A cargo ship anchored at the port of Waigaoqiao in Shanghai Photo: CFP

 

Although the plan to establish a 28-square-kilometer free trade zone (FTZ) in Shanghai is still in its early stages, investors have already started to exploit the opportunities it offers.

On July 3, the same day when the State Council announced its approval of the onshore FTZ plan, which will be a first in the country, a syndicate led by domestic property developer China Vanke announced that they had won an auction to buy an area of land in Pudong district in Shanghai for 4.87 billion yuan ($793.8 million), at a premium of 88.6 percent above the initial bidding price.

The land has a planned gross floor area of 227,400 square meters, which translates into a price of 21,400 yuan per square meter, the highest this year, news portal china.com.cn reported on July 3.

It beat a recent record set on June 27 by a syndicate led by another major developer, Greenland Group, which bought an area of land in Qingpu district in Shanghai for 4.72 billion yuan.

Shanghai vs Hong Kong

As the FTZ will offer preferential policies in areas such as international enterprise management, trade and finance, it "will encourage companies that have overseas business to set up their headquarters [including accounts, management and sales functions] in Shanghai," Yin Li, a managing director at New York-based commercial real estate brokerage Studley Inc, told the Global Times Thursday.

Studley opened its first Chinese office in Shanghai in May.

With these kinds of advantages, the FTZ may take over from other Chinese enterprise zones, such as Kunshan in the neighboring Jiangsu Province, or even Hong Kong, Li said.

She said that Hong Kong "is losing its advantage as the center of Asian international finance due to a shortage of land resources and a continuing rise in prices for already very expensive real estate. It seems that with more unique and beneficial terms, Shanghai can set itself up as the new international center for finance, shipping and trade. It may surpass Hong Kong in all those areas."

"We've already seen that Hong Kong's houses are by far the most expensive in Asia in nominal dollar terms. But the gap is even wider in real terms," David Carbon, chief economist at Singapore-based DBS Bank, wrote in a research report Wednesday.

"In Hong Kong, it takes almost 40 years for the average person to buy the average 100-square-meter house. That's 2.5 times longer than it takes in the Chinese mainland," said Carbon.

"Prices in Shanghai may be three times the national average but so are the wages," he noted.

Prices to keep rising

"To the extent that Asia's rising home prices follow from capital inflows, this is not likely to end" when the US, EU and Japan stop their quantitative easing programs and global interest rates go up, Carbon said.

The much larger and longer-term driver of capital inflows into the region is the fact that businesses want to be where the growth is, and this means that "property prices will likely continue northward as well," he noted.

Average new home prices in 70 major cities in China rose in June by 6.8 percent year-on-year, according to Reuters calculations based on official data published Thursday, marking the sixth straight month of year-on-year increases, the news agency reported Thursday.

The buoyancy of real estate prices in Shanghai is also likely to have a ripple effect in other markets, such as Beijing, Guangzhou and some major second-tier cities, experts said.

Given that controlling housing prices is a major concern for the top policymakers, Li of Studley said that the central government may consider implementing a system of annual real estate taxes to bring down the costs of land acquisitions while still providing local governments with revenues.

The price of office and retail properties is likely to rise faster than for residential properties, Li noted.

"We would expect the rules and government policies for each would be differentiated to manage business growth and moderation of residential housing costs," she said.

Singapore-based Keppel Land sold 1,940 residential units in the Chinese mainland in the first half of the year, surpassing its total sales in 2012 and leading to a 79.3 percent jump in profit contribution from overseas operations, Reuters reported Wednesday, citing the company's financial report.

LME in focus

A particularly hot topic in ongoing discussions about the FTZ is the proposal to allow foreign commodities exchanges, such as the London Metal Exchange (LME), to set up futures delivery warehouses in the FTZ.

Various government agencies expressed different opinions about this plan during the consultation stage for the FTZ, according to Chinese media reports.

Shanghai municipal government said that an LME warehouse in the city could replace the exchange's other two warehouses in South Korea and Singapore, leading to lower trading costs for domestic firms, financial news portal caixin.com reported on July 16, without naming its sources.

But the China Securities Regulatory Commission (CSRC) disagreed, arguing the conditions were not ripe and calling for the proposal to be removed from the FTZ plan, according to the caixin.com report.

"The confrontation apparently ended with the CSRC yielding," the report said.

"China is the second largest country in terms of metal futures trading volume, second only to the US… Having LME warehouses in Shanghai will directly increase the number of trades taking place in Shanghai," Jim Yeh, a research fellow at the China Academy of Financial Research (CAFR) with Shanghai Jiao Tong University, told the Global Times Thursday.

With more trading taking place in Shanghai, "futures prices settled in China will become the reference points for global futures trades," said Yeh.

If LME sets up its warehouse in Shanghai, then other commodities exchanges will follow suit, and "other financial products such as index futures, currency futures, and options on futures, will be introduced as well," Yeh noted.

The CAFR is to offer a course for Chinese financial professionals on asset-backed securities, a sophisticated financial product, on August 17.

However, given the large trading volume on the LME and the appeal of international product standards, its presence in Shanghai may have a heavy impact on the Chinese domestic futures market, Yeh said, noting the LME "could lure away a large amount of customers from domestic futures exchanges."

"It is also a well-known practice by investment banks to purchase warehouses and lease them to exchanges for the purpose of obtaining inventory data to facilitate their own trading," Yeh noted. "The Chinese government will definitely be very sensitive about its resource data being controlled by foreign investment banks."