On September 29th, 2013, China officially launched the China (Shanghai) Pilot Free Trade Zone (the “Shanghai FTZ”) by promulgating the “Framework Plan for the China (Shanghai) Free Trade Zone” (the “Framework Plan”). Compared with other regions in China, the Shanghai FTZ has adopted a friendlier regulatory system and is trying to accomplish the goal of lifting the zone up to International standards. The Shanghai FTZ reform details include loosened regulations for Foreign Invested Enterprises, service sectors opening to foreign capital, and a “Negative list” of industries in which foreign investors must abide by certain restrictions.

Reformation of Requirements upon Foreign Investors

In the past, before a foreign investor was able to set up a Foreign Invested Enterprise (an “FIE”) in China, the government required that the foreign investor perform an examination and approval procedure with the local Ministry of Commerce (the “COFCOM”). The minimum registered capital of the to-be-formed FIE had to be at least RMB 100,000. Also, the government required that 20% of the registered capital be paid within 3 months of the issuance of the FIE’s business license and the balance be paid in full within 2 years.

Now, under the Framework Plan, if a foreign investor chooses to set up an FIE in the Shanghai FTZ, the aforesaid requirements will be cancelled. This means that the foreign investor is only required to carry out the registration procedure with the local State Administration of Industry and Commerce (the “AIC”), which will only take four working days. This is also known as the “AIC One-off acceptance” system and there is no minimum registered capital requirement or set payment schedule.

Service Sectors to Open Up to Foreign Capital

Under the Framework Plan, six service sectors which include the financial services, transportation services, commerce and trade services, professional services, cultural services, and public services are additionally open to both foreign and domestic capital.

Of specific reform, in the banking service sector, foreign banks no longer need to 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.

In the sector of value-added telecommunications, qualified FIEs will be allowed, subject to network information security, to engage in specific value added telecommunication services. However, according to the Framework Plan, approval by the State Council is required if any limitations exist within the current administrative regulations.

The “Negative List”

China has also promulgated a so-called “Negative List” to put a virtual “off limits” in place upon foreign investments in the Shanghai FTZ. Foreign investors must satisfy the requirements as stipulated in the Negative List before they set up a FIE in an industry which is stated to be in the Negative List. For an industry outside the Negative List, a foreign investor may invest without any restrictions.

The Negative List covers 18 main sectors divided further into 1,069 subcategories, and it includes 190 special regulatory measures. The Negative List is designed to help reduce administrative interference and build an international business investment management system. However, analysts have commented that the Negative List is longer and more restricted than the market had expected.

Others Details of the Framework Plan

According to the Framework Plan, the Shanghai FTZ will pilot RMB capital account convertibility, interest rate liberalization, and the cross-border use of RMB. It will adopt a more efficient foreign exchange control to better facilitate trade and investment. Enterprises are encouraged to leverage against both domestic and international market resources to liberalize cross-border financing.

In the Shanghai FTZ, an enterprise’s annual reports will be released to the public (in other regions of China an enterprise’s corporate information is not open to the public unless it includes very fundamental information). The enterprise is required to present authentic information in its annual report.

For a foreign invested advertising enterprise, the record-filing system will be adopted.

The Shanghai FTZ will also adopt an information checking system to assure credit supervision of enterprises established within the zone.

The Shanghai FTZ is a critical stepping stone and a valuable trial for a system of open economy that may, in the future, be promoted throughout China. Analysts state that constant refinement will be necessary and it is clear that progress is being and will only continue to be made.

For further information about Shanghai FTZ, please contact us at mail@lehmanlaw.com or visit our website at www.lehmanlaw.com.