The recent buzz in Shanghai is centered on the China (Shanghai) Pilot Free Trade Zone (“Shanghai FTZ”) which made its debut on September 29, 2013. Under the current arrangement, the Shanghai FTZ covers an area of approximately 28.78 square kilometers and was organized on the basis of four existing bonded areas in the Pudong New District of Shanghai, namely (i) Yangshan Free Trade Port Area, (ii) Shanghai Waigaoqiao Free Trade Zone, (iii) Shanghai Waigaoqiao Bonded Logistics Zone, and (iv) Shanghai Pudong Airport Free Trade Zone (collectively, “Territory”).1
On August 30, 2013, the Standing Committee of the National People’s Congress approved the revised interpretation of the Wholly Foreign-Owned Enterprise Law (2000), the Sino-Foreign Equity Joint Venture Law (2001) and the Sino-Foreign Cooperative Joint Venture Law (2000) (collectively, “FIE Laws”) in the Territory until 2016, facilitating the pilot free trade program, with the ultimate aim of reforming foreign investment regulation to be rolled out across China.
On September 18, 2013, the State Council promulgated Circular No. 38, outlining the general plans for the development of the Shanghai FTZ (“Circular No. 38”). The Shanghai FTZ is based on a national level strategy, and therefore, covers systematic regulatory innovations including finance, international trade and investment. In terms of foreign investment regulation, the Shanghai FTZ adopts certain newer legal developments, such as a more modernized foreign investment regulation system and streamlined procedures for the establishment of foreign invested enterprises (“FIE”) in the Territory. However, the pilot program also maintains most of the exiting statutory restrictions on foreign investment and leaves certain issues open for further elaboration.
Breakthroughs and Green Lights
Under the current legal framework, foreign investment is subject to classification as “encouraged”, “permitted”, “restricted” or “prohibited” by the Foreign Investment Industrial Catalogue (amended in 2011) (“Industrial Catalogue”), as well as a series of government approvals relative to each classification level. In the Shanghai FTZ, however, government approvals for foreign investment and FIE establishment2 will no longer be triggered if the industry of the proposed investment does not fall into the categories enumerated in the Special Regulation Measures of Foreign Investment (Negative List)promulgated by Shanghai Municipality on September 29, 2013 (“Negative List”).
Specifically, the establishment or alteration of an FIE that does not participate in a business included in the Negative List, are afforded a straightforward and simplified registration and filing procedure, and may commence business in a comparatively short time frame. As specified by Shanghai Municipality, the establishment of an FIE within the Territory can be submitted directly to a one-stop authority for registration, where all related government authorities work together for necessary filings of the foreign investment project and FIE establishment.
Accordingly, a FIE registered in the Territory, may participate in any business that is not included in the Negative List, without any restrictions in terms of special license, equity ratio, business scope, etc. On the other hand, any proposed investments which fall under industries included in the Negative List, are still subject to statutory restrictions and due approval procedures.
In addition to the streamlined approval procedures, the Shanghai FTZ also enjoys certain, although quite limited, flexibility on regulation of foreign investments in certain industries. For example, foreign investors are allowed to wholly own a healthcare entity (subject to other restrictions such as the minimum total investment), which is a breakthrough under the current legal framework. Similarly, certain restrictions on foreign investment in some industries have been lifted, such as for healthcare/accident insurance companies, credit investigation agencies, for-profit education/training institutions and entertainment facilities.
Circular No. 38 also makes leeway to future breakthroughs in some industries, such as value-added telecommunication. It generally provides that foreign investors are allowed to invest in certain areas of the value-added telecommunications industry, and opens up the communication channel for adjusted interpretation of applicable regulations with the State Council for approval on a case by case basis.
Matters That Remain the Same
Except for the revised interpretation of the FIE Laws in the Shanghai FTZ, there is no amendment of other laws such as the Anti-Monopoly Law, and legislation with respect to national security review of foreign investments. Foreign investment in the Territory will still be subject to relevant review and approval procedures. Furthermore, mergers and acquisitions, strategic investment in A-share listed companies, and the use of equity/shares of domestic companies as capital contribution to FIEs, are still subject to existing nationwide laws and regulations.
Despite Circular No. 38’s general encouragement and guidance on establishment of wholly foreign owned or Sino-foreign jointly-owned commercial banks, statutory restrictions on foreign investment in commercial banks have not been lifted. For example, foreign investments in other sectors of the financial industry are still subject to existing restrictions such as securities companies and insurance companies. Furthermore, real estate investment is still highly regulated, with foreign investment in construction or operation of villas and golf courses remaining prohibited. Other industries, such as the news and publication industries, also continue to remain prohibited.
What Remains To Be Seen
Circular No. 38 relates to certain tax policies for the Shanghai FTZ,3 but provides no material terms such as favorable tax rates. Chinese officials asserted during a press release on September 29, 2013 that the rumored “15% enterprise income tax” rate would not be adopted in the Territory. The scope of tax policies and favorable tax treatment will depend on further legislation.
Circular No. 38 also allows certain financial innovations in the Shanghai FTZ, such as full capital account convertibility, which implies material changes to the current foreign currency regulation system supervised by the State Administration of Foreign Exchange (“SAFE”). However, there are no detailed measures provided by Circular No. 38. To what extent can the capital account be convertible depends on what implementations the SAFE may promulgate in the future.
The policies outlined are subject to more detailed evaluation by the relevant authorities and we will be closely monitoring new developments related to the Shanghai FTZ that are expected in the near future.