14 October 2014

China opening more doors with the Shanghai Free Trade Zone

This article was written by Paul McBride

The Shanghai Free Trade Zone (Shanghai FTZ) is currently the hottest topic for our China desk. Clients from around the network want to know how they can take advantage of this pilot programme which was formally launched in September last year.

The Shanghai FTZ is another move by the PRC Government to drive domestic economic reform and promote trade and cross border investment. While we wait for more detail on some of the initiatives, there is clearly enough to work to further develop your China strategy.

Streamlining inbound foreign investment in the Shanghai FTZ

Clients often comment on the administrative burden when setting up operations in China. The Shanghai FTZ is all about making that easier. The new measures replace the foreign investment approval system with a “negative list” approach. Under the new approach, all foreign companies (other than those falling within the scope of the “negative list”) will be subject to the same regulatory requirements as domestic companies. This means that the old restrictions on investor qualifications, shareholding percentages and permissible business scopes (other than in the telco and banking sectors) will no longer apply.

Foreign-invested enterprises (FIEs) also benefit from new streamlined filing and registration procedures referred to as the “one stop shop” system. FIEs only need to file their establishment applications with the local branch of the State Administration of Industry and Commerce in the Shanghai FTZ and it will then co-ordinate the various approvals with the other government bodies. In addition local regulators no longer need to approve FIE’s articles of association and joint venture agreements. These enhancements can reduce establishment timeframes to as little as one week.

Encouraging outbound investment from the Shanghai FTZ

Outbound investment has also become easier. For example, Shanghai FTZ entities (other than central government state-owned enterprises) are generally only subject to post-filing requirements administered by the Shanghai FTZ Management Committee. In addition, the Management Committee commits to a process that will file within five business days of receipt of the relevant material. National Development and Reform Commission (NDRC) or State Council prior approval is still required if the outbound investment involves:

  1. Any country with which China does not have a diplomatic relationship
  2. Any country subject to international sanctions
  3. Any industry that the NDRC considers to be sensitive

We expect project vehicles and funds focussing on outbound investments to be the next wave of entities established in the Shanghai FTZ to leverage these measures.

Removal of more red tape to facilitate crossborder investment

Shanghai FTZ entities also benefit from the following capital control relaxations and other measures:

  1. Simplified cross-border payment procedures – Shanghai FTZ entities can open capital accounts without prolonged government foreign exchange (FX) registration approvals and banks are now authorised to carry out FX registration and Renminbi (RMB) cross-border settlement directly
  2. Free trade accounts – Shanghai FTZ entities can open free trade accounts (FTA) and transfer funds freely between FTAs, other offshore accounts and onshore non-resident accounts
  3. Loosening of control over cross-border finance – controls over outbound security and FX finance have been relaxed so Shanghai FTZ entities may now borrow offshore RMB funds subject to certain requirements (for example, limits on the use of such offshore RMB funds and maturity profile)
  4. RMB convertibility – Shanghai FTZ entities enjoy full capital account RMB convertibility along with the benefits of future FX reforms (for example, FIEs can immediately convert foreign exchange into RMB and utilise RMB hedging, whereas a non-Shanghai FTZ FIE must wait until there is a commercial contract requiring hard currency payment before it can make the conversion)
  5. Deposit rate liberalisation – Shanghai FTZ entities may be offered higher interest rates for foreign exchange and RMB deposits with banks due to the loosening of the statutory interest rate limits

Next steps?

KWM are monitoring developments and would be happy to keep you directly informed. Please contact one of the contacts listed below to either discuss the potential benefits of the Shanghai FTZ for your China strategy.

Key contacts

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We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

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