FTZ FAQs

Published on 2016-10-24

How do I register my company in the FTZ? What advantages are there for registering in the FTZ? How does the FTZ impact the services sector? Find answers to the most frequently asked questions on the FTZ here.

Index:

1) What is the FTZ?

Since the FTZ was established on 29 September 2013, the authorities in the FTZ have carried out institutional reform and innovation to create a streamlined legal framework for investment and trade within the pilot zone. The FTZ has adopted a “negative list” approach to the application of foreign investment rules, simplified foreign trade supervision procedures, advocated financial system reform towards realising Renminbi capital account convertibility, and promoted post-filing supervision to transform government functions. Foreign investment in any sector outside the “negative list” is treated the same as domestic investment. Specific industries such as e-commerce, insurance, legal services, logistics, warehousing, and transportation, each also enjoy preferential treatment in FTZ.

2) What area does the FTZ cover?

The FTZ covers an area of 120.72 square kilometres (46.61 square miles) and integrates four existing bonded zones in the Pudong district: the Waigaoqiao Free Trade Zone, the Waigaoqiao Free Trade Logistics Park, the Yangshan Free Trade Port Area and the Pudong Airport Comprehensive Free Trade Zone. Since 21 April 2015, the FTZ's areas have been expanded to include the Lujiazui Financial and Trade Zone, the Shanghai Jinqiao Economic and Technological Development Zone (formerly the Jinqiao Export Processing Zone) and the Zhangjiang Hi-Tech Park.

3) What is the difference between the FTZ and other economic zones?

During 1980s, China established special economic zones including in Shenzhen. Economic policies in those areas tended to pay attention to tax incentives for foreign investment and greater independence for trade activities with overseas enterprises. Statistics have shown that special economic zones generally increase regional growth but past government initiatives to increase the number of SEZs have had negligible effect on China’s growth. Rather the key to faster economic growth appears to be a greater pace of liberalisation.

Specifically in Shanghai, the predecessor of the FTZ was primarily the at the customs-free trade zone at Waigaoqiao. This area was transformed into a broader investment-type zone, which has deliberately been described as a pilot area for liberalisation before, if successful, a nationwide policy rollout, rather than as another special economic zone.

4) Why are the reforms just limited to the FTZ?

The Chinese government has historically preferred to trial new reforms on a smaller scale to judge their success before a wider rollout. The FTZ set up in Shanghai is such a testing ground for new policies, with focus on liberalising China's service sector and financial services, in particular. So far, successful innovations to be rolled out nationwide include removal of minimum capital requirements, reform of annual corporate inspections and the introduction of cash pooling facilities for multinational and corporate headquarters. In addition, Shanghai’s reforms have now been replicated in three other free trade zones of similar form, with seven more zones to be established (although each having a different focal point). It is hoped that all these zones together will lead in the further reform of China. Also, competition has been stimulated between local areas of Shanghai and further afield, with local governments working on their own incentivising initiatives to keep pace with the Shanghai FTZ.

5) What advantages are there for registering in the FTZ?

Foreign investment will generally be permitted in all sectors unless within the “prohibited” category set out in the 2015 Foreign Investment Industrial Guidance Catalogue. To encourage fair competition, foreign investors will receive the same treatment as domestic enterprises at establishment, expansion or during acquisitions. A platform has been set up in the FTZ to streamline corporate establishment procedures. In particular, all application documents for the Administration of Industry and Commerce and the Tax Bureau can be submitted to and handled via inter-departmental circulation by the FTZ Committee (however, an application to the State Administration of Foreign Exchange and Customs must be submitted separately, as these authorities are not under the administration of the FTZ Committee). In practice, the four working days turn-around time originally promised by the FTZ authorities has been extended due to the large number of company establishment applications in the FTZ. It currently takes approximately 1-1.5 months to complete the process.

6) Are there any beneficial tax policies in the FTZ?

Generally the FTZ authorities have sought to encourage investment through other preferential policies than those relating to tax. Any benefits that applied in the bonded areas established before the FTZ will generally still apply.

7) How do I register my company in the FTZ?

An indicative procedure for establishing a company in the FTZ is set out below.

8) How does the FTZ impact the services sector?

The original regulatory framework for the FTZ, the “Overall Plan”, removed certain foreign investment restrictions within the FTZ for 18 service industries spanning six service areas, namely financial, shipping, commercial and trading, professional, cultural and social services. To date there has been an opening up of certain key service areas including banking, securities, legal services, credit investigation, international shipping and freight forwarding, tourist agencies and [performing arts agencies(although some of the reforms are subject to implementing rules that are still to be issued). By way of further example, after a trial period in the FTZ, limits on foreign ownership of e-commerce businesses have been removed nationwide. As a general statement, setting up in the FTZ allows an enterprise to access the Chinese market just like any other business in China.

9) What are the benefits of free trade accounts?

The FTZ’s “free trade accounts” are dual-currency accounts that enable funds to be freely remitted between accounts outside of China and other free trade accounts in the FTZ, as well as transfers of funds to and from non free trade accounts in China for limited purposes such as service fee payments, repayment of certain long-term RMB-denominated loans, and industrial investment. In addition to this key financial reform, limits on cross-border borrowing have been relaxed in the FTZ to allow borrowing from overseas provided that financing is to be used within the FTZ or abroad. FTZ entities of multinationals are also permitted to conduct cross-border RMB pooling, centralised collection and payment, and RMB current account concentrated payments/receipts. As well as facilitating two-way payment services for international RMB current account items between domestic and overseas affiliates, these reforms allow liquidity to be concentrated as well as reduce transaction volumes and, in turn, hopefully foreign exchange risk on overseas currency payments. Free trade accounts are also an essential feature of the payment mechanism that enables investors to have access to new financial products being introduced in the FTZ, including certificates of deposit and bonds.

10) What are relations like between government and businesses in the FTZ?

The FTZ Committee has generally been open to reform proposals and lobbying on a case-by-case basis. Where it thinks possible within the frameworks laid out by central government, the FTZ Committee seeks to remove regulatory red tape and facilitate a more market-orientated business environment. Given that the FTZ continues to be seen as a testing ground for wider economic reforms, engagement by business stakeholders can facilitate reforms that ultimately extend to the whole of the Chinese market. FTZ entrants can learn from first-hand experience how reforms change their sector and, by being resident there, may receive information on the FTZ earlier from the authorities. 

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Contributors:

1. Konrad Shek, Chamber Executive Committee Sponsor for the FTZ Focus Group

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