The pilot FTZ, which has the backing of the Chinese State Council, was first announced last July. It is more ambitious than China’s other free trade zones, and will be used as a testing ground for significant reforms.
The zone is seen as a first significant step towards financial liberalization: banks and other businesses will be allowed to, within its boundaries, experiment in areas that are tightly controlled in the rest of China, including loosening regulation of interest rates and full RMB convertibility. If successful, the government said the changes could eventually spread to other parts of the country.
Within the zone, the Foreign Direct Investment Catalogue is abolished and replaced by a so-called ‘negative list’. This list was published on 29 September 2013 and includes quite a number of sectors for which investment is not allowed, or for which special requirements apply. Investments into sectors not included in the negative list are allowed and will only require a filing process. According to the Shanghai Commission of Commerce (SCOFCOM) the list will be reduced in length over time in line with gradual liberalization of the tertiary sector.
We believe that the replacement of the Foreign Direct Investment Catalogue by a negative list in the FTZ is a positive step towards creating a level playing field between domestic and foreign invested enterprises and could represent a potential breakthrough in China’s future management of foreign investment. In its current form however, in our view, too many sectors are still included and we therefore strongly encourage the government to shorten the list as to allow a wider rage of foreign direct investment into the zone.
The FTZ covers 29 square kilometers of ports and logistics areas – including the Shanghai Waigaoqiao Bonded Zone, the Shanghai Waigaoqiao Bonded Logistics Part, the Yangshan Bounded Port and the Shanghai Pudong Airport Comprehensive Bonded Zone. According to the implementing regulations, the overall objectives of the zone are, amongst others, (i) to expand the services sector and promote the reform of the foreign investment management system, (ii) to develop headquarter economy and new trade forms, and (iii) to accelerate the exploration of capital account convertibility and full opening up of the financial services sector.
We will follow the developments on the FTZ closely and we will give regular updates on important new (implementation) measures. Be sure to follow our website or to register for email notifications.