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Shanghai's Pilot Free Trade Zone - An update

  • China

    10-02-2014

    Shanghai's Pilot Free Trade Zone - An update

    Background on the FTZ

    On 29 September 2013, the 28.78 square kilometre China (Shanghai) Pilot Free Trade Zone was officially established (the “FTZ”), with the aim of creating a “free and open economy” within the zone. The FTZ attracted plenty of publicity before its opening and has been compared to as a “mini Hong Kong” in some press. The centrepiece of the FTZ is that a wide range of reform measures designed to attract more foreign investment and improve integration between China and the world economy has been applied exclusively in the FTZ. If the FTZ is a success, those reform measures are expected to be implemented outside of the FTZ and across China.

    A number of regulations and rules have come into force to govern the FTZ, however, many key issues still lack detailed guidance or implementation rules. The State Council’s Circular on the general framework of the FTZ (the “Circular”) set out the overarching principles governing the FTZ.

    Key Objectives of the Circular

    The Circular sets out the objectives for the FTZ for the next 2-3 years. These include:

    • a change from pre-approval to post registration;
    • national treatment for foreign investment not on the “negative list”;
    • reform in financial sector - RMB to be made freely convertible;
    • reform in shipping and trading sectors;
    • lifting restrictions on certain professional services and cultural services; and
    • wholly foreign-owned medical institutions allowed in FTZ.

    Circular Highlights

    1. Pre approval to post registration

    Currently, foreign investors setting up companies in China are subject to a wide range of approval requirements before they can engage in business activities. Typically, the approval processes could take at least 3-6 months to complete.

    Under the new model, foreign entities established in the FTZ need only to be registered, as oppose to approved, by the authorities (provided they don’t operate in an industry set out on the negative list). Due to the current workload of the FTZ authorities, it takes approx three to four weeks for a foreign investor to obtain a business licence from making a reservation to submit establishment documents. However, once the reservation time is no longer needed after the backlog has been cleared, it should only take several working days for a foreign investor to obtain a business licence upon submission of establishment documents.

    All Chinese companies are subject to annual inspection and for foreign invested companies this involves a consolidated annual inspection of six governmental departments and an audit of the financial report. In the FTZ, annual inspection will no longer be an approval process, merely an annual return to be filed with the authorities.

    2. Foreign investment not on the “negative list”

    The current situation is that, for investments outside the FTZ, foreign investors can only invest in the areas or industries in accordance with the “Catalogue for the Guidance of Foreign Investment Industries’’ (the “Catalogue”). The Catalogue sets out three fundamental categories which specify industries where foreign investment is "Encouraged," "Restricted," or "Prohibited." Industries not listed in any of the three categories will be deemed to be "Permitted."

    The Circular sets out that in the FTZ, foreign investment is only restricted for those industries listed on the negative list. For those industries not on the negative list, foreign investment will be given national treatment. The first version of the negative list is long with over 180 industries listed which has been the subject of some criticism. Officials from the Ministry of Commerce have indicated that the new version in the first half of 2014 will be much shorter and foreign investors can expect more freedom in investment in FTZ.

    3. Reform in financial sector - RMB Convertibility

    One of main objectives is to promote the FTZ as a financial centre and this includes exploring ways RMB can be made to be freely convertible, liberalising interest rates within FTZ and developing a new foreign exchange administration system to promote trade, investment and finance.

    Further to the Circular, the People’s Bank of China has issued an opinion which introduced 30 measures to implement the policies in financial sector in FTZ.

    Up to the end of November 2013, 9 domestic and 12 foreign banks have set up presence in the FTZ, respectively.

    4. Reform in shipping and trading sectors

    The Circular sets out that one of the aims is to liberalise all trading restrictions in the FTZ and introduce measures to encourage foreign investments in the shipping industry. Under the Catalogue, shipping has to be invested in by way of joint venture and the Chinese party must be the controlling party.

    Simplifying the customs declaration formalities is a key to enhance trading in FTZ. Up to end of November 2013, 47 companies have been allowed to enter their cargo into the FTZ first, then to handle the customs declaration formalities. This will greatly improve the clearance speed of cargoes and save logistic costs.

    5. Professional service industry and cultural industry

    Restrictions on foreign investment in various professional services are lifted. For example, credit information companies, travel agencies engaging in overseas tourism businesses, human resources agencies, engineering design and construction projects are fully or partially opened to foreign investors.

    Entertainment venues and artist agencies are now permitted to be 100% owned by foreign investors.

    6. Wholly foreign-owned medical institutions allowed in FTZ

    Although the relevant foreign investment restrictions have been removed on the equity portion of foreign capital in the PRC medical institutions, however, in practice, due to a lack of the relevant implementing guidelines, wholly foreign owned medical institutions in China are very rare.

    However, in November 2013, the “Provisional Measures on the Administration of Wholly Foreign-Owned Medical Institutions in the China (Shanghai) Free Trade Zone” were issued . These measures provided more specific requirements and approval procedures for foreign investors to set up wholly foreign-owned medical institutions in the FTZ.

    Conclusion/Eversheds’ comments

    The FTZ has become a talking point for investors around the globe, and since its establishment in September up to end of November 2013, 1733 enterprises have been filed as established within the zone (info from Shanghai FTZ website). What is more, Chinese leaders are consistently promoting the FTZ to foreign dignitaries on official visits, indicating the political importance of making the FTZ a success.

    However, the development of the FTZ is a gradual process which requires detailed regulation in order to properly implement the proposed economic measures. To date, many of the objectives in the Circular remain in outline only and lack any detailed rules or regulations. As a result of this, foreign investors are more cautious than Chinese investors in making a move to the FTZ.

    It is likely that we can expect further regulatory clarification throughout 2014 and beyond. Clients, especially those in industries sought to be liberated by the FTZ, are advised to continue to monitor the position with regard to the FTZ and the implementation regulations released to govern it.

    Disclaimer

    This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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