SHANGHAI/BEIJING (Reuters) - When China launched the expansion of the Shanghai free trade zone (FTZ) recently and announced six new zones in July, officials touted the efforts to attract foreign investment and deepen trade ties with neighboring countries.

A woman walks at the entrance of the Shanghai Free Trade Zone in Pudong district, in Shanghai, China August 22, 2019. PREUTERS/Aly Song

Yet, for many businesses the FTZs have simply failed to live up to their hype, undermined in part by Beijing’s capital controls as an escalating trade war with the United States slows China’s economic growth to 30-year lows.

Back in Shanghai, in the first FTZ area, chairs lie overturned and desks sit empty behind padlocked glass office doors. Food courts that once overflowed with business diners have seen small eateries steadily shut up shop this year, leaving used chopsticks and plastic packaging scattered on the ground.

While the Shanghai FTZ, opened in September 2013, has long struggled to live up to its initial promise of free-flowing currency and easier international trade, more businesses are increasingly deserting the 28.78 square kilometer Waigaoqiao zone.

China Merchants Bank, now the country’s fifth largest by assets and profits, disbanded a 10-strong FTZ corporate business team at the end of last year, said two people with knowledge of the situation, spreading the staff among other branches after the lender found that the FTZ’s promised benefits were rendered useless as capital controls tightened.

Moreover, according to several bankers, hundreds of specialized accounts lie untouched across the FTZ as capital controls and regulatory scrutiny make free movement of currency – the hot selling point of the zone – untenable.

The people could not be identified by name as they were not authorized to speak to the media.

CMB said the bank has restructured its team in Shanghai because it attaches great importance to FTZ business, adding that assets in free trade accounts have increased by 67% at the end of August from the start of this year.

A spokeswoman for the Shanghai government said the authority was not aware of the capital control snags.

“The FTZs have reduced opportunities for local government taxes and also contradict Beijing’s attempt to reduce capital flight,” said Andrew Collier, managing director of Orient Capital Research.

“There are many conflicting desires in the FTZ – and they can’t be as effective ultimately as Beijing would hope,” he said, adding that the same issues will affect the new FTZs.

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LESS TRADE ZONE?

The idea in 2013 was that an onshore yuan account opened in a free trade zone bank branch could be used as if it were already offshore, meaning it could be exchanged, or used in payment free of domestic restrictions.

But bankers found the reality far from the hype and as concerns over capital flight led regulators to clamp down on yuan leaving the country from 2015, usability deteriorated further.

Users of an FTZ account “have to tick more than 40 boxes before they conduct one transaction. After all the due diligence, the FTZ account is no longer convenient,” said Ding Jianping, professor at Shanghai University of Finance and Economics.

“Convenience, and the concept of auto transaction used to be the selling point,” he added.

And even though Beijing plans to expand the zones, capital controls will remain strict for the foreseeable future, meaning the FTZ is unlikely to improve for lenders.

There are currently 119 finance firms in Shanghai with a registered office including the words “free trade zone”, according to a data grab on Qichacha, an information provider that uses official company registration sources.

Out of the 119 finance firms, only 3 currently have a Waigaoqiao area address.

Shanghai Huarui Bank shut its Waigaoqiao branch back in 2015, only to open another in a different part of the free trade zone when the government expanded the pilot area. While the new branch is still handling FTZ business, the prospect for growth is losing steam, said a person with direct knowledge.

The Bank of Ningbo currently has four branches in the FTZ, but while they’re still expanding, most of the work done is normal banking business.

Each transaction in connection with a free trade account needs to be reported, and money inside cannot be transferred to an ordinary account, “which makes the account useless,” said a person who works at one of the FTZ branches.

In one of the four FTZ branches of the Bank of Ningbo, there are between 20 to 30 FTZ accounts and they are rarely used, she said.

Over at the Bank of Nanjing, management is not keen on expanding the FTZ business, said a person who works in the zone branch.

The bank is unable to offer products that would really assist a client, said the person, such as an offshore loan without onshore deposits due to risk controls and regulatory hurdles.

The FTZ business is “to fulfill targets set by the government” and not because there is real opportunity, the person added.

Shanghai Huarui Bank, Bank of Ningbo and the Bank of Nanjing did not respond to repeated requests for comment.

While for banks, the FTZ has not been a golden goose, firms in other industries say reforms, such as the streamlining of registration procedures have made it easier to do business.

And the Shanghai branch of the Bank of China and Bank of Shanghai said they still engage actively in FTZ business in their annual reports.