Interesting regional insights on how the next stage of economic developments may play out.
Last Friday, US President Donald Trump announced some form of sanctions would be placed on Hong Kong following Mike Pompeo’s announcement earlier in the week that he no longer considered Hong Kong as being autonomous from mainland China. Trump specifically mentioned that 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. It should be noted that Shanghai Free Trade Zone covers an area of 240 sq.km – roughly 25 percent of the total area of Hong Kong – yet significantly larger than the Hong Kong financial district and related ports and customs facilities. China is ahead of the game here and if sanctions on Hong Kong become a reality, Beijing has an immediate, readymade solution at hand.
New policies introduced by China in the Shanghai Free Trade Zone (FTZ) 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 and Road (BRI) 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 of new trade services involving Shanghai is Volvo Construction, who recently shipped two excavators from its South Korea factory to Nigeria, considered to be part of China’s BRI. 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 New Area was set up last year as part of the Shanghai FTZ and is designed to create a cluster of multinational headquarters to develop deeper international trade. In essence, the new development facilitates offshore trade, integrating corporate headquarters with international finance. For Shanghai FTZ, 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 operations, to Shanghai from other Asian locations, as it is now capable of offering more inclusive and less costly solutions to trade administration.