China Cuts Taxes in Shanghai Free Trade Zone to Lure Investment

(Bloomberg) --

China said it would cut taxes and ease restrictions on cross-border money flows in the new free-trade area in Shanghai, a move that will likely attract more foreign investment and help counteract some of the effects of the trade war.

The Lingang Special Area, part of the existing Shanghai free trade zone, will lower the tax some companies have to pay on income to 15% from 25% for five years and offer some income tax subsidies to foreign workers with skills that are in high demand, the Shanghai government said in a statement on Friday. The 50 measures announced also include easing restrictions on property purchases, cross-border capital flows and currency exchange.

The new preferential policies come as rising labor and land costs, along with higher U.S. tariffs on Chinese goods, prompt some foreign firms to move their production facilities overseas. The Shanghai FTZ was launched in 2013 as part of the government's efforts to deepen market-oriented reforms and China has said its goal is to eventually replicate the successful policies of the free trade zones across the country.

In addition to the Lingang initiative, China released FTZ plans for six other provinces earlier this month -- taking the total number of FTZs in the world's second-largest economy to 18.

The 119.5-square-kilometer Lingang free trade area will be modeled after Hong Kong, Singapore and Dubai, Shanghai government officials have said. China also wants to turn Lingang into a hub for high-end manufacturing industries such as artificial intelligence, semiconductors, aviation and aerospace.

By 2035, Lingang's GDP is expected to reach one trillion yuan ($140 billion), the area's deputy head Zhu Zhisong told reporters on August 20. That would match the GDP of Shanghai's Pudong New Area, which has evolved into the city's main financial district from rice paddies after nearly three decades of development.

The zone can also be seen as a response to the trade tensions with the U.S., though it was planned long ago, said Chen Bo, a professor at the Huazhong University of Science and Technology in Wuhan who researches free trade zones. “China doesn't want to be isolated by the U.S. and the best option is to open more and be connected more closely with the rest of the world.”

According to Chen, the highlights of Shanghai's measures are the support for talented workers, including easing visa red tape and income support for foreigners.

“The opening-up now is different from three or four decades ago when foreign companies just came in, built a factory and business thrived. Now it is about high-end manufacturing and services industries, and talented workers are the key, so the measures need to be different,” said Gai Xinzhe, non-resident research fellow at the China Institute for WTO Studies at the University of International Business and Economics in Beijing.

Other main measures:

• Shanghai government will invest at least 100 billion yuan over five years in a fund to support development of startups, infrastructure, attracting high-skilled workers to the area
• Government will ease home purchase restriction for non-local high-skilled workers in the area by shortening the waiting period to three years from five years
• Companies or financial institutions can freely use funds raised overseas or profits gained from cross-border services for business operation or investments in the area without government approval

--With assistance from Qi Ding.

To contact Bloomberg News staff for this story: Charlie Zhu in Shanghai at qzhu46@bloomberg.net;Miao Han in Beijing at mhan22@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger, Sharon Chen

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With assistance from Bloomberg