wishful thinking. For one thing, it would not rebalance markets. Anas Al-Hajji, managing partner of US-based Energy Outlook Advisers, said: “The amount of the cut is relatively small given the major drop in demand.”
There are also some difficult relationships to smooth over in the OPEC+ alliance. Saudi Arabia and Russia exchanged angry statements last weekend, each accusing the other of starting the oil price war. Iran, with big reserves but hampered by US sanctions from exporting in large quantities, said that it might not take part in the conference.
The choreography of the two meetings also presents hurdles. The US will not be present at the OPEC+ meeting, but American Secretary of Energy Dan Brouillette said he would take part in the G20 event.
Because it is a free-market industry, America cannot order its oil producers to reduce output, but most analysts are agreed any attempt to rebalance global supply would be impossible without a US contribution.
By going first, Saudi Arabia and Russia are “playing blind” without knowing what the Americans are thinking. Neither would want to agree big price-restoring cuts only for US producers – under big financial pressure at current levels – to swoop back into the market.
This week there have been some signs that the Americans are considering their own versions of cutbacks. The biggest US company, Exxon Mobil, said it would reduce capital expenditure on future projects by 30 percent; the US Energy Information Administration said oil production would fall by nearly 1 million bpd this year, in response to falling demand and financial pressures.
But even if the Saudis and Russians cut substantially alongside other big OPEC producers such as the UAE, and the Americans enter a long-term pattern of falling demand, it is still hard to see how cuts could reach the 10 million barrels Trump “expects,” let alone 15 million.
J. P. Morgan, the big US investment bank, said that it expects OPEC+ to come up with combined cuts of about 4.3 million barrels, most of that coming from Saudi Arabia, Russia and the UAE. “If it’s 4.3 million it only puts off the day when global storage gets filled completely,” said Robin Mills, CEO of Qamar Energy consultancy.
Storage facilities are nearly at the brim. Malek Azizeh, director of the premium facilities at the Fujairah Oil Terminal in the UAE, joked that he was going to hang a sign on the terminal gates: “Thanks, but no tanks.”