FAQ on the Framework Plan and Reform Details for the China (Shanghai) Pilot Free Trade Zone
What is the Shanghai Pilot Free Trade Zone (Shanghai FTZ)?
What is the Framework Plan?
What are the goals of the newly released Framework Plan and the Shanghai FTZ?
When was the Framework Plan released?
What has this Framework Plan done to change foreign investment access in China?
Despite the opening of service sectors, what else has been done to relieve the stringent requirements that foreign investors face?
How has policy toward Foreign Invested Enterprises (FIE’s) changed according to the Framework Plan?
How will the behavior of Banks and Financial Institutions change within the Shanghai FTZ?
How has Chinese policy in the telecommunication services changed according to the plan?
What is the “Negative List” in the Shanghai FTZ?
How will the Framework Plan affect cross-border financing?
Are the policies regarding reform of the financial services sector final?
How have capital registration requirements changed within the Shanghai FTZ?
What is the “license before certificate” system in the Shanghai FTZ?
How do the reforms to business registration affect company’s annual reports?
What is the Shanghai Pilot Free Trade Zone (Shanghai FTZ)?
The Shanghai FTZ is similar in nature to the Hong Kong free trade area. This FTZ is located in Shanghai’s Pudong New Area but in the future it may cover all of Pudong. In July, Premier Li Keqiang announced his desire to create this FTZ as a vignette of China enhancing economic structure.
From the Shanghai FTZ website the definition follows, “The China (Shanghai) Pilot Free Trade Zone is a national strategy aiming to expedite the functional transformation of government, explore administrative innovation, stimulate trading and investment facilitation, and accumulate experience on achieving a more open Chinese economy.”
The Shanghai FTZ is made up of four bonded zones:
Waigaoqiao Free Trade Zone;
Waigaoqiao Free Trade Logistics Park;
Pudong Airport Comprehensive Free Trade Zone;
Yangshan Free Trade Port Area
What is the Framework Plan?
The Framework Plan has been developed by the Central Government as a strategic structure for policies and reforms to be implemented within the Shanghai Free Trade Zone. This Framework Plan provides detailed guidance on initiatives and their respective implementation measures.
To see the full English translation of the Framework Plan, please click here.
What are the goals of the newly released Framework Plan and the Shanghai FTZ?
The main goal of both the Shanghai FTZ and the associated Framework Plan is simply to open China up to global economic changes and developments. Additional goals include raising the quality of procedures through this program to meet international standards, to create convertibility of currencies, and put into place an investor-friendly regulatory environment.
When was the Framework Plan released?
While Premier Li Keqiang announced his wish to develop this program in July, China’s Central Government released the Framework Plan for the Shanghai FTZ on September 27th. Following this, the Shanghai FTZ was officially launched on September 29th.
What has this Framework Plan done to change foreign investment access in China?
The Framework Plan does loosen the regulations regarding foreign and domestic investment access and it does so according to individual service sectors. The Framework plan will open up 6 service sectors to easier investment, namely;
1. Financial Services
2. Transportation Services
3. Commerce and Trade Services
4. Professional Services
5. Cultural Services
6. Commerce and Trade Services
Despite the opening of service sectors, what else has been done to relieve the stringent requirements that foreign investors face?
Certain restrictions have also been lifted in terms of certain qualification requirements for investors. Limitations on foreign activity and business scope restrictions will be lessened if not cancelled. The goal here is to create an equal playing field for all investors.
How has policy toward Foreign Invested Enterprises (FIE’s) changed according to the Framework Plan?
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 choses 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.
How will the behavior of Banks and Financial Institutions change within the Shanghai FTZ?
Certain banks and financial institutions, which meet specific requirements, will be able to establish wholly foreign-owned banks or equity joint venture banks within the zone. Other entities, like restricted license banks can also incorporate, but under more stringent policy. Another key point is that a previously established representative office as a qualification will be eliminated for foreign banks and sole controlling investors. Previously, foreign banks were mandated to set up and operate a representative office for 2 years before forming a wholly foreign-owned bank, according to Chinese laws and policies.
How has Chinese policy in the telecommunication services changed according to the plan?
Telecommunications services will open up to certain qualified FIEs (Foreign Invested Enterprises). However, all administrative regulations that are in place will still function, approval regarding certain limitations will need to be sought from the State Council.
The amount of foreign investment in a value-added telecommunications service cannot be more than 50%. In reality, acquiring a VATs license in order to establish this type of investment rarely occurs in practice.
What is the “Negative List” in the Shanghai FTZ?
The “Negative List” is a list of prohibited sectors and activities with the Shanghai FTZ. The list covers 18 sectors. According to the list;
· Foreign ownership in joint venture securities firms cannot exceed 49%.
· Foreign investment in research and development and manufacturing of automobile electronics can only be made within a joint venture.
· Foreign investment in producing batteries for new energy vehicles is 50%.
· Foreign investment is forbidden in news agencies, publishing companies, radio companies, film producing companies.
· Internet Bars and gambling is barred from the Shanghai FTZ
The Negative list is a temporary version for 2013 and will be updated and adjusted according to testing. For a full version of the Negative list in Chinese please click here.
How will the Framework Plan affect cross-border financing?
A foreign exchange administrative system will be tested within the Shanghai FTZ, one that aligns with international policies to improve trade and investment. Treasury centers will be encouraged within the Shanghai FTZ by improving the foreign exchange centralized operations. Companies can leverage domestic and international market to relax cross-border financing. Innovation within the financial market and cross-border RMB reinsurance business are encouraged.
Are the policies regarding reform of the financial services sector final?
The State Council stated that financial experiments would proceed "as conditions allowed," and "risks would be controlled." There will be adjustments and updates made by expert analysts and the Rules will be in place on a timeframe of three years.
How have capital registration requirements changed within the Shanghai FTZ?
Within the Shanghai FTZ the following requirements have been eliminated.
- RMB 30, 000 minimum registered capital of limited liability companies
- RMB 100,000 minimum registered capital of one-person limited liability companies
- RMB 5,000,000 minimum registered capital of joint stock limited companies
- The period within which the shareholders shall fully pay up their capital contribution.
What is the “license before certificate” system in the Shanghai FTZ?
Within the Shanghai FTZ, companies with business licenses can do work in relationship to general production and business operations. If a permit is in necessary, any company will be required to apply for the proper permit with the appropriate Chinese authorities after they have received their business license.
How do the reforms to business registration affect company’s annual reports?
All companies within the Shanghai FTZ are required to provide annual reports to the appropriate Administration of Industry and Commerce (AIC) and the reports will be available to the public. All reports are required to adhere to guidelines of authenticity and legality.
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