China Kicks off Free Trade Zone Momentum in Second Quarter of 2017

Published on 2017-04-21

New 21-point plan for Shanghai Free Trade Zone, seven new FTZs launched.

Introduction

On 31 March 2017, China’s State Council issued the Plan for the Comprehensive Deepening of the Reform and Opening-up of the China (Shanghai) Pilot Free Trade Zone (the “Further Plan”), which lists 21 new initiatives for the Shanghai Pilot Free Trade Zone (“the Shanghai FTZ”).

On the same day, the State Council released an “overall plan” for the launch of seven new free trade zones (the “New FTZs”) in Chongqing Municipality and the provinces of Henan, Hubei, Liaoning, Shaanxi, Sichuan and Zhejiang from 1 April 2017 (each, a “New Overall Plan”) outlining the key areas of reform and industry focus in each New FTZ. The State Council outlined its broad objectives of introducing new incentives and measures in each New FTZ to implement the New Overall Plans, including cooperation between the authorities of the New FTZs and the relevant local government.

We consider below the key improvements contemplated for the Shanghai FTZ in the Further Plan and the developments for the New FTZs outlined in the New Overall Plans.

Shanghai FTZ to renew its focus on business efficacy

The Further Plan seeks to expand on the reforms already introduced in the Shanghai FTZ, including:

Business Names 

  • To abolish pre-approval filing of a proposed company name before registering a new company.
  • A 6 April 2017 consultation draft of the State Administration for Industry and Commerce shows this is being planned nationwide. In the past, similar reforms have first been issued in Shanghai FTZ on a pilot basis. 

Other Corporate Reforms 

  • Business address registration is to be further facilitated, building on Shanghai’s March 2015 reforms that permit affiliated enterprises to share an address. New option to allow inclusion of multiple business premises in a single registration.
  • Allowing foreign-invested enterprises to have a perpetual term and simplifying deregistration procedures. 

Foreign Trade 

  • A “single window” for trade in goods and services based on United Nations standards, including setting up free port zones.
  • Initiatives could include a single point for certifications and customs approvals, interconnected logistics, supply chain and customs clearance information networks, segmented regulation of different categories of bulk shipments and connectivity with other major ports. 

Foreign Investment 

  • Further opening up services sectors to foreign investment, including finance, telecoms, internet, culture, and maritime services. 

Regional focus of Seven New FTZs

The New FTZs are expected to introduce many of the key benefits of the existing free trade zones in Shanghai, Guangdong, Fujian and Tianjin, including the simplified customs administration procedures and single point filing of customs information in the existing free trade zones, and the convenience of a one-stop agency to process multiple regulatory applications for foreign investment, business registration, customs, tax, quality supervision and other matters.

In addition to this, the New Overall Plans focus on geographic and sector specific advantages
of each individual New FTZ, with the use of inland and western China as a springboard for
“One Belt, One Road” (“OBOR”)1 investments being a common theme. For example, each
New FTZ aims to promote cooperation with OBOR countries in customs, quarantine, certification, standards and supply chain security.

Key individual features particular to each Overall Plan are summarised below:

  • Chongqing Municipality
  • Henan Province
  • Hubei Province
  • Liaoning Province 
  • Shaanxi Province 
  • Sichuan Province 
  • Zhejiang Province 

Looking forward

Market participants will welcome the initiatives under the Further Plan to maintain Shanghai FTZ as the leading testbed for pioneering investment and business reform in China. At the same time, the purpose of the New FTZs is both to build on the experience of such reform in the Shanghai FTZ, and use development and incentive policies to rebalance the Chinese economy away from the eastern seaboard (where the first four FTZs are located) towards central and western China (with five of the New FTZs being situated in more inland regions). This rebalancing supports the partial shift in geographical focus emphasised in China’s 13th “Five Year Plan: 2016-2020”.

It is thus not surprising that a key part of the reforms for the New FTZs is centred on the OBOR initiative, which has gained significant momentum and frequent press coverage over the course of 2016, and 2017 to-date. Whilst implementing the New Overall Plans (as well as the Further Plan) will require further detailed rules and specific incentives, the text released so far does assist investors in deciding where to locate future China operations by providing an outline of key changes that can be expected in the relevant regions going forward – especially when other general OBOR-linked incentives are taken into account. For example, those New FTZs which have outlined intentions to promote activities relating to the OBOR could provide additional benefits to investors with ambitions to raise capital or ultimately exit via flotation, following recent reports that the Hong Kong Securities and Futures Commission may relax conditions applicable to OBOR-linked enterprises seeking to list in Hong Kong.

The Further Plan and the New Overall Plans combine to show the Chinese government’s renewed focus on inbound investment as a growth engine and its continued determination to liberalise selected key sectors of the economy. Domestic and foreign investors should draw positives from this impetus at a time when the slower Chinese economy and the imposition of tightening capital controls have been overshadowing growth that nonetheless continues to lead by far any other economy in the developed world.

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