Key Points

  • Trial plan to test the openness of the Chinese market in Shanghai as part of a move towards reform of the economy.
  • FTPZ will cover an area of 28 square kilometers along the east coast line of Pudong District.
  • Plans to introduce national treatment for foreign banks, allow freely convertible RMB, create a genuine free trade zone, lower taxes for corporates and individuals, and improve market entry to foreign investment.

Background

On 3 July 2013, the Overall Plan for China (Shanghai) Free Trade Pilot Zone was approved in principle at the State Council Executive Meeting. The China (Shanghai) Free Trade Pilot Zone (the “Shanghai FTPZ”) is designed to be an experimental area to test the “full-range” openness of the Chinese market as part of a reform and update of the Chinese economy including free flow of capital, trading and RMB convertibility. The Shanghai FTPZ may become a breakthrough for Chinese economic reform in the future and could create great opportunities for foreign investors.

Highlight of the Regulations

The current planning shows that Shanghai FTPZ will cover an area of 28 square kilometers along the east coast line of Pudong District including the current Waigaoqiao Bonded Zone, Yangshan Bonded Port and Pudong Airport Bonded Zone. Although the implemented regulations and detailed rules of Shanghai FTPZ are being drafted and are expected to be published soon, the proposed plan suggests, alongside additional information from commentators and analysts, that the key developments are expected to include the following aspects.

  • National treatment to foreign financial institutions

    Foreign banks may be able to enjoy national treatment in Shanghai FTPZ including being allowed to form wholly-owned subsidiaries (currently foreign banks can only have branches in China) and being allowed to engage in the full range of financial businesses (currently foreign banks’ permitted business is limited) and innovative financial products.
     
  • RMB “free convertibility

    Foreign exchange is strictly regulated in China, particularly for capital in nature funds. The ultimate goal for the Shanghai FTPZ is to allow RMB to be freely convertible. However, due to the concern of national economic security, analysts expect that will be achieved through a step-by-step approach – in the early stages, the authority will likely loosen personal overseas investment and offshore banking business.
     
  • Real Free Trading

    Unlike the existing free trade zones or bonded zones in China, where goods in the zones are under customs supervision at all times, Shanghai FTPZ intends to be a real free trade zone, i.e., goods coming from and leaving for overseas will require no customs supervision. It is expected to largely facilitate international trading, making Shanghai an international transition and processing center, allowing the international commodity futures traders to set up their futures delivery warehouses in Shanghai.
     
  • Taxes

    Lower tax rates for corporate as well as individuals are expected to attract businesses such as regional headquarters, offshore trading, shipping and logistics businesses, and financial leasing businesses.
     
  • Market Entry to Foreign Investment

    Nationwide, market entry to foreign investment is regulated through the Foreign Investment Industries Catalog. In Shanghai FTPZ, the principle is to allow foreign investment in all sectors unless prohibited or restricted in the “negative list” which is supposed to be much shorter than the list in the Foreign Investment Industries Catalog. For example, apart from the banking industry, clinics and creditability research and evaluation sectors may be opened to foreign investment. In addition, approvals and registrations for foreign investment are expected to be significantly simplified and relaxed in Shanghai FTPZ. Ultimately, the goal is to grant national treatment to foreign investment, i.e., applying the same incorporation and maintenance procedures to foreign invested enterprises as those applicable to local companies.

Conclusion

Through this pilot test in Shanghai, China hopes that suspending laws governing foreign investment in this proposed free trade zone may help the country increase its foreign competition and, as a result, further increase its economic success. Ultimately aimed at improving direct foreign investment in China, it will be interesting to observe any future developments relating to this experimental zone.