Article – Shanghai PFTZ: the Facts

by 24 December 2013

Map of the China (Shanghai) Pilot Free Trade Zone.

What’s new for foreign investors? Foreign-Invested Enterprises (FIEs) enjoy the same treatment as Chinese companies throughout the pre-establishment period of their business. They can set up without approval of the Ministry of Commerce, as long the industry is not on the Negative List.

What is the basic filing and registration process for FIEs in the Shanghai PFTZ? The application process to begin operating in the PFTZ is surprisingly simple, especially for China standards: the applicant must file a form with only the Shanghai PFTZ Administrative Commission to obtain a business license, which can now be processed in only four days, reduced from the previous 29. Following this, the FIE must register with local agencies for a license to operate, similar to the FIE set-up in the rest of the country. Under the “license before certificate” registration system, companies may begin operating even before the license to operate is obtained, a brand new policy of the PFTZ.

What is the Negative List? In a departure from the usual extensively long list of restrictions, the Shanghai PFTZ Administrative Committee opted for the use of a so-called “Negative List”, which identifies specific sectors and industries that foreign companies may not engage in, leaving the rest open for investment (in theory). According to the Shanghai PFTZ official website, “for areas falling outside the Negative List, pre-approval will no longer be required for foreign investment projects […] and establishment of foreign investment enterprises; instead filing (i.e. reporting) requirements will apply.”

The List is made up of 18 classes, each further divided into categories and sub-categories, culminating in a grand total of 190 industries that are either restricted or fully prohibited. The largest class is manufacturing, which includes categories such as pharmaceutical and transportation equipment manufacturing. There is a general expectation that the List will be updated and shortened in the coming year.

What about foreign vs. local businesses? The restrictions for ownership shares have been relaxed, meaning that any foreign investor can own part of a Chinese business within the Zone. Moreover, all enterprises will be treated equally in their business activities, a break from the preferential treatment of Chinese companies in the rest of the country. International stock exchange platforms can be established and foreign and Chinese-foreign JV banks can set up, in a move to develop the financial sector within the Shanghai PFTZ.

What does this mean for the RMB? One of the goals of the Shanghai PFTZ is to create a convertible RMB for China’s capital account, meaning that the RMB can be used for financial investments, including purchasing of  stocks internationally. Currently, the RMB is only exchangeable for the current account (tourism and trade, e.g.). The aim is to have a fully convertible RMB within five years, a major step for China, which it has gradually worked towards implementing for some time now. This will be one of the most important  outcomes of the PFTZ.

What is China’s goal with the PFTZ? The rhetoric put forth by the Overall Framework Plan of the Shanghai PFTZ includes very uncharacteristic words for China such as “deepening reform”, “encouraging innovation”, and “opening of sectors”. China has slowly moved towards opening up its economy and the Shanghai PFTZ can be seen as an experimental model that can be replicated through the country if it proves to be successful.

I thought the Waigaoqiao FTZ was set up in 1990. What’s the big deal then? The new Shanghai PFTZ not only integrates the Waigaoqiao FTZ but also is considered an upgrade of it, with the opening up of cargo trade and service industries. As a bonded zone, it has special arrangements for customs and import and export duties. When freight shipments enter the zone as ‘bonded’, they can be further processed, stored, or exhibited and later either imported into China with paying duties or shipped on internationally.

Courtesy of Fiducia Management Consultants

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