On 22 August, 2013, the China’s State Council has formally approved the establishment of the Shanghai Free-Trade Pilot Zone (FTZ). The FTZ was subsequently established on 29 September.

The FTZ covers an area of 28.78 square kilometers (approximately 11 square miles). It comprises the four existing customs supervision areas i.e.Waigaoqiao Free-Trade Zone, Waigaoqiao Bonded Logistics Zone, Yangshan Port Free-Trade Zone, and Pudong Airport Comprehensive Bonded Zone. The establishment of the FTZ will gradually implement the further opening-up policies in the fields of finance, trade, shipping, etc.

In accordance with the General Plan of Establishing the Free Trade Pilot Zone in Shanghai (Plan) issued by the State Council on 18 September 2013, further opening-up in the fields of investments and service industries will take place in the FTZ. The FTZ will open up Renminbi (RMB) capital account and set up an offshore financial center. Meanwhile, it will achieve the innovation of supervision models in the field of trade and improve the development of foreign trade logistics. With the Plan and newly-announced regulations, the related policies and implementation details of the FTZ have been basically formulated.

1.  Trade Supervision

The innovative supervision model is the highlight as to the establishment of the FTZ. For instance, a new model, which is prescribed as “a gradual release of control over the first line,” will be carried out in terms of customs supervision. The “first line” hereby refers to the border of the country. Under the new model, the free control indicates the free import and export of goods between the FTZ and the outbound, which specifically performs as clearance prior to lodging clearance documents and saves more time for companies to prepare documents.

2.  Management Model of Negative List

“Negative List Administration” refers that the government regulates which areas are not open to the foreign investment, which demonstrates that any industries, fields, or economic activities are allowed other than the ones on the list. Management measures, as to foreign investment, which are inconsistent with the national treatments, most-favored-nation treatments, performance requirements, or senior executive requirements, are specified in the negative list. The foreign investments on the negative list will be administered in the former ways; However, the ones outside of the list will be subject to filing requirements only, rather than approvals as the requirements in the past, in accordance with the principle of conformity between domestic and foreign investments.

Under the previous approval system and management model, the commerce departments would examine and approve the authenticity and legality of certificate of investors, the area of investment, the investment manner, the investment amount, and the contracts and articles for building up companies. On the contrast, under the FTZ’s new filing regime, the commerce departments shall merely record the basic information such as investors and industries excluded from the negative list. Now the focus of the investment management has turned to the management in the process and after the event. This will greatly shorten the timeframe from at least twenty-nine working days in the past to the current four working days.

3.  Reform of Company Registration System

The FTZ applies the following reform measures with regards to company registration system:

3.1  Trial Implementation of Registered Capital Subscription and Recording System

With the trial implementation of Registered Capital Subscription Recording System, industrial and commercial departments shall register the registered capital subscribed by all company shareholders or promoters, or the total capital stock subscribed (that is, the company’s registering capital), rather than the paid-in capital. As to the relaxation of the registered capital requirements, the restriction on the minimum registering capital is cancelled, except otherwise required by laws or regulations. Moreover, there will be no restrictions on the ratio of the first tranche of contribution, the ratio of the cash contribution and the registering capital, and period of completing the contribution by all shareholders or promoters in the FTZ.

3.2    Trial Implementation of Annual Report Publicity

The trial implementation of annual report publicity will be exercised in the FTZ. Enterprises shall send annual reports to industrial and commercial departments via information publicity system in the due period. They shall also publicize the reports to all, and any group or individual who may check it. Enterprises shall be responsible for the authenticity and legality. It will help simply the current annual inspection regime.

4.  Advancing Opening-Up of Service Industries

4.1  Finance

China Banking Regulatory Commission (CSRC) supports the establishment of foreign invested banks and Sino-foreign investment banks, and also encourages the foreign invested banks transfer into the FTZ.  It supports a foreign invested bank to set up subsidiaries or branches in the FTZ. Moreover, the restriction that the Sino-foreign investment banks must be controlled by the Chinese parties will be removed 

As to specific business activities, domestic banks are allowed to provide financial clearing for transactions in the FTZ, with direct connection with the banking system outside China. Domestic banks are allowed to carry out off-shore business activities within the FTZ. All those measures will further improve the internationalization of RMB, and Shanghai, following Hong Kong, is likely to become the most important offshore RMB market.

4.2  Non-Bank Finance

In the fields of finance services, the China government encourages domestic private enterprises and foreign enterprises to set up financial service companies, such as accounting, rating agencies, in the FTZ. The China government also encourages the innovation of financial products and the development of offshore business. Take the futures industry as an example. CSRC supports qualified Chinese and foreign individuals and groups to invest in both domestic and foreign securities and futures markets according to law. Also it allows foreign commodity exchanges to set up their own futures delivery warehouse in the FTZ, which will significantly reduce the cost of shipping on domestic buyers.

4.3  Shipping

The FTZ will maintain the advantage of liaison with Waigaoqiao Port, Yangshan Deep Water Port and Pudong Airport and set up an efficient shipping recording system. Moreover, international transits for airline mails and goods will be built in the FTZ, and the opening-up of airlines and shipping will be strengthened. Furthermore, shipping related industries and derivatives will be developed. Last but not least, shareholding restrictions on foreign investment will be relaxed in the Sino-foreign equity or cooperative shipping joint ventures. 

4.4  Other Industries

Other industries may enjoy the following preferential policies:

  • Foreign video game companies will be allowed for sales of games in China market pending approval from authorities
  • Overseas travel agencies may establish joint ventures providing domestic consumers with overseas traveling services (destinations not including Taiwan)
  • On the condition of maintaining the safety of the internet, foreign invested companies will be allowed to provide certain value added internet services in certain ways
  • The FTZ will extinguish the restriction of the ratio of foreign investment in performance brokerage agencies. Foreign-owned performance brokerage agencies are allowed to be set up in the FTZ. It is also allowed to set up a wholly foreign-owned public place of entertainment /amusement to provide services within the FTZ

5.  Overseas Investment

Apart from further opening up the China market to the foreign investors, the FTZ will also support and facilitate the Chinese enterprises to invest in overseas. The FTZ is targeting to become a distributing center for Chinese enterprises to expand overseas. The existing approval requirements will be replaced by filling for general outbound investment from the FTZ. The exercise of filing regime is expected to simply the regulatory requirements and greatly facilitates outbound investment, and the reform of the management will increase the facilitation of overseas investment. In the meantime, the government supports multiple forms of overseas investment conducted by various kinds of investors in the FTZ. It encourages investors to establish project companies focusing on investments of foreign equity.

6.  Foreign Exchange Management

The Plan provides explicitly that the interest rate within the FTZ will be liberalized and costs of investment will ultimately be decided by the market; RMB will be freely convertible, and enterprises will be allowed to carry out the sale and purchase of foreign exchange for a non-trade purpose.

Nowadays, the FTZ has become China’s new experimental field, and it will realize multiple reform actions in certain fields, including the governmental function, financial system, trade service, foreign investment, and taxation policies. The FTZ will also build a new platform for the cooperation among countries, and boost the economic vigor, thus upgrading China’s economy.  We can see there will be more business opportunities in this more open market.