China expands Shanghai free trade zone to pull in investment

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The Chinese government has doubled the size of Shanghai’s only free trade zone, hoping to draw new investment and sharpen its edge in advanced manufacturing.

The change to the Lin-gang Special Area, where U.S. electric car maker Tesla is building a factory, follows an economic slowdown brought on by the trade war with the U.S. and rising pressure on foreign companies in China stemming from geopolitical tensions.

The expansion of Lin-gang covers 119.5 sq. kilometers south of Pudong International Airport, doubling the size of the original Shanghai free trade zone created in 2013. It also includes the ports of Yangshang and Waigaoqiao, which, combined, handle more cargo than any port in the world.

Policymakers say the expansion was a “major strategic decision” that echoed President Xi Jinping’s call for an integrated development plan in the Yangtze River Delta, including Shanghai, to widen China’s competitive advantage in science and technology. Reforms in Lin-gang will put the free trade zone on par with Hong Kong, Singapore and Dubai in terms of efficiency, according to officials.

“The FTZ in Lin-gang will promote high-quality economic development that influences international markets,” said Ying Yong, mayor of Shanghai, at a ceremony on Tuesday marking the start of operations in the zone. The government hopes to attract sophisticated industries, including chipmaking, artificial intelligence, biomedicine and aviation by offering tax rebates and promising lighter regulation.

Companies will pay a corporate tax of 15% for the first five years, instead of the usual 25%. Income tax rebates for foreign professionals are also being considered. And the central bank hopes to liberalize financial services in Lin-gang to facilitate cross-border transactions.

The move comes as Chinese manufacturers have begun moving production abroad in hopes of skirting the trade war. According to data compiled by the Nikkei Asian Review, since last June, 33 listed companies have notified China’s two stock exchanges of plans to set up or expand production in various locations in Asia, including Vietnam, Cambodia, India and Malaysia.

Foreign companies are also taking a cautious approach to operations in China, said David Yu, an adjunct clinical professor of finance at New York University’s Shanghai campus. Multinationals are dealing with greater geopolitical uncertainty, given the trade spat and heightened tensions in Hong Kong. “Risks are present in every jurisdiction, but the question is how do companies maneuver them and optimize their strategy without hurting their interests,” Yu said.

Despite these concerns, a number of companies are setting up shop in Lin-gang. One high-profile newcomer is Tesla, which is spending 50 billion yuan ($7.1 billion) on a “gigafactory,” the company’s second. The first was built in the U.S. state of Nevada.

Tesla representative Tao Lin told reporters on Tuesday that the company may expand beyond auto manufacturing in the future. Tao did not give specifics, her remarks followed a statement from Tesla founder and CEO Elon Musk on social media announcing plans to launch a tunneling and transportation startup in China. Tesla has reportedly said production of its Model 3 will begin as early as September in China. It aims to produce 3,000 cars a week.

Some companies believe the incentives offered in Lin-gang will help grow their domestic and international business. Shanghai Xinsheng Semiconductor said shipments to the U.S. have been hurt by the trade tension. The Chinese chipmaker said it will strengthen its domestic market so that “our customer base would not change much because of the change in tariffs.”

Like Tesla, Wartsila Qiyao Diesel, a Finnish manufacturer of ship engines, believes setting up a plant in Lin-gang will open doors for the company. “The traditional merchant market may be a little bit slow, but other consumer segments, especially the cruise business, [are] very good,” said Grant Gassner, managing director of Wartsila. The company formed a joint venture with two local organizations to get “access to the very big Chinese shipbuilding market.”

It is also eyeing opportunities in liquefied natural gas, one of China’s main imports, expecting the country to buy more from the U.S. when “things settle down,” said Gassner.

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