Latest Developments in China (Shanghai) Pilot Free Trade Zone

The China (Shanghai) Pilot Free Trade Zone officially declared its opening on 29 September 2013. Since its establishment, the market has paid particular attention to the follow-up promulgation of new policies and regulations in order to ascertain the proposed reform to be adopted in the Pilot Zone, and thus any potential business opportunities therein. This article aims at summarizing certain key features of the Pilot Zone which have been made public in recent months.

Among others, the opening-up of the restricted industries for foreign direct investment is often the topic which foreign investors are most interested in. Shortly before the establishment of the Pilot Zone, the Overall Scheme of China (Shanghai) Pilot Free Trade Zone (“Scheme”) was promulgated by the State Council. According to the Scheme, opening-up measures will be implemented in at least six fields of the service industry in the Pilot Zone, including financial services, shipping services, business and trade services, professional services, cultural services and social services. The Scheme has already come into effect on 1 October 2013 and will remain valid for three years. The opening-up measures specified under the Scheme include:

Financial Services:

• Qualified foreign-funded financial institutions will be allowed to establish foreign-funded banks, and to set up Sino-foreign joint venture banks with qualified domestic enterprises. When appropriate, restricted licensed banks will be allowed to be set up in the Pilot Zone. Upon promulgation of the relevant regulations, qualified Chinese-funded banks will be allowed to engage in offshore banking business within the Pilot Zone.
  
• Foreign invested medical insurance institutions may be established in the Pilot Zone on trial basis.
  
• Subsidiaries established by the financial leasing companies in the Pilot Zone which only hold one aircraft or one vessel will no longer be subject to the minimum registered capital requirement; financial leasing companies will be allowed to engage in factoring business as a major or sideline business.

Shipping Services:

• Transportation authorities will promulgate regulations to relax the foreign shareholding restrictions in Sino-foreign equity joint venture and cooperative joint venture international shipping carriers.
  
• Foreign investors will be allowed to establish wholly foreign-owned international shipping management enterprises.

Business and Trade Services:

• Provided that the security of internet information can be safeguarded, foreign investors will be permitted to engage in certain value-added telecommunication services in designated manners
  
• Foreign invested enterprises will be allowed to conduct the production and sale of game consoles and games to the domestic markets, provided that the contents of the games have been approved by the cultural authorities.

Professional Services:

• Foreign investors will be allowed to establish credit investigation agencies.

• Foreign human resources agencies will be permitted to set up Sino-foreign joint ventures to engage in human resources business, provided that the shareholding of the foreign investors in such joint ventures does not exceed 70 per cent; Hong Kong and Macau service providers will be allowed to establish wholly foreign-owned human resource institutions. The minimum registered capital requirements of foreign invested human resources institutions will be reduced to US$125,000.

• Foreign investors will be permitted to establish joint-stock investment companies.

Cultural Services:

• The shareholding restrictions on foreign investors in foreign invested performance brokage agencies will be uplifted, and wholly foreign-owned performance brokage agencies may be set up to provide services in Shanghai.
• Foreign investors are permitted to establish wholly foreign-owned entertainment venue to provide services within the Pilot Zone.

Social Services:

• Foreign investors will be allowed to establish Sino-foreign cooperative educational institutions and vocational skills training institutions.
  
• Foreign investors will be allowed to establish wholly foreign-own medical institutions.

Following the promulgation of the Scheme by the State Council, the Shanghai Municipal Government issued the Special Administrative Measures for the Admission of Foreign Investment in the China (Shanghai) Pilot Free Trade Zone (Negative List) (2013) (“Negative List”). The Negative List comprises of general administrative measures for foreign investment and a list of industries in which foreign investment is prohibited or restricted in accordance with the terms thereof. The sprit of the Negative List is that save for those industries as expressly prohibited and restricted under the Negative List, foreign investors shall be entitled to enjoy national treatment in entering other industries in the Pilot Zone. It was further provided that foreign investors entering into such other (non-prohibited and non-restricted) industries will not be subject to any approval requirement. Instead, the foreign investors will only be required to make the necessary filing. In other words, the government authorities will not enjoy any discretion to reject the entering into such non-prohibited and non-restricted industries by foreign investors. It should nevertheless be noted that the prohibitions and restrictions as provided under the Negative List are subject to adjustments that may be made from time to time. At present, the contents of the Negative List are similar to the restrictions and prohibitions as set out in the current Foreign Investment Guidance Catalogue, except those intended to be relaxed in the Pilot Zone. It is anticipated that upon promulgation of the relevant implementing regulations on the opening-up of the prohibited or restricted industries for foreign direct investment in the Pilot Zone in the near future, the contents of the prohibitions and restrictions under the Negative List will be further reduced accordingly.

In addition to the Scheme and the Negative List, some other regulations were promulgated recently to implement the proposed opening-up of foreign investment in the Pilot Zone. In particular, the Decision of the State Council on the Temporary Adjustments to the Administrative Examination and Approval or Special Administrative Measures for Admission Specified under the Relevant Administrative Regulations and State Council Documents in the China (Shanghai) Free Trade Pilot Zone (国务院关于在中国（上海）自由贸易试验区内暂时调整有关行政法规和国务院文件规定的行政审批或者准入特别管理措施的决定) issued on 21 December 2013 temporarily adjusts relevant provisions and authorizes various supervising authorities and the Shanghai Municipal Government to promulgate certain regulations for the proposed opening of the six service fields. One of the most recent regulations is the Opinions of PRC Ministry of Industry and Information Technology and the Shanghai Municipal Government on Further Opening-up of the Value-added Telecommunication Business in the China (Shanghai) Free Trade Zone, which was promulgated and came into effect on 6 January 2014. The opinions further promote the opening-up of telecommunications market within the Pilot Zone. Following the promulgation of such regulations, it could be anticipated that more regulations will be promulgated to further facilitate the relaxation of foreign direct investment within the Pilot Zone.

Since the establishment of the China (Shanghai) Pilot Free Trade Zone, the Ministry of Commerce and the local government made significant efforts in promoting and publicizing the new policies to be adopted in the Pilot Zone. There is a clear message that the establishment of the Pilot Zone is not only for the opening of restricted industries for foreign investment in order to boost up the local economy in Shanghai and the Pilot Zone. Instead, the Pilot Zone will be a venue for holding various experiments on the economic and governmental reform, such as the further relaxation of the foreign exchange control on capital account payment items, the simplification of administrative approval procedures, the proposed change of the government’s functions to enhance internationalization and strengthen the rule of law, etc. As suggested by the senior government officials, the long term goal is to copy and implement the reform in the Pilot Zone to the whole country. Therefore, the development of the Pilot Zone can be regarded as the forecast of the future reform of China national wide.

We will continue to pay attention to the reform and the development of the policies in China (Shanghai) Pilot Free Trade Zone.