On September 18, 2013, the State Council issued Framework Plan for China (Shanghai) Pilot Free Trade Zone (Hereinafter “Framework Plan”). On September 29, 2013, Shanghai municipal government released Administrative Measures of China (Shanghai) Pilot Free Trade Zone, Municipal Government Order No. 7 (hereinafter “Administrative Measures”) and several supportive regulations. On the same day, China (Shanghai) Pilot Free-Trade Zone started to operate officially with Administration Committee of China (Shanghai) Pilot Free Trade Zone (hereinafter “Administration Committee”) being formed as its administration agency. The Administration Committee is responsible for the implementation of reform tasks as well as coordination and management of the administrative affairs of Shanghai Pilot Free-Trade Zone (hereinafter the “FTZ”). Obviously, the thorough reform policies to be implemented in the FTZ will bring huge challenges and opportunities to all Chinese industries within the FTZ. On the other hand, as a pioneer pilot for comprehensive deepening reform and expanding exploration of opening up in China, it is very likely that the FTZ policies will be promoted in other regions or even nationwide in the future, and in turn exert impacts on development strategies of Chinese enterprises outside the FTZ. Therefore, it is of significant meanings for all industries in China to thoroughly understand and interpret the FTZ reform policies.

As lawyers specialized in intellectual property (hereinafter “IP”) practice, on the basis of our comprehension to the relevant policies, we believe that the FTZ may face a tidal wave of prosperous development of IP-related industry that may be accompanied by enormous IP investment opportunities; in the mean time, with further opening up of foreign investment fields in the FTZ, incoming foreign-owned enterprises may take advantages of their IP to intensify their competitions against domestic companies, and then trigger dirputes over IP rights.       

  1. IP-Related Policies

The policy reform of the FTZ substantially includes four aspects, expediting opening up of service sector, investment management system reform, trade transformation and upgrading, and deepening opening up of financial field. Among them, the policies for strengthening IP protection shall push the development of IP industry within the FTZ, and other policies such as those on investment and trade promotion shall also bring broad market opportunities for IP investment, therefore it is necessary to pay close attention to these interconnected policies.

  1. Policies on Reinforcement of IP Protection and Establishment of Comprehensive Law Enforcement System of IP Market Supervision

The Administrative Measures explicitly grants the Administration Committee the following responsibilities: enhancing IP protection within the FTZ, encouraging and supporting professional institutions to provide services such as IP mediation and enforcement assistance; managing IP matters occurred within FTZ (including administratively mediating and handling patent disputes, and making approvals on the behalf of IP administration offices regarding preliminary review of IP agency applications, certificates of patent advertising, registration of overseas book publication contracts, registration of licensing agreements for reproducing overseas copyrighted audio and video products, and registration of printing imported books in Shanghai); jointly exercising administrative penalty rights as well as relevant administrative rights to take coercive measures and administrative inspection, which were previously exercised by respective municipal intellectual property administrative offices.

  1. Policies on Enhancing Investment and Trade Opening up of service sector--

The Administrative Measures expressly states that the FTZ will expand the opening up of the following sectors: financial service, transportation service, commerce and trade service, professional service, cultural service and public service, and market access restrictions such as requirements concerning investor qualifications, limitations on stock proportion, and business scope restrictions will be suspended or eliminated.

Reform of investment administration system--The Administrative Measures expressly states that the FTZ adopts “National Treatment” on foreign investment permission and implements special administrative measures on foreign investment access (hereinafter “Negative List”). For sectors falling outside the Negative List, foreign investors and domestic investors will receive the same treatment, by going through filing procedures instead of approving requirements, with the exception of areas specifically defined by the State Council. The approving requirement on foreign investment contracts and Articles of Association will be replaced by a filing procedure.

The setup of overseas branches by enterprises in the FTZ will be principally subject to the filling requirement, which also applies to the general outbound investment projects.

Trade transformation and upgrading--In accordance with the Framework Plan and the Administrative Measures, the FTZ will proactively cultivate new types and functions of commerce and form new competitive advantages for trade by focusing on the development of technology, brand, quality and service; actively promote the headquarter economy by encouraging multinational companies to set up Asia Pacific regional headquarters in the FTZ and establish operation centers with comprehensive functions of trading, logistics, settlement, etc.; the FTZ will advance the transformation and upgrading of foundational basic businesses such as international trade, warehouse and logistics as well as processing and manufacturing, and develop new trade businesses such as offshore trading, international settlement, international commodities trading, financial leasing, bonded futures delivery, trans-border ecommerce, etc.; and enterprises within the FTZ are encouraged to employ a comprehensive plan in international and domestic trade to integrate the development of domestic and foreign trading business.

Tax policies on boosting investment--In accordance with the Framework Plan, for enterprises or individual shareholders registered in the FTZ that carry out investment using non-monetary assets, the income tax payable due to the increase in asset valuation can be paid by installments within a five-year period. When enterprises within the Zone award highly-skilled employees or employees in short supply by means of shares or capital contributions, the relevant individual income tax may be paid by installments as same as the policies piloted in Zhongguancun.

  1. Opportunities For Intellectual Property Investment Under The New Policies

Promoted by relevant FTZ policies, IP investment market is expected to emerge for the reasons stated below:

First, the FTZ takes comparatively strong intellectual property protection measures and establishes policies of a joint system of IP market supervision and law enforcement. It will improve a healthy development of IP-related industry within the zone,achieving incomparable systematic advantages over other regions in China.

Second, with the transformation of foreign investment management system and against the background of economic globalization arising from emerging technologies, the FTZ is bound to attract a large number of foreign high-tech enterprises. Those enterprises will drive developments in relevant domestic industries as well,together creating tremendous technical achievements and forming exchange of technologies and trade needs of certain scales.

Third, systematically, transformation of foreign investment management system and policies on trade transformation and upgrading and tax policies to boost investment are much more beneficial to domestic enterprises to ‘go abroad’. In recent years, many domestic industries were hindered from international business by intellectual property issues. The domestic enterprises will have to pay high attention to IP rights if they plan to do business out of the Chinese borderline for greater success.

Therefore, under the market guidance of FTZ‘s relevant policies, investing in high-tech industries or corresponding IP service industries may become a market opportunity that cannot be ignored. Meanwhile, before making any investment decisions, enterprises should take their capabilities and competitiveness with international competitors into consideration. Especially, with the implementation of measures on expanding the opening up of service industry, foreign IP service companies may rush into the zone one after another, and bring high competitive pressures to local service providers.

At present, some domestic enterprises have made attempt on such service investment. 

News link 1[1] At the opening ceremony of (Shanghai) Pilot Free-Trade Zone, Shanghai United Asset and Equity Exchange became one of the first batch of enterprises that got the FTZ certificates. Its newly established subsidiary, Shanghai United Asset and Equity Exchange Service limited, registered in the FTZ, plans to set up an offshore property rights exchange center. The offshore property rights exchange center will form a cross-border investment and M&A transaction service platform,to provide services including investment promotion, project financing, capital increase and share expansion, stock transfer to all types of enterprises within the FTZ including technology-based enterprises, covering various scientific and technological achievements of intellectual property and technological property rights.

News link 2[2]Shanghai Lansheng Corporation announced that it and Shanghai Lansheng Group would jointly set up Shanghai International import and Export Service Limited within the FTZ, which would run business related to intermediary service for technology import and export, merchants-recruiting, exhibition and investment promotion, goods trade, entrepot trade and offshore trade. The data on Lansheng’s official website introduced that Lansheng, originating from Cultural, Educational and Sporting Goods Import and Export Corporation founded in January 1983, was restructured to be the first foreign trade company in China under the current name in August 1993. Lansheng’s scope of trade services includes import and export trade, import and export agency trade, entrepot trade, domestic trade, Sino-foreign joint venture, Sino-foreign joint venture and cooperation, and domestic distribution of exported goods.

  1. IP Competition Under The New Policies   

In view of the policies that promote opening up of service sector, reform foreign investment administrative system and encourage multinational companies to set up their Asia Pacific headquarters within the FTZ, we have to realize that in the future, foreign capitals will come into all the industries that are not allowed before and the foreign companies’ advanced technologies and systems of management and service will bring huge competition pressures into relevant domestic industries. Most likely, the IP rights owned by foreign companies will become one of the highly competitive pressures.

Due to their long history of IP development, foreign enterprises are usually better than domestic enterprises in IP quality, management, operation and protection. As for patented technologies, domestic companies in many industries are of rather weak innovation abilities, still in the stage of imitation. While foreign capitals are banned or restricted from entering certain domestic industries, those Chinese companies may not be threatened much by the patented technologies owned by foreign companies. However, once the ban or restriction is cancelled, the Chinese companies may have to buy licensing from the IP owners at high costs to continue their operation, and of course they may become much less competent.

Therefore, domestic enterprises in the FTZ should promptly realize the importance of IP, make efforts on innovation, manage to develop competitive technologies with relatively high market value, take advantages of patents and make sound preparation for competing with foreign enterprises in relevant fields in the future.

  1. Conclusion

Not only the enterprises that have already come into or intend to come to the FTZ, but also those outside the FTZ shall pay great attention to the new polices. Since the Administrative Measures expressly states that the FTZ shall further play proactive demonstration roles in leading and servicing nationwide companies, once the FTZ polices achieve their objects, they are likely to be applied in other regions or even in the whole country. It can be seen that the central government has been determined to comprehensively deepen the reform and expend opening up and exploration, so it is but a matter of time that domestic and foreign companies would compete intensively. Therefore, domestic enterprises must get themselves prepared well, starting from development, management, operation and protection of quality IP rights.

Yun Zhang