On July 3, 2013, the State Council of the People’s Republic of China approved the Overall Plan for the China (Shanghai) Pilot Free Trade Zone, and announced the establishment of the China (Shanghai) Pilot Free Trade Zone (“FTZ”) in four specifically supervised areas by custom including the Waigaoqiao Free Trade Zone. The FTZ was officially launched on September 29. The establishment of the FTZ is a major initiative to deepen the reform and broaden the opening-up of China market and is important in exploring and promoting the reform of Chinese governments’ administrative examination and approval system, simplifying the examination and approval procedures, removing non-statutory administrative permits, and promoting the reform of political structure through economic restructuring.

After the decision to establish the FTZ was released, the Standing Committee of the National People's Congress approved the Decision on Authorization of the State Council to Temporarily Adjust Relevant Administrative Examination and Approval Items Stipulated in Applicable Laws (hereinafter referred to as the “Decision”). Following that, relevant competent authorities have subsequently released several policies and opinions regarding the FTZ. With the promulgation and implementation of such laws and regulations, the general framework of the legal system in the FTZ is formed. The significance of the legal system innovation in the FTZ lies not only in various preferential policies and new measures applied to the FTZ, but also in exploring the overall reform of China’s examination and approval system of foreign investment by suspending the implementation of the Sino-Foreign Cooperative Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-Owned Enterprise Law (the “Laws Regarding Foreign-funded Enterprises”) of which the core is the examination and approval system in the FTZ on a pilot basis. The Decision provides that adjustments regarding relevant administrative examination and approval specified in the Laws Regarding Foreign-funded Enterprises will be made based on the results of the three-year pilot program in the FTZ. Such innovative provision applicable in FTZ has clearly illustrated the intention to reform the China’s relevant examination and approval system. This article will provide an analysis on the core innovations of the FTZ, i.e. establishing the management model of “pre-entry national treatment” and “negative list”.

  1. Pre-Entry National Treatment

On August 30, the Standing Committee of the National People's Congress approved the Decision on Authorization of the State Council to Temporarily Adjust Relevant Administrative Examination and Approval Items Stipulated in Applicable Laws. From the Decision, the FTZ has made significant breakthrough regarding the examination and approval system of foreign investment which are stipulated in the Laws Regarding Foreign-funded Enterprises. According to current laws, regulations and policies, foreign invested enterprises shall be subject to the examination and approval of competent authorities including their establishment, changes and termination. However, the Decision moved the pre-examination and approval into post record-filing which has significantly decreased the supervision on foreign invested enterprises and has managed to promote the principle of equal treatment between domestic and foreign investors in the FTZ. Although the FTZ is defined as a pilot zone and the adjustments on relevant laws are temporary, the fact that these legal documents were promulgated by the supreme legislative body, the Decision and its implementation effect will definitely affect the foreign investment regime in China. The establishment of the negative list model in the FTZ and subsequent supporting policies may be promoted in other places.

On September 18, the State Council issued the General Plan of China (Shanghai) Free Trade Pilot Zone (hereinafter referred to as the “Plan”). Provisions relating to the “pre-entry national treatment” are mainly specified in Item 2 of Part II of the Plan, “Expand the opening up of investment sector. In general, it includes the following items:

  1. The service sector shall be further liberalized. The financial services, shipping, commercial and trade services, professional services, cultural and social services sector are selected for further liberalization (see Appendix for the detailed list);
  2. Replace the examination and approval of foreign-invested projects with a record-filing system; replace the examination and approval of the contracts and articles of associations of foreign-invested enterprises with record-filing management; align industrial and commercial registration with the reform of the business registration system to gradually optimize the registration process.
  3. Promote outbound investment, simplify the examination and approval procedures of outbound investment, and apply record-filing system to general outbound investment projects.

Following that, the State Administration for Industry & Commerce, the Ministry of Culture, the Ministry of Transportation, the Securities Regulatory Commission, the Insurance Regulatory Commission and relevant competent authorities have subsequently released the policies and opinions with respect to the FTZ, which provide positive response to the opening up of investment and change of approval system. The provisions relating to the registration system for the subscription of registered capital stipulated in the Certain Opinions of the State Administration for Industry and Commerce on Supporting the Development of the China (Shanghai) Pilot Free Trade Zone promulgated by the State Administration for Industry & Commerce have provided a change from the paid-up system to the subscription system, which is a significant change to China’s corporate registration system, as well as a great innovation in corporate management. Such provision is in conformity with the customary rule of corporate registration in the world; however, its application is in conflict with the provisions of paid-up system of registered capital stipulated in the Company Law. According to the Decision approved by the Standing Committee of the National People's Congress, only the Laws Regarding Foreign-funded Enterprises are temporarily suspended in the FTZ, and the Company Law is not included. Therefore, the enforcement effect of the opinions released by the State Administration for Industry & Commerce needs to be further clarified by the Standing Committee of the National People's Congress.

  1. Negative List

”Negative list” is usually named as the “measures that are not compliant with national treatment”. It refers to the aggregation of the special administration measures specifying that the principle of national treatment shall not be applicable to foreign investment prior to their investment approval. In order to enforce the requirements on the management model of “Pre-entry national treatment” and “management by negative list”, the Shanghai Municipal Government has promulgated a series of management measures,  the most eye-catching one is inter-alia, the Special Administration Measures for Foreign Investment Entry in China (Shanghai) Free Trade Pilot Zone (Negative List) (2013). The negative list includes 18 industry catalogues and 1,069 sub-catalogues, with a total of 190 articles of administration measures. For the 1,069 sub-catalogues, approximately 17.8% of them shall be subject to “special administrative measures”. Among them, there are 38 articles which use the “prohibit” wording, and 74 articles which use “restrict” wording.

Before the “negative list” is released, concerns were focused on its distinctions from the Catalogue of Industries for Guiding Foreign Investment (2011) (hereinafter referred to the “Guiding Catalogue”). However, the published “negative list” has failed to attain people’s expectation on any breakthrough in contents. The “negative list” is almost the same as the Guiding Catalogue. Their differences are only several adjustments to the classification and arrangements. According to the international practice, if the items in the “negative list” is more specific and detailed, this would mean that the prohibitions and restrictions will be lesser, which could lead to better transparency and more practical in the system. However, the current “negative list” in the FTZ is too generic. In addition, according to the provisions provided in the “negative list” released by the Shanghai Municipal Government that “it is based on the laws and regulations regarding foreign investment, the Overall Plan for the China (Shanghai) Pilot Free Trade Zone and the Catalogue of Industries for Guiding Foreign Investment (2011)”, it is clarified that the Guiding Catalogue is more superior than the “negative list” of the FTZ. Therefore, the Guiding Catalogue shall prevail in case of any conflicts.

Due to the fact this pilot project has just been released in a short period, it is inevitable for the “negative list” of the FTZ to be somehow imperfect. With the implementation of various supporting policies and measures in the FTZ, it is believed that the contents could be better adjusted after gaining more practical experiences.

In addition, if the FTZ is successful in establishing the management model of “pre-entry national treatment” and “management by negative list”, not only will it promote the reform and development of China’s economy and further enhance China’s ability to attract foreign investment, but it will also increase the capability of China to negotiate on further assertion of international investment regulations. The deadlock of WTO negotiation has resulted US and other countries to initiate the negotiations on the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership Agreement (TTIP) , and these have already replaced WTO as the main platform to restructure the global investment regulations. If China has the opportunity to participate in the negotiation at early stage, it will be able to avoid being trapped in only complying with the regulations stipulated by other countries.

In 2012, China has become the third largest outbound investment economy in the world. As such, China needs to further improve its outbound investment legal system, effectively enhance the protection on the rights and interests of Chinese investors and boost outbound investments. With the concept of advance and innovative policy in mind, the FTZ has been the focus in both domestic and foreign markets. The policies in the FTZ will not only play as an active reference to the improvement of China’s investment system, but will also drive the development of China into a new historical stage. Further developments in this area will be favourable.