China Opens Experimental Free-Trade Zone in Shanghai

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China’s hastily and recently launched first mainland free-trade zone is destined to be a laboratory for remaking the country's financial sector by attracting investment and internationalizing its currency. The China (Shanghai) Pilot Free Trade Zone (“SHANGHAI PILOT FTZ”) is expected to allow banks and other businesses within its boundaries to experiment in areas that are tightly controlled in elsewhere in China. The plan includes loosening the regulation of interest rates and full convertibility of nation’s currency, the renminbi (RMB), even though the rest of Mainland China remains subject to currency controls.

The pilot zone covers 29 square kilometers, or about 11 square miles, of ports and logistics areas in Waigaoqiao, Yangshan and Pudong New Area in Shanghai. Although the government of Shanghai is named as the manager, the common understanding is that the central government of China (a.k.a. Beijing) is in actual control of the issuance and means of implementation of policies applicable to the SHANGHAI PILOT FTZ.  Despite the lack of clarity in the functioning of the zone, many parties with high hopes have already established companies.

Most of the SHANGHAI PILOT FTZ's favorable policies are designed for foreign-invested companies and international transactions, rather than Chinese domestic or local businesses and companies with the exception of outbound Chinese investment. Developments in the transformation of the SHANGHAI PILOT FTZ will be influenced by the parties’ final agreements to be embodied in the China-U.S. Bilateral Investment Treaty (“BIT”), which is under active negotiation and is expected to become effective in three to five years. Considering the broad scope of this BIT compared with previous investment treaties between China and other countries, this one promises to be a real “game-changer” for China in the world commercial community since its provisions will be passed onto other countries through the “Most Favored Nations” provisions in their treaties.

The SHANGHAI PILOT FTZ in many respects is trying to compete with Hong Kong and Singapore, the pioneers and leaders of free-trade zones in Asia. Even though the introduction of such zone is certainly exciting, critical implementation details are yet to be issued under the General Plans of SHANGHAI PILOT FTZ1. The table below lays out the already-issued policies and those predicted by various economists, government commentators and lawyers based on their understanding of the General Plans of SHANGHAI PILOT FTZ1:

Subject Matter

Current
out of SHANGHAI PILOT FTZ

Current
in SHANGHAI PILOT FTZ

Future
in SHANGHAI PILOT FTZ

  1. Size

N/A

28.78 km2

1210.4km2

  1. Trade Account

Conversion between RMB and foreign currency is subject to government pre-approval.

One-way free conversion.
Converting RMB to foreign currencies freely with exchange rates regulated by the Chinese government.

Two-way free conversion.
Mutually converting between RMB and foreign currencies freely with exchange rates determined by the private market through supply and demand.

  1. Capital Investment Account

No

No

Yes

  1. Unlimited Cross Board Remittance

No

No

Yes

  1. Minimum Time to Register an Entity

Twenty-nine days or longer

Four days

Four days or shorter

  1. Substantial Government Review to Register an Entity

Yes

No, unless listed in the Negative List2

No, unless listed in the Negative List2

  1. Minimum Registered Capital Required to Register an Entity

Per company law, RMB 30,000. However, in practice, a minimum of USD 15,000 is typically required for registering foreign invested entities.

RMB 1

RMB 1

  1. Registered Capital Requested to be Paid in

Yes, 15 percent down-payment in the first three months of the registration. The remainder shall be paid within two years of the registration.

No

No

  1. Governmental Annual Audit

Entity self-declaration based, plus reviews by various government agencies for “pass”

Self-declaration

Self-declaration

  1. Off-Shore Company

Not permitted

Permitted

Permitted

  1. Internet Censorship

Yes

Yes

No

  1. Immigration

Visas are required for most foreign visitors (including U.S. citizens) unless the visa exemption program applies.

Visas are required for most foreign visitors (including U.S. citizens) unless the visa exemption program applies.

Foreign visitors may be able to have short visits without a visa.

1The General Plans for China (Shanghai) Pilot Free Trade Zone issued by the Chinese government in September 18, 2013

2The Negative List is the China (Shanghai) test area of free trade access to special measures to control foreign investment (negative list) (2013) announced by Shanghai government on September 29, 2013. The list covers key areas of China’s economy and includes a total of 190 areas of businesses of no or constrained access by foreign investments, including but not limited to golf courses, cafes, gambling and pornography. The 2013 Negative List is very similar to the currently applied Catalogue of Industries for Guiding Foreign Investment (2011 Revision). However, it is predicted that many items will be dropped from the Negative List in the future.