(By Dr. Qiao Wenbao) On August 22, 2013, the State Council officially approved the establishment of the China (Shanghai) Free Trade Test Zone (the “FTZ”). Compared with regular domestic bonded zones, export-processing zones, and the Qianhai Bay economic zone previously approved, the FTZ is of profound significance upon the degree of openness and the influence of China’s development in the future.

The FTZ occupies an area of 28.78 square kilometers, including the Yangshan Free Trade Port Area, the Waigaoqiao Free Trade Zone, Waigaoqiao Free Trade Logistics Park, and the Shanghai Pudong Airport Comprehensive Free Trade Zone. The FTZ, centered on the Waigaoqiao Free Trade Zone and combined with Yangshan Free Trade Port Area and Shanghai Pudong Airport Comprehensive Free Trade Zone, is quickly becoming the new experimental field in China’s economy, promoting the development of Shanghai’s financial, trade and shipping center.

According to related planning and news reports, the administrative committee of the FTZ will be officially launched in late September 2013.

The FTZ may, based on the author’s information, benefit a number of fields, including financial, shipping, trade of goods, trade of services, cultural fields and social filed.

I. Innovation of Financial Supervision.

1. Financial Interest Rate Marketization: interest rate marketization is a difficult and focal point for financial development in China. The FTZ will be the first pilot area to implement a policy of interest rate marketization, in order to explore a direction for free development of China’s financial interest rates in the future.

2. Implementing and exploring Renminbi (RMB) capital projects’ convertibility: currently, China has restricted RMB exchange controls within capital projects; the FTZ may make an attempt to implement breakthroughs in the loosening of RMB exchange controls in order to explore and develop a management system for the realization of the free exchange of the RMB. Such openness of RMB exchange policy implies that enterprises can establish Asia-Pacific operation centers in the FTZ, serving international investment and financing to drive the development of RMB free exchange within capital projects.

3. Allowing the establishment of a delivery warehouse of commodities futures appointed or set by a foreign futures exchange of goods: Such a delivery warehouse may greatly replace the function of the London Metal Exchange (LME) warehouse in Busan, South Korea, or similar warehouses in Singapore, thus reducing transaction costs for domestic enterprises.

4. Allow qualified foreign financial institutions to establish foreign banks, or qualified private capital with foreign financial institutions to jointly establish Chinese-foreign equity joint banks. If the required conditions are satisfied, restricted license banks can be established at the right time in the FTZ.

 

The FTZ may allow qualified Chinese-foreign banks to operate offshore businessd.

 

II. Implementation of Shipping Centers

The FTZ would expand the industry chain of shipping services on different types of shipping service institutions, including ship transactions, ship management, shipping economy, shipping consultancy and ship technology, while further developing a logistics industry and related industries. The FTZ would improve the services functions of an international shipping center, including promoting the Transit LCL (LCL refers to “Less Than Container Load”) business, actively developing shipping finance, international shipping, international shipping management, international shipping brokerage and other industries, as well as supporting the Shanghai Pudong Airport in increasing international transit flights for commodities.

 

III. Commodities Trade Liberalization

The FTZ would explore the free import, free export and free storage of goods, and implement a new supervisory pattern of “a frontline of openness, a second line of safe and efficient operations, and the free flow of goods within the FTZ” for trade of goods. The FTZ may encourage multinational corporations to establish Asia-Pacific headquarters within the pilot area, support enterprises in developing offshore business, expand and refine experimental transaction practices for bonded futures, accelerate base construction on external cultures and trades, and promote the development of services outsourcing businesses.

 

IV. Exploration of a New Investment Management System

The FTZ may temporarily cease the implementation of the Law on Chinese-Foreign Equity Joint Ventures, the Law on Chinese-Foreign Contractual Joint Ventures, the Law on Foreign-Funded Enterprises and the Law for the Preservation of Antiques, so as to change the current requirements of the Catalogue of Industries for Guiding Foreign Investment and develop a new investment management system centered on pre-accession national treatment and a negatives list. In other words, all industries excluding the industries in the negatives list can be freely established by foreign capital, and carried out a registration system for subscribed capital contributions of  registered capital, so as to make the FTZ the most typical investment facilitation region in Mainland China.

The overall planning of the FTZ, based on the author’s information, may involve 98 pilot tasks within the following industries and fields:

Financial Services Field:

Ø Plan to establish foreign-invested professional insurance institutions for health and medicine;

Ø Cancel the restriction on minimum registered capital in the FTZ for financial leasing companies in setting up subsidiary corporations in leasing single engines and single vessels, and on the operational limits for enterprises concurrently engaged in commercial factoring businesses related to its main business;

Ø Allow qualified foreign financial institutions to set up foreign banks and Chinese-foreign equity joint banks;

Ø Allow qualified Chinese banks to operate offshore businesses;

Ø Allow foreign invested payment institutions to obtain a Payment Business License;

Ø Allow the establishment of a delivery warehouse of commodities futures appointed or set by a foreign futures exchange of goods;

Ø Allow the establishment of foreign capital invested joint stock enterprises;

 

Shipping Services Field:

Ø Advance exploration of outer Costal Piggybacking services; (Outer “Coastal piggybacking” refers to foreign vessels engaged in foreign trade between China’s coastal ports in the domestic section of container transport of heavy boxes)

Ø Permit the establishment of foreign-owned international communication management enterprises;

Ø Loosen the restrictions on the foreign-owned shareholding ratio of international shipping enterprises.

Professional Services Field:

Ø Allow foreign enterprises to operate in the manufacturing and marketing of gaming devices;

Ø Allow foreign enterprises to operate part of the value-added telecommunication services in specific forms;

Ø Allow qualified enterprises to engage in the auctioning business of cultural relics in the FTZ;

Ø Allow the establishment of foreign-invested credit investigation enterprises;

Ø Allow qualified Chinese-foreign equity travel agencies registered in the FTZ to operate outbound travels, with the exception of the Taiwan area;

Ø Loosen partial restrictions on the shareholding ratio and minimum registered capital for Chinese-foreign joint ventures and foreign talent agencies

Ø Cancel partial restrictions on performance requirements and shareholding ratios of projects for foreign engineering, design, and construction services;

Ø Explore cooperative approaches and mechanisms to strengthen the cooperation between Chinese and foreign law offices.

 

Cultural Services Field:

Ø Allow the establishment of wholly foreign-owned entertainment enterprises;

Ø Allow the establishment of wholly foreign-owned entertainment venues.

 

Social Services Field:

Ø Allow the establishment of Chinese-foreign cooperative education training institutions;

Ø Allow the establishment of Chinese-foreign cooperative vocational training institutions;

Ø Allow the establishment of wholly foreign-owned medical institutions.

In addition, it is said that the FTZ will explore further in an examination of taxation policies.

Ø Prepare the implementation of income tax payments of assets assessment appreciation by installments;

Ø Prepare income tax payments of stock stimulation;

Ø Carry out international ship registration policies;

Ø Implement a pilot tax rebate on financial leasing;

Ø Reduce import value-added taxes where leasing companies purchase airplanes outside of China;

Ø Issue a selective taxation on declaration of commodities for home use;

Ø Perfect taxation policies adapted to foreign equity investment

Ø Perfect taxation policies adapted to the development of offshore business.

With the gradually progressing construction of the FTZ, the Bridge IP Law Commentaries will update its readers on relevant policies and laws. If you have any questions, comments, or concerns, we encourage and welcome our readers to contact us.

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