Shanghai is Open for Business

China is not wasting time developing its economy and industry. It’s not like Shanghai wasn’t open business before but on Sunday, the city, which was previously a Coastal Development Area, became a new free trade zone:

A free-trade zone in Shanghai that China‘s government has billed as a major step for financial reforms and economic experimentation has formally started.

State media reported that a first batch of 25 Chinese and foreign companies were granted licences to register in the zone.

The China (Shanghai) pilot free-trade zone is a nearly 11-sq mile district that covers four existing special trade zones in Pudong district, including one at the airport.

China’s state council formally announced rules for the zone on Friday. They outline goals to upgrade financial services, promote trade and improve governance as well as measures to encourage foreign investment in 18 sectors in the country’s tightly regulated service industry.

There are also plans to experiment with the convertibility of China’s tightly controlled currency, the yuan, and let market forces rather than regulators set interest rates.

The zone is expected to serve as a testing ground for such financial experiments before they are rolled out elsewhere in China. No timeline was given for any changes, but rules in the zone will be introduced over a three-year period.

At a ceremony marking its opening on Sunday, Gao Hucheng, the commerce minister, said the government hoped it would act as “an experimental field to conduct economic reform” and promote economic development nationwide.

The Shanghai zone has been touted as the most important attempt at economic reform since the establishment of the country’s first special economic zone in 1980 in Shenzhen, near Hong Kong.

[…]The government has pledged to open up 18 service industry sectors to foreign investment, including shipping, law and engineering. Foreign-owned performing arts agencies and medical institutions will be allowed.

[…]Wei Yao, a China economist at Société Générale, said in a research note that setting up the zone in Shanghai, a city of “great strategic importance”, was a clear sign that policymakers wanted to push for fast economic liberalisation.

“The framework that is shaping up looks rather promising, although details of most measures are to be put in place over the course of six months to a year,” she wrote. “Like all previous economic experiments, this project is going to be a work in progress, subject to constant refinement.”

And now back in the US, let’s compare these reforms in Shanghai to the business climate in California, which in 2012 it was categorized as a state “unfriendly to business.”

So what is it that makes California unfriendly to business? For starters, it’s very expensive to do business in the state. Corporate taxes are high, as are energy and labor costs, according toMoody’sAnalytics and the Tax Foundation. In the Forbes rankings, the state also comes in at No. 40 in the category of regulatory environment. To compute the state’s regulatory score, Forbes looks at the Pollina Corporate Real Estate Index, Pacific Research Foundation’s Tort Liability Index, PRI’s Economic Freedom Index,Moody’sbond ratings, transportation infrastructure and right-to-work laws. Thank goodness it didn’t also look at the Los Angeles City Council’s proposed new regulation of the porn industry’s safe-sex practices — a proposal that increases both regulation and costs in an economically important industry in the state. California also ranks a disappointing No. 32 in the “labor supply” category, based largely on its low high school and college graduation rates. This ranking represents a precipitous decline from the days when California’s colleges were ranked among the best in the world.

How ironic is to have China, a “state controlled communist country,” teaching business lessons to the US, a “free market capitalist country.”

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