On 25 September 2020, the Shanghai Municipal People’s Congress adopted the Shanghai Regulations on Foreign Investment, effective from 1 November 2020 (the Shanghai FDI Regulations). The Shanghai FDI Regulations are the first local-level legislation on foreign investment in China aimed at further opening up the local market, stepping up the promotion of investment, making business opportunities more accessible to foreign investors and protecting their legal rights.

1. Overview

The Shanghai FDI Regulations comprise six chapters, made up of 51 articles that cover general provisions, expansion and opening-up, the promotion of investment, the protection of investments, investment management and services, and miscellaneous other provisions.

The regulations will apply to all foreign investment projects (existing or potential) located within Shanghai, including the China (Shanghai) Pilot Free Trade Zone and New Lingang Area. Furthermore, the regulations specify the cross-regional initiatives within the Yangtze River Delta Ecological Green Integration Demonstration Zone (which includes Wujiang District in Suzhou City and Jiashan County in Jiaxing City, both adjacent to Qingpu District in the Shanghai Municipality) and therefore foreign investment projects located within Wujiang District and Jiashan County may also qualify for preferential treatment under the regulations.

2. Highlights of Shanghai FDI Regulations

The highlights are summarised below:

i. Equal treatment for foreign investors

The Shanghai FDI Regulations repeatedly emphasise that foreign investors and domestic investors will be treated equally during the entire investment cycle (including at each of the establishment, operation and disposal stages) and no additional market access restrictions shall be set up for foreign investments beyond those specified in the negative list for foreign investment. It is worth noting that as compared with the negative list at the national level, certain restrictions on shareholding percentage and business scope have been further lifted for foreign investment projects located within the China (Shanghai) Pilot Free Trade Zone. Shanghai aims to serve as a gateway for foreign investments into China by taking the lead in opening up the financial sector, gradually opening up key fields including telecommunications, the internet, health care, transportation, culture and education, and actively pioneering the trial implementation of policies and measures for the further opening up of other service industries.

The local government will also ensure that foreign invested companies are given fair and equal opportunities to participate in public bids for government procurement, infrastructure and utilities, transportation and other public-private projects, and are able to comment on local industrial standards and guidelines.

ii. Encouraged industries and preferential treatment

The Shanghai FDI Regulations specifically set forth preferential treatment for foreign investment in the following encouraged industries:

  • The National Development and Reform Committee and the Ministry of Commerce jointly issued the Catalogue of Encouraged Foreign Invested Industries on 30 June 20191.  If a foreign investment project falls within an encouraged industry under the catalogue, preferential treatment in respect of taxation and use of land may be available.
  • Foreign invested holding companies will gain full support for their equity investments within China, including measures to facilitate equity purchase/disposal transactions and the cross-border transfer of funds.
  • Multinational companies upgrading their Shanghai subsidiaries into regional headquarters to manage their business in China or, more generally, Asia will be offered incentives (such as a cash bonus upon opening and rent subsidies) by the local authorities and measures may be available to fast-track or streamline expatriate visa applications, talent hiring, the settlement of funds, trading and logistics, and customs clearance.
  • Foreign-invested R&D centres will gain greater access to services provided by the local authorities, to facilitate their participation in government-funded R&D programmes, marketing of the fruits of R&D, prosecution (both in China and worldwide) of patents, and the import of equipment and appliances for the purposes of R&D.

iii. Facilitation initiatives

  • A less burdensome registration process: All available e-services throughout the enterprise registration process will be promoted and implemented in Shanghai. In addition, an “one-stop service” will be available for encouraged or significant foreign investment projects, giving foreign investors the benefit of dealing with a single, consolidated government service centre delegated to provide the various government services (including market access, zoning and planning, land use, environmental protection, construction, energy and utilities, and foreign exchange registration and approval). 
  • More access to local financing: In addition to bank loans, foreign invested companies can also seek financing through public listing, issuance of bonds or other derivative products (via both public and private placement) and the securing of offshore loans.
  • Fewer restrictions on cross-border payments: No additional restrictions beyond those are provided under Chinese laws and regulations shall be imposed on the currency, amount or frequency or other aspects of any of the following cross-border payments: (a) capital contributions made by foreign investors into China, profits, capital gains, the proceeds of disposals, licence fees, indemnities and proceeds generated from liquidations within China; and (b) expatriate employees’ salaries and other legitimate income.
  • Strengthened IP protection: Local courts will accelerate legal and enforcement proceedings in IP infringement cases involving foreign investors and their invested companies. Punitive measures may be imposed on the infringing party in cases that are repeated, malicious or otherwise serious.
  • Undertakings by local authorities: Undertakings and contracts entered into by the competent local authorities in writing will be legally binding upon such authorities, and may not be unilaterally terminated or breached solely for reasons arising out of zoning adjustments, the re-election of municipal heads, or any change to the person in charge or their functions or powers. Furthermore, if a government authority enters into any undertaking or contract that is beyond its legal authority, and thus is considered invalid or unenforceable, it shall assume all legal liabilities arising therefrom.
  • More communication and transparent disclosure: A mechanism for communicating between the government and foreign invested enterprises will be established, so that, through various means, including surveys, discussions, questionnaires, and new media, the government is able to listen and respond to the reasonable requests of foreign investors in a timely manner. Specific complaint channels will also be created, allowing foreign investors to report and seek remedies for any governmental actions that, in their opinion, infringe their legitimate rights and business activities in Shanghai. These complaints shall be dealt with in a timely manner and the final ruling on the complaint will be made public.

3. Insights

Shanghai has always been committed to attracting more foreign investment, which makes up almost one third of local GDP. Despite the COVID-19 pandemic, Shanghai received US$10.28 billion in foreign investment in the first half of 2020, up by 5.4 per cent year on year. In the January-June period, 26 regional headquarters of foreign multinational companies and 10 foreign-funded R&D centres were established in Shanghai. By June, total foreign investment in Shanghai amounted to nearly US$270 billion and the number of regional headquarters of foreign multinational companies and of foreign-funded R&D centres had reached 746 and 471, respectively. 

The new Shanghai FDI Regulations show the government’s continuing efforts to further enhance the confidence of foreign investors and represent Shanghai’s resolve to further open up to the outside world.

Foreign investors that are doing business or plan to invest in Shanghai are highly recommended to review and take full advantage of the local preferential policies and government support at both the municipal and district level when formulating business plans and strategies, and when deciding new regional locations and corporate forms and structures.