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.

A female entrepreneur brings crowdlending to Saudi Arabia

Updated 25 January 2020

A female entrepreneur brings crowdlending to Saudi Arabia

  • Shariah-compliant peer-to-peer lending platform called Forus to be launched this year
  • Founder Nosaibah Alrajhi aims to help businesses and small investors in the Kingdom

RIYADH: It is no secret that small businesses struggle with obtaining funds to expand, with one avenue being particularly tricky in the region: Trying to rely on a national bank for help.
While things are improving, they are not doing so quickly enough. These longstanding problems have inspired Nosaibah Alrajhi, a former investment banker, to launch Forus, a Shariah-compliant peer-to-peer lending platform that she hopes can help bolster Saudi Arabia’s economic growth and enrich both business owners and small investors.
“It’s very straightforward: We bring together investors and SMEs (small and medium enterprises). Crowdlending will provide a steadier and safer return than say, investing in stocks or investment funds,” said Alrajhi, who serves as co-founder and chief executive.
“If you compare it to real estate, for example, you need a lot of cash upfront to invest in property, but with P2P (peer-to-peer) lending it provides almost everyone with the opportunity to invest and get a return.”
Having received a special license in July 2019, Forus will launch its platform in early 2020. For investors, it is quick and easy to register: You just need to complete a standard know-your-customer (KYC) process, and you will then be able to lend SR500 ($133) to SR10,000 to whichever companies you choose.
For would-be borrowers, Forus will undertake a credit and risk analysis that usually takes about 10 days.
“We do all the due diligence, and once companies meet our benchmarks, they’re listed on the platform, giving investors — individual and institutional — the opportunity to lend them money,” said Alrajhi. “We call it income investments — investors get their money back, plus fees.”
Companies listed on the online platform are rated according to risk — the bigger the risk, the larger the return for lenders. Companies can borrow up to a maximum of SR2 million.
“Investors can look at the companies’ financial reports, their strategy, their team, their products, as well as specific financial ratios that will help them make their decision,” said Alrajhi.
A company will request to borrow a certain amount, and once this is fully pledged by investors, it will receive the loan. Forus, in turn, earns a small commission. Loans are for six to 48 months.
“Our marketplace is providing investors with diversified alternative options (for) investing, while businesses are empowered with an opportunity to grow and scale,” said Alrajhi.
“We achieve this by minimizing friction, streamlining the customer experience and providing a seamless, secure and transparent platform.”
Alrajhi holds an MBA from Madrid’s IE Business School, where her research led her to spot a gap in the market for a fintech-based, P2P lender in Saudi Arabia.
“If you look at the market today, there’s only a few banks who are willing to lend to SMEs, which banks see as quite high risk,” said Alrajhi. “In Saudi, there are roughly 16,000 SMEs looking for loans.”
Forus uses a murabaha — cost plus financing — structure for its loans, which are not interest-bearing and so are Shariah-compliant.
In English, Shariah-compliant lending will refer to a profit rate rather than an interest rate, although in Arabic there is no such linguistic distinction.
Nevertheless, Forus’s loans are Islamic. “In Saudi, the biggest market is for Shariah-compliant financial services,” said Alrajhi.
She hopes her platform will provide a win-win for investors and SMEs — investors can earn a bigger return on their money, while SMEs can obtain the funds needed to expand their operations and increase profits.
In the longer term, Forus plans to expand to Egypt and Pakistan, but for now Alrajhi’s focus is firmly on her native Saudi Arabia.
“One of the main impacts we aim to have is transparency, which will then enable financial inclusion and help increase GDP (gross domestic product),” she said.
“We’ve talked to so many SMEs, and we found that almost all are facing challenges when it comes to borrowing.”
She leads a team of 10 staff at Forus, and is a female trailblazer in the Kingdom’s male-dominated financial services sector and more broadly in Saudi Arabia, where women constitute less than 25 percent of the workforce.
“Within the next five years, Saudi’s financial sector will look completely different,” said Alrajhi.

This report is being published by Arab News as a partner of the Middle East Exchange, which was launched by the Mohammed bin Rashid Al Maktoum Global Initiatives and the Bill and Melinda Gates Foundation to reflect the vision of the UAE prime minister and ruler of Dubai to explore the possibility of changing the status of the Arab region.