How the Shanghai FTZ Makes It Easier for Foreign Companies to Invest in China

“Foreign investors in the Shanghai FTZ will be given full national treatment and have equal market access with domestic investors.” (Davis Wright Tremaine)

In late September, Chinese officials unveiled the Shanghai Free Trade Zone (FTZ) to loosen restrictions and red tape for foreign companies and, according to some, to test the waters for a broader liberalization of the country’s economic policies. Attorneys Ron Cai and Chao Tong of Davis Wright Tremaine explain:

“… optimistic observers see the pilot zone as a testing ground for a potential nationwide roll-out of structural economic reforms, including the liberalization of interest rates and eventually making the yuan fully convertible. Rumors that the plan has been personally championed by Premier Li Keqiang have strengthened opinions that the Shanghai FTZ proposal represents one of the clearest signs of the new leadership’s determination to deliver major economic reforms and bring China into the free market system.”

Here’s a look at how the FTZ will change the way foreign companies do business in China:

1. Investment approval procedures will be simplified:

“The approval process for foreign investment in China is not straightforward and notoriously time-consuming. In the [Free Trade Pilot Zone (FTPZ)], the foreign investment approval process will be liberalized (i.e., replaced with a filing formality rather than approval requirement)… […] [O]n a trial basis in the FTPZ for three years, the filing formality will replace eleven MOFCOM approvals that are now required for the establishment or modification of foreign invested enterprises…” (DLA Piper)

2. Foreign companies will be able to invest in a number of industries currently off limits:

“Foreign investors may be able to invest in industries that had been categorized as “Restricted” or “Prohibited” by China’s Industry Catalogue for Foreign Investments. For example, foreign investors may be permitted to form wholly owned healthcare service providers in the Shanghai FTZ, which is considered a type of restricted industry sector for foreign investment outside the Shanghai FTZ.” (Ropes & Gray)

3. Businesses will be able to freely convert Chinese yuan into foreign currencies:

“Foreign exchange regulations in the Shanghai FTZ would be relaxed relative to current standards. Under present-day laws and regulations, foreign exchange settlements under current accounts are only permitted for purposes under the business scope of a given company, and making settlements for capital accounts requires intricate administrative approval processes. It is expected that the government would loosen capital account controls. The government would also make the yuan freely convertible for foreign exchange settlements under current accounts.” (Davis Wright Tremaine)

4. New tax rules will encourage investments:

“All companies registered with the free-trade zone or their individual shareholders are entitled to pay incomes taxes in installments over a five year period for those amounts equal to their assets’ increased evaluated value as a result of non-monetary assets investments or other assets reorganization activities. Highly skilled personnel or personnel in short supply will be permitted to pay income tax applicable to company shares or equity received as incentive compensation in installments.” (Miller Canfield)

5. Interest rates will be set by the market, not the Bank of China:

“Recently, the People’s Bank of China abolished the minimum interest rate restriction for bank loans. This has been seen as the latest in a long-term policy of easing bank controls. People have predicted that interest rate liberalization would be more comprehensive in the FTZ, allowing market forces to determine capital costs.” (Davis Wright Tremaine)

6. Customs supervision procedures will be streamlined:

“In existing bonded zones, the entry and exit of goods are under customs supervision. In contrast, the [Free Trade Pilot Zone (FTPZ] is intended to be a real free trade zone, whereby customs recordal for goods shipped from overseas into the FTPZ will no longer be required. Customs supervision will also be streamlined. Currently, Chinese Customs carry out batch supervision of goods. This supervision method will be replaced with one that is centralized, categorized, and electronic.” (DLA Piper)

7. Companies in the free trade zone will be given “national treatment:”

“Foreign investors in the Shanghai FTZ will be given full national treatment and have equal market access with domestic investors. For any foreign investment not on the negative list, the Shanghai FTZ will remove all current applicable government approvals required on foreign investment, including its establishment, split, merger, business scope expansion, and business term extension. Same as domestic enterprises, foreign investors are only required to go through the registration process with the local registration authority in the free trade zone.” (Davis Wright Tremaine)

The updates:

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