On September 27, 2013, the State Council of the People’s Republic of China issued the Blueprint of the China (Shanghai) Pilot Free Trade Zone (“FTZ”). On September 29, 2013, the FTZ went into effect. This is the first FTZ in China, and, as per the Blueprint, it would relax certain regulatory restrictions – particularly regarding foreign investment in some industries.

Click here to view image.

The FTZ is China’s national strategy. Through the two or three years’ pilot program, the strategy is to:

  • Expedite the functional transformation of government
  • Expand the opening of service sectors
  • Promote the reform of the foreign investment administrative system
  • Develop headquarter economy and new trade forms
  • Explore the Chinese currency (i.e., RMB), convertibility under capital account items
  • Open up financial services

The FTZ is going to further facilitate and develop investment and trading procedure, full convertibility of currencies, effective and efficient goods supervision, and investor-friendly regulatory environment.

It should be noted that the Blueprint is only a framework. The corresponding regulations, which have already existed or will be enacted, shall apply to different industries. The framework of polices is apparent. It is typical in China’s rulemaking procedures to have the principle and framework announced first and the detailed rules enacted thereafter. As said, many rules and regulations governing specific industries and transactions are still uncertain and are to be enacted/announced by the different government agencies. In respect to business tax, currently there is no preferential rate at the FTZ.

The FTZ uses a special measure for market entry of foreign investments, i.e., the negative list. The negative list indicates what industries are restricted or prohibited to foreign investments. The industries that are not on the negative list are open to foreign investments. For those industries which are not on the negative list, foreign investments only need to register with the pertinent government agency rather than go through the approval procedures as required for non-FTZ areas. The registration procedures mean national treatment to foreign investments. To some extent, Chinese companies lose advantages in the FTZ which are protected by some special approval requirements in non-FTZ zones. It should also be noted that the negative list will become shorter, which means more currently restrictive or prohibitive industries will open to foreign investment.

Pursuant to Measures on Opening up Service Industry to Foreign Investment (the Appendix to the Blueprint), the FTZ further opens up six services industries, which are banking and financial services, ocean transportation services, commerce and trade services, professional services, cultural services and public services.

On July 1, 2014, the new negative list was issued. The new negative list is nearly 27% shorter than the 2013 negative list. By the end of June 2014, there are 1245 foreign-invested enterprises. Among those, 91% (1136 enterprises) were established through filing with the pertinent government agency. Such filing can be completed on-site which previously needed eight-day’s filing time.  Foreign companies, especially in those prohibited or restricted industries in China, may consider starting their business in the FTZ.  We are closely monitoring the new policies of the FTZ and will update our clients of the same.