Key Points

  • Amendments made to overseas investments rules
  • Chinese companies and FIEs are now allowed to borrow RMB from overseas
  • Free Trade Account is a critical step in the financial reform of the zone
  • Several changes introduced to the Negative List

Highlights Of The Developments

1.       Overseas Investment – Five Days from Signing to Closing1

No NDRC/MOFCOM Approval Required

When the China (Shanghai) Pilot Free Trade Zone (“Shanghai FTZ”) claimed that the NDRC and MOFCOM approvals for overseas investment by Chinese companies were no longer required in the Zone, there was doubt about whether it could actually be implemented. Now, experience shows that indeed,  no overseas investment approval (neither NDRC nor MOFCOM as required elsewhere in China) is needed for overseas investment under US$30 million by companies formed in the Zone. Instead, an investor only needs to go through a registration process with the Administration Committee of the Shanghai FTZ, which takes less than five days. The successful experience indicates that an overseas investment can be closed in five days from a regulatory perspective, as compared with a three to six month period outside of the Zone, which may even be rejected.

No SAFE Approval

Once the registration of overseas investment is completed, the investor may directly deal with its bank to convert and send the investment amount. Outside the Zone, additional SAFE approval is required to realize the payment.

No Project or Target Needed

Outside the Shanghai FTZ, a Chinese company, in order to form  an overseas company, must demonstrate that the company is formed for a specific project which will then be reviewed and approved by NDRC and MOFCOM. In the Shanghai FTZ, no reason has to be given; a company may freely form a foreign shell company in advance and wait for the right opportunity. However, when a real deal emerges, the project needs to be registered  with the Zone in order to make the payment.

2.       Expansion of Use of RMB – Consider Borrowing RMB from Overseas2

Low Finance Cost

Chinese companies are suffering from the tightened liquidity and the finance cost in China for medium and small size companies is as high as 10% or more. Chinese companies borrowing foreign currency are subject to strict quota limitation and approval. In PFTZ, both Chinese companies and FIEs may now borrow RMB from overseas, the cost of which is only 3-4%.

Chinese Company – No Approval Required; Equal to Registered Capital In the Zone, a Chinese company may borrow overseas RMB without approval, but is limited to an amount  equal to its paid-in registered capital x n (which is published by Central Bank from time to time, presently n = 1). An FIE may choose to be subject to the difference between registered capital and total investment, or the same quota as that for a Chinese company.

Use of the Borrowed RMB

Use of the borrowed RMB is more flexible, in principle, and can be used by the borrower for any purpose other than financial investment or lending, such as any contract payment to outside of Shanghai FTZ. Although it is unclear whether a borrower may use the RMB for direct investment (share acquisition) in a Chinese company outside of the Zone, practice shows that it is not impossible.

RMB Cash Pool

For multinational companies that have extensive business dealing with China (receipt and payment from and to China), setting up a RMB cash pool might be an option to facilitate cash flow in China and avoid the complicated China foreign exchange restrictions. Companies may consolidate all RMB cash in one account and distribute among affiliates as needed. A few multinational companies, such as Roche, have set up a RMB cash pool

3.       Free Trade Account – A Critical Step of Financial Reform of Shanghai FTZ 3

Official Launch

In our previous China Updates, we discussed the financial reforms contemplated in Shanghai FTZ and, among other things, how the Free Trade Account (“FTA”) attracts the most interest. At that time, however, the FTA had not been realized due to the lack of implementing rules and banks’ installation of necessary system. On May 21, 2014, the People’s Bank of China (the “Central Bank”) officially launched FTA in the Zone.

What is FTA?

FTA is a bank account for both RMB and foreign currency. It has all the features of an offshore account (i.e., free flow of cash to any offshore account) and may freely connect with other accounts in China on certain conditions.

Who Can Open FTA?

An FTA account is available to (i) any foreign entity, (ii) any entity formed in the Shanghai FTZ, (iii) any foreign individual that has worked in the Zone for more than a year, and (iv) any Chinese individual that has worked in and paid personal taxes in the Zone for more than a year.

Where to Open FTA?

Initially, five banks’ branches in the Shanghai FTZ have passed the test and been certified by the Central Bank to operate FTA business, including Bank of China, China Construction Bank, the Shanghai Pudong Development Bank, Bank of Shanghai and the Industrial and Commercial Bank of China. Further banks, including various foreign banks, are proactively applying for the FTA business.

Permitted Use of FTA

At initial stage, only RMB can be traded in an FTA, which will be expanded to foreign currencies in the near future. Funds in an FTA can be used for all kinds of current accounts and direct investment purpose.

4.       2014 Negative List 4

Shortened List

The Negative List (list of restrictions on foreign investment) is supposed to be revised from time to time. There are 33 restrictions on foreign investment under the 2013 Negative List that have either been removed or relaxed in the 2014 Negative List, e.g., qualification requirement of foreign investors to certification organization, the share percentage restrictions on various logistics business.


Compared with to the 2013 Negative List, the 2014 Negative List is a lot clearer in terms of the detailed conditions and restrictions for each item. The 2013 Negative List was issued in a rush and was, as a result, less comprehensive and organized. The 2014 Negative List is one more step towards a mature negative list that can be adopted throughout China.

No Substantive Freedom

Having said the foregoing, the 2014 Negative List does not substantively decrease the number of restrictions on foreign investment. The purpose of the list is to make those restrictions more transparency.


It is worthwhile monitoring the developments in the Shanghai FTZ for the foreseeable future, particularly in relation to (i) expanding the application of certain trial rules to elsewhere of China, such as overseas investment approvals, and (ii) the use of FTA and further freedom of foreign currency flow.