Key Points

  • The PFTZ was officially established on September 29, 2013.
  • The State Council’s Circular on the General Scheme of PFTZ outlines principles, direction and goals for PFTZ.
  • The Circular covers factors such as government administration, restricted foreign investment, free flow of capital and trading and shipping.

Background

The China (Shanghai) Pilot Free Trade Zone (“PFTZ”) was officially established on September 29, 2013. Within a month of its formation, a number of regulations have been issued including the State Council’s Circulator on the general framework of PFTZ as well as a large volume of implementing rules in various areas.

The General Framework

The document that sets out the general framework scheme for the reforms is known as the State Council’s Circular on the General Scheme of PFTZ (the “Circular”). It outlines the principles, directions and goals for the PFTZ. The highlights of the Circular are as follows:

1. Government administration: from pre-approval to “after-supervision”

The Chinese government has been criticized over being too actively involved in the operation of private companies. Many things have to be pre-approved or administrated, such as what business a company can do or how much capital it requires. Such pre-approvals are particularly extensive in foreign investment. The reform in PFTZ is to completely change the way of administration by government – from “pre-approval” to “after-supervision”, i.e., a company may decide to act however it chooses (in accordance with the law) and will be responsible for itself, with the government only becoming involved in a supervisory capacity in case anything goes wrong. In this regard, various changes have been implemented. For example, foreign invested entities no longer need to be approved and instead only need to register with the local ministry of commerce as long as the business is not included in the “negative list”. Operational licenses, e.g., food operation license, will not be required before a business license. Capital verification no longer needs to be filed or recorded with AIC. In addition, the annual inspection will no longer be an approval process but will be changed to the same process as with many western countries or Hong Kong, i.e., an annual return to be filed to the government system which is made available to the public.

2. Negative List: National Treatment and areas that will be opened to foreign investment

The “Negative List” relates to national treatment of market access, i.e., foreign investment is restricted or prohibited in those industries listed in the negative list. For any companies not included in the list, foreign investment will be given national treatment. It does not mean, however, that a foreign investor can invest in any industry that is not on the negative list. It only means that beyond the scope of negative list, a foreign investor will be treated the same as a Chinese investor. If an industry is restricted or prohibited to Chinese investors, then the same rules apply to foreign investors. The first version (2013) of negative list is fairly long, approximately 190 items, which is considered a “disappointment” by many foreign investors. However, the government claimed it to be a fundamental change in the method of administration and the list will be shortened in the next version. The Circular lists the sectors that will be opened to foreign investment, with the financial sector considered to be most significant. Certain restrictions relating to value-added telecoms businesses may also be loosened. Other sectors include survey, travel agency, HR service, construction/engineering, performance agency, training and medical services. Specific details, however, will depend on the implementation rules.

3. Free Flow of Capital; Overseas Investment

One of the main goals of the PFTZ is to explore the ways to make Renminbi freely convertible and allow the free flow of capital between China and the rest of the world. Although nobody knows how it will do in this regard, it is clear that the free flow of capital will be allowed only between the zone and overseas, not between the zone and the rest of China. In connection with free flow of capital, PFTZ intends to make overseas investment easier, with only a five day registration required instead of various approvals outside of PFTZ. The registration authority is the administration commission of PFTZ itself.

4. Free Trading and Shipping

The PFTZ aims to liberalize all trading restrictions, hoping to make it a transition center of goods as well as a global trading settlement center. It engages foreign companies to establish a global warehouse in the zone via a customs free trading system. It will also engage foreign companies to set up testing and repair centers in the zone, as these are restricted under the current legal regime, as well as finance leasing.

One of the major differences between PFTZ and other free trade zones in China is that it will not to form a special regime in China that enjoys special benefits in order to attract foreign investment. The ultimate goal is to embrace a different approach and formulate a set of legal regulations and practices that can be expanded and implemented in all over China. A fundamental principle of the PFTZ is not to adopt any rule or beneficial treatment that cannot be applied to elsewhere of China. For example, it will not apply low corporate income tax rate, but it will explore tax reform in connection of investment. So, one shall not expect special tax benefits or low land price in PFTZ.