Shanghai is open for trade

September 2015

In December 2014, the State Council approved the expansion of the FTZ from the 29 sq km FTZ Bonded Area to include Lujiazui Financial Area, Jinqiao Export Processing Zone and Zhangjiang High Tech Park, adding another 92 sq km in total. In addition, reforms were announced in the key areas of trade, investment, administration and finance.

In this article we will look at some of the changes that may be most useful to businesses looking to trade in China.

Access to the Negative List

For companies with foreign investors, there exist two official lists of business activities issued by the PRC government: a Positive List and a Negative List. Foreign companies outside the FTZ can only engage in activities on the Positive List but foreign investors in the FTZ can now invest in the Negative List subject to meeting some prescribed procedures.

Investing in activities on the Negative List requires a pre-approval procedure while activities other than those listed the Negative List require only standard procedures with the relevant authorities. The good news is the number of activities on the Negative List is shrinking - the list has reduced from 190 to 135 in 2014, and 122 on the 2015 Negative List. Examples of activities that are off the Negative List include manufacturing certain medicines, construction vehicles, and certain types of battery.

Easier incorporation

Minimum registration capital requirements do not apply in the FTZ. Foreign investors are no longer required to contribute 15% capital within three months and the balance within two years of establishment. Shareholders of companies formed in the FTZ can agree among themselves the capital contribution, form of contribution, and any timescales.

There is now a one-stop application processing platform in the FTZ. Applicants can get all the necessary documents from the Shanghai Municipal Administration for Industry and Commerce (AIC); those outside the FTZ must deal with different authorities for different kinds of registrations.

Simplified customs requirements

Two newly adopted procedures - frontier opening and second-tier safe and efficient control - aim to ease the flow of imported goods into the FTZ and improve the customs administration process. Also, a consolidated duty payment system will help businesses to make monthly customs declarations.

To date, there are 14 pilot measures in the FTZ all aimed at cutting clearance costs and improving customs efficiency.

Foreign exchange restrictions lifted

In June 2015, Zhang Xin - the deputy head of the Shanghai headquarters of the People's Bank of China - said that the Shanghai FTZ is ready for full convertibility of the Chinese yuan. Several systems designed to prevent money laundering, terrorism financing, and tax evasion have been put in place.

Banks can now offer foreign currency services for trade and foreign direct investment to offshore companies and companies in the FTZ. Companies can also manage their yuan and foreign currencies under a unified system. This should help foreign and local exchange conversion and aid better management of foreign exchange risk.

Easier borrowing

Previously, non-financial companies could only borrow yuan from overseas up to their registered capital level. Banks could not borrow yuan from overseas at all. Companies and financial institutions in the FTZ can now borrow yuan and foreign currencies from overseas with far greater flexibility.

Under the FTZ's special free trade account system, companies, banks and brokerages need no administrative approval to borrow from overseas and can raise up to twice the value of their registered capital.

These new rules will reduce significantly the borrowing costs for companies and banks and create freedom for cross-border trade and investment. You can expect to see further financial reforms, such as capital account convertibility and interest rate liberalisation, in the future.

Tax and incentives

Incentives exist to encourage innovative business models. Examples include:

  • Value added tax (VAT) refunds on exports for financial leasing companies in the FTZ
  • Those investing non-monetary assets in companies in the FTZ can average their asset appreciation premium over five years for both corporate and personal income tax purposes
  • Certain professionals receive preferential tax treatment on share-based income from companies in the FTZ.

Tax administrative procedures are simpler since ten online services became available. These include:

  • Generating tax registration numbers without pre-approval
  • Self-service tax filing
  • Electronic invoicing
  • VAT taxpayer online recognition
  • Tax payment credit evaluation.

A four-level credit rating system exists to determine the online service and administrative level the business will receive.

Outbound investment

As well as aiding inbound investment by foreign and domestic investors, the FTZ also encourages domestic companies to invest abroad. Domestic companies only need to file a record for outbound investment projects rather than seeking approval from the relevant government authority.

This shows the government's willingness to reduce its influence over the economy and financial system.

What next?

Shanghai aims to set up eight international trading platforms in the FTZ for commodities in 2015 as part of the effort to build the city into a global trading centre.

As part of this plan, the Shanghai Stock Exchange will likely begin operating an international trading platform in the FTZ; this will provide a gateway through which foreign investors can enter the Chinese market. The platform will also offer fundraising services to businesses in the FTZ as well as to foreign investment institutions.

The China (Shanghai) Pilot Free Trade Zone is clearly a significant step designed to help provide more opportunities and easier access to the Chinese market for foreign investors. We will watch closely to see if it achieves its objectives of reducing bureaucracy, easing investment, opening up financial systems, and boosting trade.

Author: Charles Wang, James Ngai

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