Incentives - Free Trade Zones

Rationale behind Chinese Free Trade Zones (“FTZ”) is to allow the Chinese Government to experiment reform policies on a localized basis before extending them nationally.
Shanghai Pilot Free Trade Zone (“Shanghai FTZ”), launched on September 29th, 2013, was the first FTZ in China. Originally covering an area of 28 square kilometers, it has been further extended and now covers 120 square kilometers, including Lujiazui financial district.
Shanghai FTZ was established with five original purposes:

  • attracting foreign investments;
  • stimulating outbound investments;
  • improving the efficiency of customs clearance;
  • setting-up a one-stop filing and approval process;
  • supporting financial reforms.
Among foreign investments’ incentives, Shanghai FTZ introduced a “Negative List” approach (the “Negative List”), which simplifies the administrative procedures applicable to FIE established therein. Approval procedure have been removed and replaced by more straightforward filing requirements. As such, investment approvals from the Ministry of Commerce of the People's Republic of China (“MOFCOM”) or the National Development and Reform Commission (“NDRC”) are no longer required for the establishment in the Shanghai FTZ, of FIE in industries outside the Negative List. Besides, Shanghai FTZ relaxed foreign ownership limits in specific sectors. Examples include value-added telecommunication services (such as e-commerce platforms and call centers), international shipping transportation, and hospitals. The latest version of the Negative List, adopted on May 8th, 2015, also applies in the additional FTZ created in Guangdong, Fujian and Tianjin (see below).
In order to stimulate outbound investments, shortened review and simplified filing process have been adopted for overseas investments made from the Shanghai FTZ. Applicants no longer need to submit a detailed project report, which is usually time-consuming to prepare. Instead, they only need to submit a filing form together with the relevant supporting documents, such as the investing entity’s business license and articles of association.
In terms of customs, supervision procedures have been simplified to include a single filing of customs information at the time an entity registers in the Shanghai FTZ, which allows reuse of information at each import or export transaction. In addition, settling of customs tax can be achieved via deduction from a security deposit, paperless filings and disclosure are available for some information, and favorable customs clearance treatment is granted to goods imported from an Authorized Economic Operator (“AEO” - so far, Hong Kong, Singapore and South-Korea).
Shanghai FTZ also introduced the concept of a one-stop agency able to process multiple regulatory applications. Within the Shanghai FTZ, investors do no longer need to make separate applications to MOFCOM and NDRC. A single independent office is also responsible for the management and enforcement of copyrights, patents and trademarks.
As for the financial industry, special free-trade bank accounts opened with banks established in the Shanghai FTZ facilitate cross-border flows of RMB. Foreign-exchange restrictions have been further relaxed, enabling multinational to establish cash-pool arrangements. In the future, Shanghai FTZ should be leading the introduction of greater flexibility in the convertibility between RMB and foreign currencies.

Three (3) new FTZ were officially launched on April 21st, 2015, in Guangdong, Fujian and Tianjin. Similarly as in Shanghai, the Chinese Government shall use these FTZ as laboratories for local reforms, to be further extended to other parts of the country.
All FTZ (i.e. Shanghai, Guangdong, Fujian and Tianjin) share some common characteristics. As such, the negative list (the “Negative List”), which latest version entered in force on May 8th, 2015, applies to both of them. The Negative List outlines the sectors in which foreign investments are restricted. Industries which are not listed therein could in principle be invested under the same conditions as those applying to domestic investors. In addition, within those FTZ, foreign investments triggering national security concerns shall be subject to National Security Review, in compliance with the specific procedure adopted therein (the “Trial Measures”).
Besides some common features, each FTZ will develop its own characteristics.
  • Guangdong FTZ will promote economic integration with Hong Kong and Macau. Covering 116 square kilometres, it should open up the transport, finance and travel industries, in particular to Hong Kong companies and investors. Guangdong FTZ will also encourage Hong Kong service providers to further expend their activities into China.
  • Fujian FTZ will focus on developing economic ties with Taiwan. It covers an area of 118 square kilometres, and should facilitate customs clearance procedures for goods imported from and produced in Taiwan. Fujian FTZ should also foster Taiwanese investments in China, by exempting Taiwanese investors from some restrictions applying to other foreign investors. The area should also faster corporate establishment procedure and should contribute to the development of financial services.
  • Tianjin FTZ will coordinate economic relations with Beijing, Hebei and South-Korea. It should also enhance a transportation belt between China, Mongolia and Russia. Also called “Jing-Jin-Ji”, from the abbreviations of the localities names (Bei)jing, (Tian)jin, and Ji (commonly referring to Hebei), the zone covers an area of 119 square meters. It will focus on emerging industries, high-technologies, finance and high-end services.

September 2015

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