COMMENTARY COVERSHEET

Ahmet Ulusoy College

Economics commentary number: SL Number 3

Title of extract: China to Ease Foreign Investment Rules for New Free Trade Zones

Source of extract: Bloomberg News

Date of extract: 17 August 2013

Word count: 737

Date the commentary was written: 10 September 2013

Sections of the syllabus to which the commentary relates: Section 2 and 3

Candidate Name: evval Beli

Candidate Number: 006615-006










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China to Ease Foreign Investment Rules for New Free Trade Zones
By Bloomberg News - Aug 17, 2013 7:01 PM GMT+0300

China plans to suspend some laws on
foreign investment in proposed new free
trade zones including Shanghai as part of
Premier Li Keqiangs drive to open up the
economy to sustain growth.
The changes will provide innovative
ways of opening up the economy, remove
unnecessary administration and help
transform the states role in the economy,
according to a State Council statement
after an Aug. 16 meeting led by Li.

China is boosting efforts to attract foreign
companies after investment from abroad
fell last year for the first time since the
global financial crisis. Free trade zones that
will be allowed to cut bureaucracy and test
financial liberalization may offer
incentives that help the government
maintain economic growth of at least 7
percent a year as the export- and
investment-led model of expansion runs
out of steam.
The Chinese government knows that
having foreign investment is a very good
thing and they want this to be an attractive
market for strategic and financial
investors, Kent Kedl, managing director
for Greater China and North Asia for risk
consulting firm Control Risks, said in a
telephone interview. Many foreign
investors are concerned about the
bureaucracy and lack of clarity around
regulations, thats probably the biggest
concern when they come in to China, he
said.

Foreign Investment
Foreign direct investment in China fell 3.7
percent last year to $111.7 billion from a
record $116 billion in 2011, government
data show. Investment rose 4.9 percent in
the first half of this year to $62 billion.
The American Chamber of Commerce in
China has urged the government to open
more industries to overseas investors and
improve the climate for foreigners, while a
European Union business group has
warned that optimism is declining and the
regulatory environment is worsening.
The State Council will submit a draft
document to the Standing Committee of
the National Peoples Congress, the
legislature, according to the Aug. 16
statement. If approved, the State Council
will be allowed to suspend some laws on
foreign investment, Sino-foreign joint
ventures and cooperative enterprises in the
free trade areas, it said.
The statement didnt give a time frame or
additional details about the changes, which
will apply to the proposed zone
in Shanghai and any potential new ones.

Less Interference
While the State Council and Chinese
media use the term free-trade zone, the
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meaning is more akin to a free-market zone
subject to less regulation and interference
rather than an area of duty-free trade.
The State Council said July 3 it approved a
pilot program to set up the countrys first
free-trade zone in Shanghai, describing it
as an important move to adapt to global
economic and trade developments and
further open up the economy.
Shanghai Mayor Yang Xiong said the city
will accelerate the building of the trial zone
in the second half of this year, including
creating laws to regulate the project, the
Shanghai Daily reported on July 14.
One part of the plan includes ending a 13-
year ban on the manufacturing and sale of
video-game consoles in China, on the
condition that companies such as Sony
Corp. and Nintendo Co. make their
products in the new Shanghai area,
the South China Morning Post reported
July 10, citing unidentified sources who
have reviewed documents on the policies.

Essential Step
The Shanghai free trade zone will allow
the city to explore investment and trade
policy innovations and expand the opening
of the services industry, HSBC Holdings
Plc said in a July 4 report. Trials which
will involve financial reform including
interest-rate liberalization and full
convertibility of the yuan are seen by the
State Council as an essential step towards
upgradingChinas economy, Hong Kong-
based economist Qu Hongbin and Beijing-
based Ma Xiaoping wrote.
China already has a financial zone in the
Qianhai district of the southern city of
Shenzhen, which borders Hong Kong. The
area was created by the State Council in
2010 and the government said in June 2012
it would make Qianhai a test ground for
freer yuan usage and capital account
convertibility.
Other Chinese cities have also expressed
interest in creating free-trade areas. The
southern province of Guangdong is looking
at setting up a zone in its Nansha new area,
the Shanghai Securities News reported July
25, citing a statement from the Guangdong
government. Tianjin, a port city about 100
miles (162 kilometers) southeast of
Beijing, submitted a plan to the commerce
ministry last month, according to a July 10
report in the 21st Century Business Herald.
Xiamen, a port city in southeastern Fujian
province is also trying to get central
government approval for a zone, the
official Xinhua News Agency reported
Aug. 16.




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Commentary Number 3
International trade is the exchange of goods and services between countries.
i
Nations engage
in trading for several benefits that could be obtained from it such as; lower prices, greater
choice for consumers, differences in resources in other countries and efficient allocation of
resources, economies of scale, increased competition and foreign exchange. In the extract, it is
said that the authorities in China are planning to suspend laws on foreign investment in
proposed new free trade zones because of the following reasons; attracting foreign companies
to make strategic and financial investments in China and maintaining economic growth rate.
China is known to have government policies which include strict regulation and interference
to the international trade. Among these policies, there are applications of tariffs, a tax charged
on imported goods, subsidies, which is the amount of money paid by the government to firms
per unit of output and quotas, physical limit on the numbers or value of goods that can be
imported in China. These protectionist policies have their own benefits, which will be
discussed later, but they also prevent the country from draw advantages from trading. This is
an example diagram showing the effect of tariff on supply:


Domestic Supply
of China
World Supply + Tariff
World Supply
Quantity of the product
P
r
i
c
e

o
f

t
h
e

p
r
o
d
u
c
t

Q
e

P
e

D
P
w
+T
P
w

Figure 1: A tariff on the
imports of a good.
Q
4
Q
2
Q
3
Q
1

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As seen in Figure 1, before the tariff, Q
2
amount of product were being supplied at a price of
P
w
. Country's production was Q
1
and the imports were Q
1
Q
2
. When tariff is applied, World
Supply shifts up by the amount of the tariff to World Supply + Tariff and so the market price
increases to P
w
+T. Total quantity falls because the law of demand states that as the price of a
good or service rises, the quantity demanded for that good or service falls, ceteris paribus.
Tariffs are useful to prevent dumping of certain goods in a country, however they increase the
prices of imported goods, decreasing consumers' willingness and ability to buy those
products.
Comparative advantage gained from trade-offs between goods can be visualized via using
production possibility curves (PPCs). Let us take the video-game console example given in
the extract; Nintendo Co. and Sony Co. are Japan-based companies, and it will be assumed
that Chinese technology companies have made a trade deals with them to exchange
televisions and video-game consoles:

In Figure 1, it is assumed that China produces twenty thousand televisions and twenty five
thousand video-game consoles whereas Japan only produces ten thousand televisions and
fifteen thousand consoles. Even though China has more consoles, they may have higher prices
and fewer qualifications, causing Chinese consumers to switch to Japanese video-game
consoles. When agreed on price levels, Japan and China can exchange televisions and
Televisions (ten thousands)
V
i
d
e
o
-
g
a
m
e

c
o
n
s
o
l
e
s

(
t
e
n

t
h
o
u
s
a
n
d
s
)

10 20
25
15
China
Japan
Figure 2: Comparative
advantage on PPC.
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consoles; causing a rise in competition in both markets, and thus a consequent decrease in the
price of these goods. If similar trade deals could be sustained in the future, the Chinese
government will be able to gradually lessen the interference to the international trades and
thus, opening up the economy as intended.
Chinas current objective seems to be sustaining economic growth via suspending laws on
foreign investment and cooperative enterprises in the free trade areas. This seems to be a
beneficial plan for the near future; however the Chinese government needs to consider the
international factors that may block both economic growth and development such as over-
specialization on a small range of products, price instability of primary products and
protectionism policies of other countries before opening up new free trade zones. Now,
China's protectionist policies narrow down the choices of consumers in the country, but how
can they be sure that over-specialization will not occur when the government suspends laws
on foreign investment? Even though the wide range of goods produced makes China an
unlikely place for over-specialization, the risk always exists; hence the Chinese government
should foresee the possible outcomes of the formation of new free trade zones for the sake of
the country's macroeconomic aims and the wellbeing of citizens.
It is explained in the extract that the term "free-trade zone" used by State Council and Chinese
media actually refers to a free-market zone subject to less regulation and interference rather
than an area of duty-free trade. For my part, it is the best for China to open up its economy for
free trade step by step as the country's inexperienced about free-trade and how it works; firstly
suspending some laws on foreign investment to attract strategic and financial investors, then
gradually lessening the interference of the government on international trading.

i
I got help from (Maley S. & Welker J. (2011). Pearson Baccalaureate Economics. Pearson Education Ltd.) and
(Blink J. & Dorton I. (2011). Economics Course Companion. Oxford University Press.) books to define terms.