Shangai free trade zone pilot project

A key point summary of the project's main features

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The Shanghai Free Trading Zone (FTZ) is an area that covers Waigaoqiao Free Trade Zone, Waigaoqiao Bonded Logistics Park, the Yangshan Bonded Part and Shanghai Pudong Airport Free Trade Zone and four customs supervision. This area traded over 100 billion USD in 2012. The goal is to become a major financial hub by 2020. It is estimated that the FTZ will be completed in 2023. The FTZ in Shanghai could be used as a pilot for the rest of the country. One of the major developments is that the RMB is going to be convertible. The People’s Bank of China abolished the minimum rate restriction for bank loans. In order to make sure that capital flows into Shanghai, it has become easier for foreign investment banks to establish branches within the Free Trading Zone. The branch can be with or without cooperation from a Chinese bank. The cooperation between Chinese and foreign banks is encouraged and the idea is to open up for foreign bank accounts and become more transparent. Adding to this, the Free Trading Zone is creating a more favorable tax policy and a foreign exchange for currencies, which includes the RMB. The Free Trading Zone includes one of the biggest harbors in the world and can therefore handle the new potential trade. Premier Li and other politicians are backing the FTZ and this is a way for Premier Li to show his leadership. Economic reforms are moving China closer to a free market system. [1] The result of the FTZ will reflect the Chinese new government approach. The FTZ derives from Deng Xiaoping Theory of “Three Represents”.  According to the national strategy, China wants to play a major role in economic globalization. The National People’s Congress has endorsed the State Council to do some adjustments of the administrative approval decision of the Free Trading Zone. [2]


Sommario


1. The Plan and guidelines

 

The plan is to open a finance center in the South East Asia and Pacific, which can compete with other international financial centers. Shanghai Municipal People’s Government has the responsibility to support foreign companies and investors inside the Free Trading Zone. Chinese businesses will also be supported and encouraged to open-up and create business contacts outside China. To make this possible, a new service system is being created. Even some restricted trading in natural resources, leasing companies and data services will be possible.[3]

 

The main goal is to create the “perfect way” through reforms, new functions and policies to create a finance center. The wished result is to foster innovation with the support of international investments. This will be enabled by trade conventions and rules of convergence as well as a basic institutional framework. [4]

 

The plan is to within two or three years’ time to promote the service sector, and have opened up for foreign investment management systems. China wants to achieve an open financial industry and development of a new trade industry. To make this possible they will create regulation and policies to classify goods and use these policies for investments and innovation. The aim is to create a world-class investment and trade market and thus create an international competitive business environment. The major goal is to serve the national services of People’s Republic of China. This can be done with the free currency exchange and new legislation and policies. [5]

 

The project will facilitate other sectors as well. Restrictions on the follow sectors will ease: the financial sector, the transportation sector, commercial sector, trade services, professional services, cultural services and some public sector’s services. The pilot is an experiment of a market economy. To make this possible, market access requirements will be cancelled for example in qualifications for investors, limitations of foreign participation, restriction of business deals etc. The exception is that the “open market” will not include banks, information and communication services.[6]

 

In January 2014, the State Council decided to modify the terms of the Free Trading Zone. Please see below for the list of sectors that the Free Trading Zone is opening for foreign investors. Nevertheless, People’s Republic of China still has created a “negative list” with the sectors off limits for foreign investors and businesses.

 

The pre-approval is not more necessary for these 24 different procedures inside the Free Trading Zone: 

 

  1. Foreign investment projects
  2. Establishment of wholly foreign-owned enterprises (Wholly Owned Foreign Enterprises - WFOEs)
  3. Division and merger of WFOEs
  4. Reduction, increase and transfer of registered capital by WFOEs
  5. Mortgage and assignment of assets and interests by WFOEs
  6. Capital contribution by foreign investors
  7. Extension of capital contribution period by foreign investors
  8. Operating period of WFOEs
  9. Termination of WFOEs
  10. Establishment of Sino-foreign equity joint ventures (Equity Joint Venture - EJV)
  11. Equity transfer by EJVs
  12. Reduction, increase and transfer of registered capital by EJVs
  13. Capital contribution method of EJVs
  14. Operating period of EJVs
  15. Dissolution of EJVs
  16. Establishment of Sino-foreign cooperative joint ventures (Cooperate Joint Venture - CJVs)
  17. Major amendments to the agreements, contracts and articles of association of CJVs
  18. Reduction of registered capital by CJVs
  19. Assignment of rights under the cooperative contracts by CJVs
  20. Entrusted operational agreements of CJVs
  21. Early recovery of foreign investment
  22. Extension of operating period by CJVs
  23. Dissolution of CJVs
  24. Capital contribution by WFOEs, EJVs and CJVs

 

Another change is also the 8 guidelines of the Free Trading Zone. The guidelines are as follow:[7]

 

  1. Relaxing the restriction on the proportion of foreign equities permitted in join venture international shipping enterprises;
  2. Allowing wholly foreign-owned shipping management enterprises to be established in the Shanghai FTZ;
  3. Allowing Foreign-invested credit investigation companies to be established in the Shanghai FTZ;
  4. Cancelling equity caps for foreign performance agencies, and allowing wholly foreign-owned performance agencies to be established in the Shanghai FTZ;
  5. Allowing wholly foreign-owned entertainment venues to be established in the Shanghai FTZ;
  6. Allowing Sino-foreign education and vocational training organizations to be established in the Shanghai FTZ;
  7. Allowing foreign enterprises to run certain designated value-added telecommunication businesses in the Shanghai FTZ; and
  8. Allowing foreign enterprises to produce and sell gaming consoles in the Shanghai FTZ (Gaming consoles can be sold to domestic market upon approval from the competent culture department).

 

Adding to this a foreign corporation is allowed to own 50 % of a telecoms company and 50% of online companies. The Free Trading Zone is also allowing the opening of call center services, Internet access services, multi-side voices and video communication services as well as domestic Internet virtual private network businesses. [8]

 

Moreover, the telecom companies are allowed to register and offer their services to the entire People’s Republic of China and not only the Free Trading Zone. The conclusion is that China increasingly opens up the VATS sector; however, the question that still remains is if foreign companies will be granted licenses in the future.  [9]

2. Negative List

 

The negative list limits and prohibits foreign investments inside the Free Trading Zone. If the sector is not on the list, foreigners will receive the same treatment as a Chinese company. Nevertheless, foreigners still need to go through procedures; these procedures are not approval requirements. Shanghai Municipal People’s Government is responsible for the process and the approving requirements should be in accordance to law and regulations.[10] The State Council decides the exceptions.

 

The list includes more sectors than was expected from the beginning. The negative list is covering 16 service sectors and 190 management measures. [11] The sectors included in the list is:

 

1. Agriculture, Forestry, Animal Husbandry and Fishery Industries

2. Mining Industry

3. Manufacturing Industry

4. Production and Supply Industries for Power, Gas and Water

5. Construction Industry

6. Wholesale and Retail Industries

7. Transportation, Warehousing and Postal Service Industries

8. Information Transmission, Computer Service and Software Industries

9. Finance Industry

10. Real Estate Industry

11. Leasing and Commercial Service Industries

12. Scientific Research and Technical Service Industries

13. Water Conservancy, Environmental, and Public Facilities Management industries

14. Education Industry

15. Health and Social Industries

16. Cultural, Sports and Entertainment Industries

 

The negative list prohibits foreign investments in cultural, sport and entertainment industries. Foreigners are not allowed to participate in the radio, film, publication, newspaper and books industry. Gambling, Internet bars and gold parks are out of reach of foreigners. Normally inside the Free Trading Zone, cooperation between Chinese and foreign companies is encouraged in the Free Trading Zone. It is not possible for a foreign company to cooperate with a Chinese company or do investments in exploration, aircraft maintenance, and railway construction and management. [12]

 

The purpose of the negative list is to protect national security interests from foreign interference. Nevertheless, the Shanghai Vice Executive Mayor Tu Guangshao states that the central bank will provide more information on policies and details soon. [13]

3. Taxation

 

The tax policies are aiming to make the Free Trading Zone more competitive. For example, goods transferred between the Free Trading Zone and foreign countries do no longer have to pay any customs duties or import taxes. Even more, a tax cut is given to Chinese goods that enter the Free Trading Zone. The goods are considered exported and will receive a tax cut.  If a company gets its profits from the international shipping insurance and the company is registered in the Yangshan Free Trade Port Area, the company will not have to pay business tax. If the company is located in Yangshan Free Trade Port Area or Shanghai Pudong Aiport Free Trade Zone, the company will also get a tax cut, as soon the goods leave this area. [14]

 

Companies registered inside the Free Trading Zone do not need to have a contract deposit in their bank accounts or go through the verification system of processing trade. [15]

To help to improve the investment rate inside the Free Trading Zone a shareholder or company that does not have any monetary assets can have the possibility to pay their income tax in installments over a 5 year-period. A valuation of their assets will be made before this will be a possibility. If a company has high skilled employers or employees that would receive shares or capital contributions, they also get the possibility to pay in installments.[16]

 

To support the Free Trading Zone both foreign and Chinese company gets reduced taxes if they are registered inside the Free Trading Zone. For example a financial leasing company can get export tax refunds. Different shipping companies can also get reduced import tax. If a registered Chinese company is shipping weight over 25 tons and the aircraft can be used by Chinese airlines as well, they can get reduced import VAT. The authorities need to approve the reduced import VAT. Evidently, the reduced taxes have to be in accordance to law and other regulations. [17]

 

Companies will have the possibility of choosing where finished products or pieces of the product are going to be taxed. The goods that are imported for manufacturing in the Free Trading Zone can be exempt for import taxes. The exceptions on the tax cuts and tax rebates are stated in law and regulations. One of the exceptions is in the social sector.

 

Import and export companies will still be taxed; however, these companies will not have any customs duties and get tariff reductions. Import and export companies will pay regular taxes. Imported goods to Mainland China from the Free Trading Zone are included and will be in accordance to law and other regulations.

4. Financial system

 

To encourage the construction of a financial center, China is opening the market to private investors. Foreign, Sino-foreign and Chinese banks are allowed inside the Free Trading Zone. Forex inside the Free Trading Zone is allowed. To create a sustainable finance center, innovations and trading commodities are encouraged. The assets of the financial institutions will be at market rate. Even equity escrow institutions and cross-border RMB reinsurances are not only allowed, but encouraged. However, cross-border RMB use and also RMB convertibility and interest rate liberalization will be overlooked to enable to control the risks. Administrative authority will be founded to balance foreign debts.[18]

 

It is worth to noticing that the foreign exchange cancellation is not implemented in the Free Trading Zone. The foreign exchange is in accordance to Administrative Measures on Foreign Exchange in Bonded Supervision Area. [19]

 

To promote the shipping services, it is possible to use a “flag of convenience” from Shanghai. The application process is efficient and simplified to make this a good option. Companies can also, if registered in the Yangshan Free Trade Port, open overseas bank accounts, which was not a possibility before, for Chinese companies. This possibility is to enable a simpler procedure for financial settlements.  [20]

5. Legislation and Rules

 

The new legislation and rules will develop at a fast pace. The new regulation is supposed to uphold a high standard when it comes to investment and trade. If the new regulations inside the Free Trading Zone do not conform with administrative rules or documents from the State Council, the later will be dismissed. The laws; “Law of the People’s Republic of China on Wholly Foreign Owned Enterprises”, “Law of the People’s Republic of China on Sino-Foreign Equity Joint Ventures Companies”, “Law of the People’s Republic of China on Sino-Foreign Cooperative Joint Venture Companies will be temporarily changed from October 1st, 2013 and three years into the future in accordance with the Free Trading Zone Pilot. 

 

The control system aims to be transparent and to be able to promote the ‘open-up’ policy in the service sector and support trade. A part of the transparent control system is to establish a standardized tax system. Realizing the policy of a  “Frontier Opening”, and create a real possibility to import and export goods as well as do transactions and do business in an easier way with China is the main goal of the new system. Moreover, the control system is aiming to be efficient. To enable the creation of an efficient system, different models are being tried. The tax condition is strictly implemented on imported and exported goods to create trading platforms in specific areas inside the Free Trading Zone.[21]

 

Departments are obliged to encourage the Free Trading Zone. The goal of the plan is to protect the national security of China and on the other hand to encourage an‘open-up’ policy and expansion of the service sector. Therefore, the State Council implements decision’s that support fair competition on the market. The State Council is responsible to lead and coordinate the Free Trading Zone. However, the Shanghai Municipality People’s Government is responsible for establishing the administrative system and building up legislation in accordance with the pilot of the Free Trading Zone, and for the practical implementation, improvement and enforcement of the legislation. If any new issues occur, the Shanghai Municipality People’s Government is responsible for solving these issues and reporting to the leading State Council. The enforcement of the policies inside the Free Trading Zone is to be done without delay.[22]

 

The guidelines of the “Second-tier Effective and Efficient Control” will be divided into two parts. The first part concerns the goods coming into China; the second part concerns the goods coming out of China. The inspections and quarantine model is an incentive for fostering strict quality and the promotion of the safety risk control. The government’s new supervision body is connected to information from companies’ operation. Moreover, under the “Second-tier Effective and Efficient Control” companies registered in the Free Trading Zone are allowed, to do businesses outside China, if nothing else is stated in legislation and regulation.[23]

6. Registration

 

The company registration process is divided into six parts. They are; finance service industry, shipping service industry, commerce and trade service industry, professional service industry, cultural service industry, and social service industry. [24] The registration takes approximately a week, except for import and export license, for which it takes two weeks.  To be able to register a company in the Free Trading Zone, no real capital is needed. It is stated that low capital should be registered, however, it is not specified when it should be injected. [25] If a foreign company is cooperating with a Chinese company the introduction fee is waived. [26]

registration process in the finance sector can be completed according to the image:

Comments

The question is how the free trading zone will affect both the Chinese and global markets.

The result, according to Shanghai-based technology and Intellectual Property expert Kening Li of Pinsent Masons, the Free Trading Zone will enable possibilities for both foreign banks and Chinese banks. The rate will be determined in a more transparent way, which makes it possible for clients to conduct businesses with the RMB. The State owned banks will also get the possibility to compete in the global market and do business outside China. The Chinese banks that are private will have the possibility to invest both domestically and internationally. The interest rate will be decided by the market rather than decided by the Central Bank of China. [27]

 

The Shanghai Vice Executive Mayor Tu Guangshao said that there could be more cooperation between Hong Kong and Shanghai. The Mayor believes that the FTZ will be good for both Shanghai and Hong Kong. More capital from the Mainland will come to Hong Kong. At the moment Hong Kong is the biggest RMB financial center outside the Mainland. [28]

 

In the China Morning Post on Tuesday 14 January, it was mentioned that 1400 companies have signed up to be a part of Free Trading Zone in Shanghai. Unexpectedly only 38 companies from overseas signed up. The Free Trading Zone is a result of lobbying. Recently, both DBS and Bank of East Asia were approved as the first international banks. More bank licenses for international banks will soon be approved. To support foreign banks, the People’s Bank of China has published a reform guide. Critical voices mean it will take time to implement a working Free Trading Zone in Shanghai and that the foreign investors will come if they can see positive results from the area. However, the Free Trading Zone has a time limit and if the banks wait too long, it will be too late.

 

The China Morning Post also writes that the central government may give Shanghai a one-year privilege before approving other provinces and cities to become Free Trading Zones. It all depends upon the balance of different interest and authorities.[29] Adding to this, the State run news agency rapports that 12 new cities will become Free Trading Zones. Two of the cities are Tianjin and Guangdong. However, the other potential Free Trading Zones have not been released and this is not certain yet. [30]

 

The results of the Free Trading Zone are still uncertain. Nevertheless, it is a symbol to the rest of the world that China is opening up after Deng Xiaoping Theory of “Three Represents”, which, can lead to endless possibilities. Foreign companies get better perquisites to invest in China and if China has its eyes set on creating a successful financial center, it will be hard to stop it. The Free Trading Pilot of Shanghai can be the pilot for the entire country. The legislation and regulation is still vague, however, more guidelines are being made to make a more transparent and efficient system. 

(Altalex, 3 April 2014. Article by Giovanni Pisacane)

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[1] Cai Ron, Tong Chao, Chen Elisabeth. Shanghai Free Trade Zone: A Test Ground for New Economic Reform Policies in China. http://www.dwt.com/Shanghai-Free-Trade-Zone-A-Test-Ground-for-the-New-Economic-Reform-Policies-in-China-08-05-2013/: (January 17, 2014)

[3] Please see the Framework Plan for the China (Shanghai) Pilot Free Trade Zone http://en.shftz.gov.cn/Framework%20Plan%20for%20the%20China%20(Shanghai)%20Pilot%20Free%20Trade%20Zone.pdf : (January 17, 2014)

[4] Please see the Framework Plan for the China (Shanghai) Pilot Free Trade Zone http://en.shftz.gov.cn/Framework%20Plan%20for%20the%20China%20(Shanghai)%20Pilot%20Free%20Trade%20Zone.pdf : (January 17, 2014)

[5] Please see the Framework Plan for the China (Shanghai) Pilot Free Trade Zone http://en.shftz.gov.cn/Framework%20Plan%20for%20the%20China%20(Shanghai)%20Pilot%20Free%20Trade%20Zone.pdf : (January 17, 2014)

[6] Please see the Framework Plan for the China (Shanghai) Pilot Free Trade Zone http://en.shftz.gov.cn/Framework%20Plan%20for%20the%20China%20(Shanghai)%20Pilot%20Free%20Trade%20Zone.pdf : (January 17, 2014)

[7] China Briefing, Shanghai Free Trade Zone Further Relaxes Foreign Investment Control, January 7, 2014 - http://www.china-briefing.com/news/2014/01/09/shanghai-free-trade-zone-further-relaxes-foreign-investment-control.html (January 17, 2014)

[8] FTZ – Shanghai Trade Financial Liberalization. Shanghai FTZ Overall Plan released,  http://www.ftz-shanghai.com/Policies/overall_plan_released.html (January 17, 2014)

[9] China Briefing, Shanghai Free Trade Zone Further Relaxes Foreing Investment Control, January 7, 2014 - http://www.china-briefing.com/news/2014/01/09/shanghai-free-trade-zone-further-relaxes-foreign-investment-control.html (January 17, 2014)

[11] China Briefing, Shanghai Releases ”Negative List” for Foreign Investment in Shanghai Free Trade Zone, September 13, 2013   http://www.china-briefing.com/news/2013/09/30/shanghai-releases-negative-list-for-foreign-investment-in-shanghai-free-trade-zone.html (January 17, 2014)

[12] China Briefing, Shanghai Releases ”Negative List” for Foreign Investment in Shanghai Free Trade Zone, September 13, 2013   http://www.china-briefing.com/news/2013/09/30/shanghai-releases-negative-list-for-foreign-investment-in-shanghai-free-trade-zone.html (January 17, 2014)

[13] Yu Jeanny, Chen George, Regulation delay puts foreign banks in a spot in Shanghai free-trade zone:http://www.scmp.com/business/banking-finance/article/1405201/regulation-delay-puts-foreign-banks-spot-shanghai-free: (January 17, 2014)

[14]Please see the Framework Plan for the China (Shanghai) Pilot Free Trade Zone http://en.shftz.gov.cn/Framework%20Plan%20for%20the%20China%20(Shanghai)%20Pilot%20Free%20Trade%20Zone.pdf : (January 17, 2014)

[15]Please see the Framework Plan for the China (Shanghai) Pilot Free Trade Zone http://en.shftz.gov.cn/Framework%20Plan%20for%20the%20China%20(Shanghai)%20Pilot%20Free%20Trade%20Zone.pdf : (January 17, 2014)

[16] Please see the Framework Plan for the China (Shanghai) Pilot Free Trade Zone http://en.shftz.gov.cn/Framework%20Plan%20for%20the%20China%20(Shanghai)%20Pilot%20Free%20Trade%20Zone.pdf : (January 17, 2014)

[17]Please see the Framework Plan for the China (Shanghai) Pilot Free Trade Zone http://en.shftz.gov.cn/Framework%20Plan%20for%20the%20China%20(Shanghai)%20Pilot%20Free%20Trade%20Zone.pdf : (January 17, 2014)

[18] Please see the Framework Plan for the China (Shanghai) Pilot Free Trade Zone http://en.shftz.gov.cn/Framework%20Plan%20for%20the%20China%20(Shanghai)%20Pilot%20Free%20Trade%20Zone.pdf : (January 17, 2014)

[19]Please see the Framework Plan for the China (Shanghai) Pilot Free Trade Zone http://en.shftz.gov.cn/Framework%20Plan%20for%20the%20China%20(Shanghai)%20Pilot%20Free%20Trade%20Zone.pdf : (January 17, 2014)

[20]Please see the Framework Plan for the China (Shanghai) Pilot Free Trade Zone http://en.shftz.gov.cn/Framework%20Plan%20for%20the%20China%20(Shanghai)%20Pilot%20Free%20Trade%20Zone.pdf : (January 17, 2014)

[21]Please see the Framework Plan for the China (Shanghai) Pilot Free Trade Zone http://en.shftz.gov.cn/Framework%20Plan%20for%20the%20China%20(Shanghai)%20Pilot%20Free%20Trade%20Zone.pdf : (January 17, 2014)

[22]Please see the Framework Plan for the China (Shanghai) Pilot Free Trade Zone http://en.shftz.gov.cn/Framework%20Plan%20for%20the%20China%20(Shanghai)%20Pilot%20Free%20Trade%20Zone.pdf : (January 17, 2014)

[23]Please see the Framework Plan for the China (Shanghai) Pilot Free Trade Zone http://en.shftz.gov.cn/Framework%20Plan%20for%20the%20China%20(Shanghai)%20Pilot%20Free%20Trade%20Zone.pdf : (January 17, 2014)

[24] Corporate China, Company Formation in Shanghai Free Trade Zone – Shanghai Company Setup, http://www.corporationchina.com/Shanghai-Free-Trade-Zone.html (January 17, 2014)

[25] Corporate China, Company Formation in Shanghai Free Trade Zone – Shanghai Company Setup, http://www.corporationchina.com/Shanghai-Free-Trade-Zone.html (January 17, 2014)

[26]Corporate China, Company Formation in Shanghai Free Trade Zone – Shanghai Company Setup, http://www.corporationchina.com/Shanghai-Free-Trade-Zone.html (January 17, 2014)

[27]Out-Law.com, Shanghai free trade zone presents opportunity for growth of outsourcing market, says expert; http://www.out-law.com/en/articles/2013/October/shanghai-free-trade-zone-presents-opportunity-for-growth-of-outsourcing-market-says-expert/. (January 17, 2014)

[28]Cao Grace, Top Shanghai Official looks to start yuan pilor scheme, http://www.thestandard.com.hk/news_detail.asp?we_cat=2&art_id=141452&sid=41314734&con_type=1&d_str=20140114&fc=1 (January 17, 2014)

[29] Yu Jeanny, Chen George, Regulation delay puts foreign banks in a spot in Shanghai free-trade zone:http://www.scmp.com/business/banking-finance/article/1405201/regulation-delay-puts-foreign-banks-spot-shanghai-free: (January 17, 2014)

[30] Tiezzi Shannon, Xinhua: China Approves 12 More Free Trade Zones http://thediplomat.com/2014/01/xinhua-china-approves-12-more-free-trade-zones/ (January 23, 2014)

 

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