China Unveils Reform Details for China (Shanghai) Pilot Free Trade Zone
ChinaChina’s Central Government released the “Framework Plan for the China (Shanghai) Free Trade Zone (the “Framework Plan”)”, which listed out the reform tasks and liberalizing measures for the China (Shanghai) Pilot Free Trade Zone (“Shanghai FTZ”) on 27 September, and the “Shanghai FTZ” was officially launched on 29 September 2013.
The creation of a Shanghai FTZ is the Chinese government’s latest major initiative in adapting to global economic development trends and furthering its opening up to the outside world. The government is taking a more “business friendly” and “market driven” approach and aims to lift the zone up to international standards with convenient investment and trading procedure, full convertibility of currencies, effective and efficient goods supervision, and investor-friendly regulatory environment, according to the Framework Plan. Below are highlights of some features of the reform details of the Shanghai FTZ.
1. Easier Investment Access
According to the Framework Plan, the Shanghai FTZ will offer easier investment access to both foreign and domestic capital and further open up 6 service sectors (including 18 service industries), including the financial services, transportation services, commerce and trade services, professional services, cultural services, and public services.
Market access restrictions such as requirements concerning the qualification of investors, limitations on foreign participation, restrictions concerning business scope, etc., (except in respect of banks, information and communication services) will be suspended or cancelled, in order to create an environment of equal market access for the benefit of all investors, according to the Framework Plan. Below are the highlights of opening-up measures for the banking and Value-added Telecommunication sectors.
“Qualified foreign financial institutions will be allowed to set up wholly foreign-owned banks and Sino-foreign equity joint venture banks with eligible private capital within the China (Shanghai) Pilot Free Trade Zone. Restricted license banks will be allowed to be incorporated under certain conditions.”
Under current regulations (PRC Administrative Regulations on Foreign-invested Banks), foreign banks or the sole/controlling investors of foreign banks must set up a representative office and operate it in China for at least two years before they may set up an operating branch or a wholly foreign-owned bank. The Framework Plan therefore appears to eliminate the pre-condition of a rep office establishment.
“Subject to the network information security, qualified FIEs (Foreign Invested Enterprises) will be allowed to engage in specific value added telecommunication services. Approval by the State Council is required if the limitations exist in current administrative regulations.”
Under the Administrative Provisions on Foreign Invested Telecommunications Enterprises, the proportion of foreign investment in value-added telecommunications services (“VATS”) must not exceed 50%. However in practice, VATS licenses are seldom granted where direct foreign investments are involved, even where such investment is restricted to less than 50% equity ownership.
2. Negative List Management Approach towards Foreign Investment
The Framework Plan provides that the Shanghai FTZ will adopt a “negative list” approach towards foreign investment administration, which means that foreign investment in all sectors should be allowed unless listed as prohibited or restricted under the “negative list” (“Negative List”). For the projects that are not stated in 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), according to the Framework Plan.
The Negative List is set to replace the 2011 Foreign Investment Industrial Guidance Catalogue (“General Catalogue”) in the Shanghai FTZ, a catalogue setting out all sectors in which foreign investment is encouraged, restricted or prohibited in China. Like the General Catalogue, the Negative List will be updated from time to time to cater to the on-going development needs of the zone.
The 2013 Negative List covers 18 main sectors divided further into 1,069 subcategories, and includes 190 special regulatory measures. The Negative List is to help reduce administrative interference and build an international business investment management system, however the 2013 Negative List is longer and more restricted than the market had expected, said analysts.
3. Opening-up of the Financial Services Sector
According to the Framework Plan, under the precondition that risk can be controlled, the Shanghai FTZ will pilot RMB capital account convertibility, interest rate liberalization, and the cross-border use of RMB. In the zone, the assets by the financial institutions will be at market rate. The Shanghai FTZ will explore the trial of a foreign exchange administrative system that is in line with international practice to better facilitate trade and investment. Enterprises are encouraged to leverage on both domestic and international market resources to liberalize cross-border financing. Administration on foreign debt will be further reformed to facilitate cross-border financing. Foreign exchange centralized operation by multinational companies’ headquarters will be enhanced to encourage the setup of regional or global treasury centers in Shanghai FTZ. The oversea companies will gradually be allowed to engage in commodity futures trading. Financial market innovations are encouraged. Equity escrow institutions will be supported to setup comprehensive financial service platform in Shanghai FTZ. The cross-border RMB reinsurance business is also encouraged to cultivate reinsurance market.
The above policies, e.g. RMB capital account convertibility and interest rates liberation, are all subject to the issuance of more detailed implementation rules. Financial experiments would proceed “as conditions allowed,” the State Council statement said, and “risks would be controlled.” Rules would be put in place over a three-year period, it said, without hint about priorities.
4. Business Registration Reform
China’s State Administration of Industry and Commerce released “Several Opinions on Supporting the Construction of Shanghai Free Trade Zone (the ‘Opinions’)” on September 26, which specify several opinions regarding the business registration reform in the Shanghai FTZ, with summary of details as follows:
Piloting the business registration system reform
Piloting the registration of subscribed capital instead of paid-up capital (excluding those subject to separate requirements for the paid-up registered capital)
Relaxing the capital registration requirements: The following capital registration requirements have been canceled in the Shanghai FTZ:
The minimum registered capital of limited liability companies (RMB30, 000);
The minimum registered capital of one-person limited liability companies (RMB100,000);
The minimum registered capital of joint stock limited companies (RMB5,000,000); and
The period within which the shareholders shall fully pay up their capital contribution.
Piloting the “license before certificate” registration system. Enterprises within the Shanghai FTZ that have obtained business licenses shall be allowed to engage in general production and business operations; for activities where permits are required, enterprises shall apply for permit to competent authorities after obtaining their business licenses.
Piloting the public announcement of enterprises’ annual reports. Enterprises in the Shanghai FTZ shall submit annual reports to the industry and commerce authority, and such reports shall be publicly released except for commercial secret related contents. Enterprises shall be responsible for the authenticity and legality of the annual reports.
Piloting the record-filing system for foreign-invested advertising enterprises
Optimizing the enterprise setting-up process and improving the registration efficiency
Piloting an “AIC One-off acceptance” system to simplify the administrative procedures for business registration: 4 working days to obtain Business Registration compared with government committed 29 working days in the past.
A new type of business license has been piloted in the zone.
Transforming the market entity supervision mode and maintaining the market order in the Shanghai FTZ.
The Shanghai FTZ will set up an information sharing system to strengthen the credit supervision of enterprises established within the zone.
Other reform details also include: simplifying the import supervision model to facilitate trade convenient and setting up a system to support outbound investment, etc.
“Shanghai FTZ should function as a test field for reforms and an open economy that would provide experience that can be duplicated and promoted nationwide,” the State Council said in a statement. Like all previous economic experiments, this project is going to be a work in progress, subject to constant refinement, analysts said.