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HAPPY ANNIVERSARY SHANGHAI FREE TRADE ZONE

HAPPY ANNIVERSARY SHANGHAI FTZ!

快乐周年庆!
SHIBOLET & CO. - CHINA DESK
Michelle Tzhori, Esq.
Admitted in Israel and NY

M: +86 18501658062; 
T: +86-21 58812568
M.Tzhori@shibolet.com
www.shibolet.com
Our China Desk specializes in corporate-commercial, foreign direct investments, cross  border transactions, intellectual property and dispute resolution. We provide legal escort in China in cooperation with qualified Chinese attorneys, as well as business-commercial support in the day-to-day operation of our clients
CHINA (SHANGHAI) PILOT FREE TRADE ZONE
IN A NUTSHELL
 
China (Shanghai) Pilot Free Trade Zone (FTZ) is celebrating its first anniversary today; this is a great opportunity to review the vision and mission that led to the establishment of FTZ, its goals, objectives, and the first year’s execution and achievements.
 
Announced on July 2013 and officially established on 29 September 2013, FTZ is the largest and most innovative trade zone in China. It covers 28 square kilometers, including Waigaoqiao free trade zone, Waigaoqiao free trade logistic park, Yangshan port and Pudong airport, and is designated to operate on a pilot mode until 2016. During the pilot period FTZ is exempted from several regulations and administrative approval stages.
 
Although the FTZ is one year old, this experimental zone continuous to attract massive attention blended with question marks regarding its innovativeness and advantages to the foreign business community in China. In this article we shall review the objectives of, and expectations from, the FTZ, the related reforms that underlie the experimental zone, and the achievements so far. 
 
Main objectives of SHANGHAI FTZ
 
Unlike other worldwide free trade zones aimed at attracting investments by utilizing geographical advantages, the main objective of the FTZ is to act as a testing ground for China’s ongoing reforms, with the main objectives being as follows:
 
Objective 1:                Further open-up
 
China’s plan to open-up to the world - which commenced early 1980th and was accelerated after China’s accession to the World Trade Organization (WTO) - is now being reinforced through the FTZ. Several industries, normally strictly prohibited for foreign investments, are now being accessible to foreign players in the FTZ. In addition, China also releases the tight control over investment approval procedures and allows speedy registration in various sectors not included in the ‘negative list’ (further elaborated below). The above reliefs, together with the RMB liberalization implemented in the FTZ, will assist China along the process of bilateral and multilateral treaty negotiations.
 
Objective 2:                Enhance the administrative reform
 
China is going through a comprehensive administrative reform, designated to transform several central government’s functions to the provincial or municipal levels. During this year, the central government has delegated hundreds of approval authorities to lower levels and, while shifting controlling roles to the local governments, it remained in the picture as a supervisor or observer. Relevant rules and regulations, experimented in FTZ, will be reviewed, analyzed and eventually implemented in the entire mainland.
 
Objective 3:                Strengthen the investment management reform
 
A.       Foreign Direct Investment: the “Negative List”

The Negative List, comprised by the Shanghai municipal government, sorts foreign invested projects by industries. Foreign investment projects not listed in the Negative List enjoy preferential treatment along the establishment process, during which the onerous approval requirements applicable to foreign invested enterprises are waived and instead, a mere record filing action is conducted by the FTZ management committee. This departure from the rigorous approval-based system increases the efficiency of foreign direct investment management and makes incorporating at the FTZ a lighter and more straightforward process.
To read more about the negative list (Hebrew version) click here.

Since the establishment of the FTZ, complaints have been raised about the length of this list, and its negative effect on the initial objectives of the zone. As FTZ gradually opens up to foreign investments, the Negative List will most likely be shortened and reduced in approximately 30% as compared to the original list (as per Shanghai vice mayor Tu Guangshu, in the Shanghai Forum)

B.     Outbound investment: Record-filing registration
 
Unlike the long and arduous approval process for outbound investment projects that dominated the outbound investment arena since China’s opening-up to the world, the FTZ introduces a light record-filing registration process in which, upon receipt of the project’s filing, the relevant FTZ committee (rather than the Shanghai government) shall issue “record opinion” within 5 workdays. The opinion will state the decision whether to file the enterprise and will determine whether such project is subject to the normal approval process, or to the speedy filing process

C.       Strengthen post-establishment supervision
 
The FTZ investment management system emphasizes the “low threshold, strong supervision” concept. The registration authority is responsible for post-establishment supervision. Meanwhile, credit information and annual report system are built to supervise enterprises’ operation.
 
Objective 4:                Ignite the Financial System Reform
 
The financial system reform introduced by the FTZ received the highest media attention and is referred to as the main achievement of the FTZ. This reform is combined of the following three subcategories:

A.       Market-oriented reform of interest rates

The SHFTZ’s policy promotes market-oriented interest rates. Financial institutions in Shanghai have more freedom to set their interest rates applicable to FTZ residents[1]. The People’s Bank of China (PBOC), Shanghai Office, published on Feb. 26, 2014 the Implementing Opinions on Lifting the Caps on the Interest Rates of Small-amount[2] Foreign Currency Deposits within the China (Shanghai) Pilot Free Trade Zone, regulating that Shanghai financial institutions can independently price interest rates for foreign exchange deposits of FTZ residents. At the same time, FTZ encourages the development of nonbank financial institutions and foreign-funded banks, which increases the competitiveness of the financial market and offers more financing channels for enterprises.
 
B.       Lift restrictions on the cross-border use of RMB
 
  1. Simplifying cross-border RMB settlement procedure:
    Financial institutions in the FTZ can directly handle Cross-border RMB settlement under current account and direct investment account.
  2. Simplifying the procedure of offshore RMB loan:
    Enterprises and nonbank financial institutions can set up special deposit accounts for offshore RMB funds in a bank, which shall be used only inside the FTZ or abroad[3].
  3. Cross-border two-way RMB reservoir
    Multinational Group Companies can assign an affiliate company in FTZ to set up a special deposit account to transfer RMB currency within the group. The RMB currency must come from business operations and cannot be generated from other activities such as fund-raising.
  4. Free Trade Account System (FTA)
    PBOC Shanghai Office recently issued the Implementing Rules for Separate Account Calculating System in China (Shanghai) Pilot Free Trade Zone (the Implementing Rules), which formulates that Shanghai financial institutions can set up free trade accounts to provide financial services for entities registered in the FTZ. An FTA is a local and foreign currency account with uniform rules. Capital flow between an FTA and an onshore account outside the FTZ shall be treated as a cross-border transaction.
     
C.       Release control of foreign exchange
 
  1. Current account management
    A foreign exchange transaction under current account is conducted by FTZ banks.
    Funds can be transferred freely between Resident Free Trade Accounts on the one hand, and offshore accounts, non-resident accounts that are opened outside the FTZ but within Mainland China, Non-resident Free Trade Accounts and other Resident Free Trade Accounts on the other hand. Fund transfers may be processed between the Resident Free Trade Accounts of the same non-financial institution and other bank settlement accounts for business under current accounts, loan repayment, industrial investment and other cross-border transactions in compliance with relevant provisions.
  2. Capital account management
    The registration of foreign exchange under direct investment item has been transferred from the local foreign exchange departments to the FTZ banks. FIEs inside the FTZ shall settle their foreign exchange freely upon their own discretion.
  3. Liberalization of foreign debts management
    Administrative approval of foreign guarantee and offshore financial lease are cancelled. To provide external guarantees, an enterprise within the FTZ may conclude guarantee contracts on its own without applying for prior administrative examination and approval with the Foreign Exchange Bureau. Enterprises and non-banking financial institutions within the FTZ are not required to apply for verification and approval of the payment of guarantee fees overseas. They may directly handle foreign exchange purchase and payment with banks by producing the guarantee fee payment notices.
In addition, Finance Lease Companies within the FTZ are no longer required to apply for examination and approval of the external creditors' rights acquired from each finance lease transaction. Instead, administration by registration shall be adopted in this regard.
Lastly, the upper limit of enterprise’s overseas loan is increased from 30% to 50% of its shareholders equity.
 
Other objectives:
  1. Development of the service industry
    Pursuant to the General Plan of China (Shanghai) Pilot Free Trade Zone, the FTZ removed some restrictions related to the financial service, shipping service, commercial service, professional service, cultural service and social service industries, and facilitated the registration and activities of service companies.
  2. Streamline the procedure of Import and Export:
    Commodities can enter the FTZ without going through the import custom procedures. These commodities are not regarded as an import to China for as long as it is stored at the FTZ area. Once shipped to the mainland it is regarded as an import to China and must go through the relevant custom procedures. In the event such commodities arrive at the FTZ and shipped abroad, such entry to and exit from China is not regarded as an import and export and is not subject to the Chinese custom or tax authorities.
  3. Improve International shipping service
    The Shanghai FTZ aims at developing the international shipping service industry and optimizing international shipping registration system.
 
The percentage of foreign investment in joint ventures related to international shipping and international ship management services is increased to 49%. In addition, the limitation on employing foreign crew members is lifted. Previously, foreign crew employment should have been approved by the Ministry of Transport; now a mere reporting to Shanghai Maritime Bureau is required in order to employ a foreign seaman.
 
FTZ IN A GLANCE
  1. Number of newly registered enterprises in the FTZ: more than 10,500 as of August 2014.
  2. Main categories of FTZ enterprises: finance, import and export industry, investment management, international trade, manufacturing industry, logistics industry. There are more than 2,000 financial companies, accounting for 20% of the newly registered enterprises.
  3. The future orientations of FTZ: five leading industries: international trade, financial service, shipping service, professional services and high-end manufacturing.
  4. The Negative List: 2014 negative list was shortened 26.8% comparing to the 2013 list. Special management measures have decreased to 139 articles from 190. This indicates further release of the limitation on foreign enterprises. For instance, the limitations on the paper industry, petroleum processing industry, chemical industry and special equipment manufacturing industry have been lifted. According to the official news, the 2015 negative list will continue to shrink, indicating further reliefs on the foreign investments.
 
TO SUMMARIZE
 
The FTZ is an experimental zone intended to explore new concepts of finance and trade in the sino-international investment arena. While policies are constantly being reviewed and adjusted, the main advantages of this new zone remain clear:
  1. Administrative simplification: The central government will move aside and give space to the lower level authorities and to the market forces.
  2. Increased user experience: FTZ focuses on providing best user experience by developing the service industries and simplifying transaction procedures. Convenience and efficiency are the most emphasized advantages of this new zone.
  3. Introduction of international rules: FTZ works as a bridge between China and the international markets, therefore emphasizes the application of international rules. FTZ introduces new legal concepts; its new arbitration committee and rules are a good example.
  4. Internationalization of RMB: FTZ encourages RMB settlement in international transactions. It is aimed at expanding the cross-border use of RMB and building a sound mechanism of RMB outflow and inflow.
 
The new FTZ heralds a new era of sino-foreign investments interactions. It raises high expectations for reduced bureaucracy, deregulation, improved services and better use of the local currency. Time will tell whether this new popular zone can accomplish the goals and objectives set by the government, and lead China to the next step in its race to the top.
 

[1] Residents within the FTZ include Chinese-funded and foreign-funded enterprises and public institutions qualified as legal persons that are duly established within the FTZ (including financial institutions), organizations that are registered within the FTZ but are not qualified as legal persons, other organizations within the FTZ, FTZ branch institutions of overseas legal person institutions, and domestic individuals who have been employed within the FTZ for one year or longer.
[2] “Small-amount foreign deposits” refers to foreign deposits under 3 million dollar.
 
[3] Relevant regulation: Notice of the Shanghai Head Office of the People's Bank of China on Supporting the Expanded Cross-border RMB Use within the China (Shanghai) Pilot Free Trade Zone (the “Notice”).
Pursuant to the Notice, The offshore RMB funds borrowed by financial institutions and enterprises within the FTZ (excluding trade credit and intra-group operational financing) shall be used for fields in line with national macro regulation and control. They shall not be used for investment in marketable securities (including wealth management products and other asset management products) and derivatives for the time being, and shall not be used for entrusted loans.
The special account for offshore RMB borrowings may only be used within the FTZ or overseas, including for purposes such as production and operations within the FTZ, project construction within the FTZ, overseas project construction, etc.
 
Copyright © Michelle Tzhori                                                        Mailing address: M.tzhori@shibolet.com

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