Development of Various Free Trade Zones in China

Latest relaxation in the Shanghai Free Trade Zone (“FTZ”)

On 4 September 2014, the State Council released the Decision of the State Council  on Temporary Adjustments to the Implementation of the Special Administrative Measures for Admission Specified under the Relevant Administrative Regulations and State Council Approved Ministerial Regulations in the China (Shanghai) Pilot Free Trade Zone ( 国务院关于在中国（上海）自由贸易试验区内暂时调整实施有关行政法规和经国务院批准的部门规章规定的准入特别管理措施的决定, “New FTZ Measures”), which is a new version of a similar decision made in December 2013.  The New FTZ Measures allows further opening of various industries which were originally restricted against foreign investment, and it further adjusts the implementation of relevant legislations on foreign investments in such industries, (i.e. Regulations of the People’s Republic of China on International Ocean Shipping, Regulations of the People’s Republic of China on Certification and Accreditation, Administrative Ordinance of Salt Industry, Policy on Development of Automotive Industry, Provisions on Foreign Investment in Civil Aviation and Catalogue of Industries for Guiding Foreign Investment).  Through the latest adjustments, the relevant restrictions towards business scope, foreign equity ratios and foreign investor’s qualification are further relaxed.

There are in total twenty-seven measures under seven sectors being covered in the New FTZ Measures as set out below:

• Manufacturing (14 measures)
• Transportation, warehousing and postal service (5 measures)
• Wholesale and retail (3 measures)
• Real estate (1 measure)
• Scientific research, technical service and geological survey (2 measures)
• Mining (2 measures)

Among all the concerned measures, 19 of which permit the setting up of wholly foreign-owned enterprises in previously restricted areas, 6 measures uplifted the previous restrictions and requirements in relation to foreign investment in various business, 1 measure opens room for foreign investment in the form of joint-venture, though the Chinese party shall hold majority interest in such joint-venture, and 1 measure raises the maximum foreign equity holding ratio in the Sino-foreign joint-venture from 49% to 51%.

19 measures permitting the setting up wholly foreign-owned enterprises (“WFOE”)

• International maritime cargo loading, unloading, container freight station and container yard business
• Salt wholesaling (provided that service scope shall be limited within the FTZ)
• Developing and applying oil-recovery-efficiency-enhancing technology (provided in the form of engineering services) and relevant new technologies
• Developing and applying new technologies in oil exploration and exploitation (e.g. geophysical prospecting, drilling, measuring, logging, down-hole operation, etc.)
• Manufacture of chemical wood pulp (with a single production line of 300,000 ton capacity per year or above) and chemical ground wood pulp (with a single production line of 100,000 ton capacity per year or above), as well as high quality paper and containerboard
• Manufacture of wheeled or crawler cranes (400 tons or above)
• Production, research and development of automobile electronic bus network technology and electronic controller of electric power steering systems
• Research, development, design and manufacture of passenger service facilities and equipment used in high-speed railways, special railway lines for passenger transportation, intercity railways; research, development, design and manufacture of rails and bridge related equipment used in high-speed railways, special railways lines for passenger transportation and intercity railways; manufacture of electrified railway equipment; manufacture of sewerage disposal equipment for passenger trains
• Design of luxury cruise and yachts
• Design of machinery for ship cabins
• Design, manufacture and maintenance of aero-engines related components
• Manufacture of motorcycles (with displacement of not more than 250ml)
• Manufacture of key parts of high engine displacement motorcycles (with displacement of more than 250ml): Motorcycle electronic fuel injection technology
• Manufacture of contact material for electric appliance and lead free, cadmium free solder in accordance with European Directive on Restrictions against Hazardous Substances Directive
• Construction and operation of branch local railway lines, and related bridges, tunnels, ferries and station facilities
• Wholesale, retail, and distribution of vegetable oil, edible sugar, and fertilizers; retail, and distribution of grains and cotton, without quantity limitation upon chain stores
• Railway freight transport
• Sales agency for air transportation
• Photography services (exclusive of aerial photography and other stunt photography services)

6 measures uplifted certain previous restrictions and requirements towards foreign investors

• Import and export certification
• Manufacture of various types of plain-ordinary grade bearings and their components (steel balls and cages) and roughcasts
• Manufacture of equipment for general polyester filament yarn and short fiber
• Manufacture of hydraulic excavators of 15 tons or less, wheeled loaders of 3 tons or less
• Mail orders, online sales (restricted to common commodity only)
• Real estate intermediary or brokerage service

1 measure opens room for foreign investment in the form of Joint-Venture (with Chinese partner holding majority interest)

Green tea processing

1 measure raises the maximum foreign equity ratio from 49% to 51%

Public international vessel agencies

Basically, the New FTZ Measures focuses on transportation related manufacturing and service.

Three more free trade zones to be established in Tianjin, Fujian and Guangdong

On 12 December 2014, the State Council approved the second-round of the establishment of free trade zones in Tianjin, Fujian and Guangdong, about a year following the launching of the FTZ in Shanghai. The three free trade zones will follow the model of the FTZ in Shanghai, whilst local characteristics would be considered.

For Tianjin, shipping and financial leasing are expected to take lead in the zone as the city has long been a major shipping center in Northern China and has experienced the huge success of the financial leasing business in recent years.

In a bigger picture, the Tianjin zone will play a significant role in the economic integration of the “Jing-Jin-Ji” (“京津冀”) region which includes Beijing, Tianjin and the Hebei Province in Northern China. Internationally, the Tianjin zone will face Northeast Asia and will sure be the window for the China-Korea Free Trade Area. The Guangdong zone will mainly focus on logistics and financial industries, given the Province’s longstanding tradition in manufacturing and foreign trade. With borders with both Hong Kong and Macau, the Guangdong zone aims to expedite the economic integration of the “Yue-Gang-Ao” (“粤港澳”) region which includes the Guangdong Province, Hong Kong and Macau in Southern China. Last but not least, for the zone to be set up in Fujian, the biggest motivation behind is the economic integration with Taiwan which faces the Fujian Province across Taiwan Strait to the west. Regarding focus of the Fujian zone, spotlight is shed on high-profile service in regard to shipping, logistics, finances as well as the export-import trade with Taiwan.

Like Shanghai FTZ, the newly approved zones will be established on the foundation of the existing economic zones therein, rather than starting from scratch. For the second-round free trade zones, experience could be drawn from Shanghai FTZ in terms of the foreign investment recordal reform (so that foreign investors no longer need to seek government’s approval for conducting business within certain industries) as well as the negative list management model. At the end of the day, the free trade zones all aim at implementing administrative reform and economic reform for China so as to create a more efficient and free market environment for foreign investments.