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The Shanghai Free Trade Zone, one year after

The Shanghai Pilot Free Trade Zone (SHFTZ) was created in September 2013, championed by Mr. Li Keqiang himself, Prime Minister of the People’s Republic of China. Among the main objectives of the SHFTZ, and which has been of great interest to US companies looking to enter the Chinese Market, is the opening of service sectors still restricted to Foreign Direct Investments and the overall reduction in procedures, red tape, and faster time to incorporation and perform company set up. However, a year after the zone’s opening; the picture is not quite as bright as initially painted and has been pointed out accordingly by several international observers in the last few weeks, including prominent newspapers such as the New York Times, the Economist and the South China Morning Post. This article provides the latest update to those interested in entering the Chinese Market and who are confused about the advantages of the SHFTZ.

The SHFTZ adopts a Negative List approach towards foreign investment management, which lists the sector still restricted or banned. Foreign Investment projects on the Negative list are required to go through pre-approval procedures while foreign investment into sectors not on the list will require record-filing procedures. After the latest revision made on July 2014, the number of items on the list was cut from 190 to 139, with 51 items previously belonging on the “negative list” has now been relaxed or removed, paving the way for an increasingly free investment climate in the zone.

The revised list also clarified several restrictions, indicating increased transparency in the way foreign investments are regulated. Major industries that benefited include manufacturing, medical, automobile, financial and cultural.

Manufacturing Industry

The manufacturing industry has seen the greatest change. Foreign investment is now freely permitted in many sectors including, but not limited to the manufacture of ink and related products, previously restricted chemicals, synthetic materials, construction equipment, and electronic automobile components. The lifting of these restrictions in the manufacturing industry serves as a juxtaposition to China’s economic direction in the 12th Five-Year Plan which ushered in a new age of hi-tech manufacturing.

Medical Industry

Entry barriers were significantly reduced in the medical industry. Before the revised “negative list” was published, most foreign doctors were discouraged from setting up their own private practice due to the minimum capital requirement of RMB 20 million. The large capital requirement also meant that high-value investors were for the most part the only ones capable of making a foray into the healthcare sector. Often, the investors who had capital would not have the necessary medical experience to contribute to the industry. As a result, a deadlock ensued where neither doctors nor high-value investors were investing in the booming industry.

However, with the recent removal of the minimum capital requirement, medical professionals who have been looking to set up their own private practice can now do so in the Pilot Free Trade Zone. Vistra Shanghai 星凯投资咨询(上海)有限公司

Financial Industry

The financial industry has also advanced forward greatly since restrictions on investments into financial-related activities have been slightly lifted. Foreign investors are now permitted to operate with small-scale investment banks, financial and trust companies in the Free Trade Zone, whilst insurance, securities, and firms dealing with large scale financing and loans are still restricted.

Automobile Industry

For the automobile industry, restrictions largely remain, but there is greater clarity in the mandatory Sino-foreign investment ratio. Although the manufacture of finished automobiles is still not allowed, foreign investors considering to import, export, development, repair and modification of automobiles, and related hardware products can now do so without a Chinese partner.

Cultural, Arts & Entertainment Industry

On the cultural front, establishing and operating movie theatres has been made possible by investing through Hong Kong and Macau. However, it has been further clarified that the import, export, auction and sale of cultural objects is strictly prohibited, cementing the strong stance against possible loss of cultural heritage.

New Opportunities

Apart from reducing the number of restrictions, the revised “negative list” has also granted the Hong Kong and Macau Special Administration Regions (SARs) preferential status with regards to investing in the Free Trade Zone. This implicitly means that foreign investors can now invest into restricted industries within the Free Trade Zone by setting up an intermediate company in Special Administration Regions (SARs). Restricted industries that now accept investments through the SARs include businesses ranging from movie theatres to aviation-transport and logistics.

Also, where small-scale investment banks and financial companies have been allowed in the zone, foreign investors can look forward to greater convenience regarding capital accessibility when operating within the zone. Despite its name, the SHFTZ does not provide any specific tax preferential policy to investors.

Lastly, a new circular with additional reductions has just been announced with more than 20 sectors being opened to foreign direct investment. For the first time, foreigners will be allowed to own a controlling stake in joint-venture shipping agencies, with the investment cap raised from 49 to 51 per cent.

Forex Cash Pooling

Another important advantage offered by the Free Trade Zone that may be of great interest to foreign investors is the unique possibility to transfer funds between onshore and offshore entities through a two-way cash pooling. Such transactions are basically inter-company loans that allow multinational enterprises to move capital between the headquarters and subsidiaries, which may be located in different countries and jurisdictions. Cash pooling often aims at greater liquidity and a more efficient management of finances. It is often used to remit undistributed profits to foreign related companies sharing an equity relationship. Vistra Shanghai 星凯投资咨询(上海)有限公司

The Shanghai Free Trade Zone is today the only area in China offering forex cash pooling. To set up a cross border cash pool, all the companies involved must have positive equity, part of the same parent company; and in the case of more subsidiaries in China, the cash pool header must be the company registered in the FTZ. In addition to these general requirements, forex cash pooling also requires the approval of the State Administration of Foreign Exchange (SAFE) and a slightly more complex agreement with the appointed bank compared to the one for RMB cash pooling.

Incorporation procedures for Foreign Invested Enterprises

According to the regulations in place, the incorporation procedures of a Foreign Invested Enterprises, including a Wholly Foreign Owned Enterprises (WFOEs) in the SHFTZ should take about 4 working days to complete compared to two and a half months in the rest of China. Moreover, the SHFTZ allows the use of virtual address for registration purpose, which is not typically allowed in China. A company registered in the SHFTZ can registered under a virtual address for RMB 20,000 per year. With the above being said, our experience shows this still takes between four to six weeks since authorities are currently unable to guarantee a company registration in 4 days due to their high workload.

One main aspect not always clear to foreign investors we would like to point out is the practical implication of a company registered in the SHFTZ when considering the future operation of such company in relation to customers and suppliers outside the zone.

Although the restrictions have been gradually eased, there remains significant uncertainty in terms of the degree of regulation from authorities as well as local interpretation of the laws governing the Free Trade Zone. In this sense, it would be more effective for potential investors to seek the guidance of professionals with deep specialization in the Chinese market.

Vistra’s specialist colleagues provide tailored trust, fiduciary, fund and corporate services. We work in close partnership with our clients, to maximise what is possible in international business. As part of the Vistra Group, we employ over 1,300 professionals across 35 countries. With offices in Shanghai, Beijing, Guangzhou, Shenzhen and Hong Kong, in addition to New York and San Francisco, Vistra China assists a portfolio of US clients with a full corporate offering including company formation, secretarial services, market entry advisory, bookkeeping/accounting, tax compliance services, HR admin and payroll.

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