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China (Shanghai) Pilot Free Trade Zone – New Investment Opportunities in China
1 January 2014

In the last few months, the establishment of the China (Shanghai) Pilot Free Trade Zone (“PFTZ”) has been widely published. More than 1,500 companies’ names have been pre-registered in the zone, within one month of its official establishment date, 29 September 2013. Depending on the practical implementing rules to be issued, the PFTZ may have great impact on the way foreign investments will be made in China.

The Area of the PFTZ and Its Objectives

Since the day of launch, the Shanghai municipal government has issued the Measures on the Administration of the PFTZ (“Measures”) and the Special Market Entry Management Measures for Foreign Investment in the PFTZ (“Negative List”) together with other administrative measures governing the administration and procedures in the PFTZ. A series of other rules have also been issued by various regulators and government authorities to support and facilitate the ongoing operations of the zone.

The PFTZ is much more than a traditional bonded zone which consists of primarily import and export businesses with relaxed customs requirements. The zone is expected to serve as China’s testing ground for new financial reforms to be used in other cities in China or even for the whole country.

Major Reforms in the PFTZ

The reforms in the PFTZ are pursuant to an overall plan approved by the State Council, the Measures and other ancillary regulations/measures and the major changes are summarized below :-

(a) Foreign Investment : Management Model of Negative List

The zone has adopted the “Negative List” approach towards foreign investment administration, which means that foreign investment may be set up in the same manner as domestic companies, except those business areas listed on the Negative List. Under the existing approval system and management model, the commerce departments would examine and approve the authenticity and legality of the status of the investors, the area of investment, investment plan and amount, and constitutional documents of the new enterprises. With the PFTZ’s new filing regime, the commerce departments would then merely record information of the investment and corporate information unless the intended investment is in the Negative List’s industries.

The 2013 version of the Negative List (which is subject to annual update), published on 29 September 2013, basically lists all categories that are already restricted or forbidden to foreign investors in the 2011 Foreign Investment Industry Guidance Catalogue. Only a few service sectors have been opened up to foreign investors in the PFTZ, including financial services, shipping services, commercial and trade services, professional services, culture services and social services.

(b) Overseas Investment : Record Filing Superseding Approval Review

To support and facilitate the growing overseas investments by the Chinese investors, the Shanghai government also formulated two regulations on 29 September 2013 to provide that a record filing requirement will supersede the approval requirement for Chinese enterprises intending to make outbound investments in the PFTZ. According to the existing Measures for the Administration of Overseas Investment, any overseas investment shall be 0reviewed and approved by the Ministry of Commerce or provincial department of commerce in advance and the approval will take around one month. However, in the PFTZ, the Chinese investors would now need only to record their overseas investments with the related authorities in the PFTZ and the record filing procedure will take 5 working days after all the requisite materials have been submitted. This should greatly simplify procedures for and encourage Chinese investors to develop overseas businesses.

(c) Reform of Company Registration System

The following reforms on company registration system have also been made in the PFTZ :-

(i) Trial Implementation of Registered Capital Subscription and Recording

System

According to the new PFTZ Registered Capital Subscription Recording System, company shareholders or promoters could merely record the registered capital subscribed by them, or the total capital stock subscribed (that is, the company’s registered capital) in the company’s articles of association unless otherwise prescribed by PRC laws. The paid-in capital will no longer be registered. Furthermore, the requirement of the minimum registered capital is cancelled except otherwise required by laws or regulations. There will be no restrictions on the ratio of the first tranche of contribution, the ratio of the cash contribution for the registered capital and timeline for completing the capital contribution by all shareholders or promoters in the PFTZ.

(ii) Trial Implementation of “business licenses before permits”

The PFTZ now adopts a pilot registration system of “business licenses before permits” (with some exceptions). Enterprises within the PFTZ may engage in general business activities after registration at the relevant Administration for Industry and Commerce and receiving the business license. An enterprise engaging in a business area which requires special license can still only carry out those business activities after obtaining the business license and the relevant permits.

(iii) Trial Implementation of Annual Report Publicity

In the PFTZ, the publishing of annual report shall replace the annual inspection requirement. Enterprises shall send their annual reports to the industrial and commerce departments. Such reports will be accessible to the public and enterprises shall be responsible for the authenticity and legality of their annual reports.

(d) Trade Facilitation

As to the policies on trade facilitation, firstly, the zone will maintain the advantage of liaison with Waigaoqiao Port, Yangshan-Deep Water Port and Pudong Airport hub and will set up an efficient shipping recording system. Moreover, international transits for air mails and goods will be built in the PFTZ, and airlines and shipping business will be strengthened as well. Shareholding restrictions on foreign investment will be relaxed in the Sino-foreign equity or cooperative shipping joint ventures.

(e) Financial System Liberalization

The overall plan of the zone and the Measures both commit to carry out a wide range of financial reforms, including conversion of RMB in capital account items and liberalization of interest rates. RMB will be freely convertible, and enterprises will be allowed to carry out the sale and purchase of foreign exchange for a non-trade purpose.

If you have any questions on the above or other issues regarding doing business in Mainland China, experienced lawyers in our China Business Department will be happy to assist you.

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