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Shanghai Free Trade Zone (FTZ) - What is known

Shanghai Free Trade Zone - What is Know

In my previous two articles on Shanghai Free Trade Zone I talked about the initial draft regulation and negative list. In this article I will like to summarize what I know about Shanghai FTZ. Hopefully it will help people looking for information and update on Shanghai FTZ.

Draft Regulation [1] [9]

Shanghai Pilot Free Trade Zone draft regulation was published on 29th September 2013 with following key provisions:

1. Geographical Scope

Shanghai FTZ covers an area of 28.78 square kilometers, and consists of 4 areas:

  1. Waigaoqiao Free Trade Zone.
  2. Waigaoqiao Free Trade Logistics Park.
  3. Pudong Airport Comprehensive Free Trade Zone.
  4. Yangshan Free Trade Port Area.

2. Major Tasks and Measures

Shanghai Pilot FTZ will open up following 18 sectors divided into 5 broad categories for trial.

1. Financial Services

  1. Banking service (Classification of National Economic Industries: J Finance industry – 6620 Monetary banking service)
  2. Specialized health and medical insurance (Classification of National Economic Industries: J Finance industry – 6812 Health and accident insurance)
  3. Financial leasing (Classification of National Economic Industries: J Finance industry – 6631 Finance leasing service)

2. Transportation Services

  1. Ocean transportation (Classification of National Economic Industries: G Transportation, warehousing and postal industry – 5521 Ocean transportation)
  2. International ship management (Classification of National Economic Industries: G Transportation, warehousing and postal industry – 5539 Other water transportation auxiliary service)

3.Commerce and Trade Services

  1. Value-added telecommunications (Classification of National Economic Industries: I Information transmission, software and information technology service – 6319 Other telecommunication service, 6420 Internet information service, 6540 Data processing and storage service, 6592 call centre)
  2. Entertainment and gaming consoles sales and service (Classification of National Economic Industries: F Wholesale and retailing – 5179 Wholesale of other mechanical and electronic products)

4. Professional Services

  1. Lawyer service (Classification of National Economic Industries: L Leasing and business service – 7221 Lawyers and related legal service)
  2. Credit inquiry (Classification of National Economic Industries: L Leasing and business service – 7295 Credit service)
  3. Tourism companies (Classification of National Economic Industries: L Leasing and business service – 7271 Travel agency service)
  4. Human resources service (Classification of National Economic Industries: L Leasing and business service – 7262 Professional intermediary service)
  5. Investment management (Classification of National Economic Industries: L Leasing and business service – 7211 Headquarter s management)
  6. Engineering design (Classification of National Economic Industries: M Scientific research and technology service company – 7482 Engineering investigation and design)
  7. Construction service (Classification of National Economic Industries: E Construction industry – 47 Housing construction industry, 48 Civil Engineering Construction, 49 Construction and Installation, 50 Building decoration and other construction)

5. Cultural Services

  1. Entertainment artist agency (Classification of National Economic Industries: R Culture, sports and entertainment – 8941 Culture and entertainment agency)
  2. Entertainment facilities (Classification of National Economic Industries: R Culture, sports and entertainment – 8911 ballroom recreation activities)

6. Public Services

  1. Education and training, vocational skills training (Classification of National Economic Industries: P Education – 8291 Vocational skills training)
  2. Medical service (Classification of National Economic Industries: Q Health and social work – 8311 General hospital, 8315 Specialized hospital, 8330 Out-patient department)

3. Establish an appropriate regulatory environment for supervision and tax

1. Create new mode of supervision

  1. Simplify the import supervision model to realize “Frontier Opening”.
  2. Strictly enforce “Second-tier Effective and Efficient Control”.
  3. Enhance cooperation among authorities like Customs, Inspection & Quarantine, Industry & Commerce, Taxation, Foreign Exchange and others.

2. Explore a supporting tax regime

  1. Implement tax policies to boost investment.
  2. Implement tax policies to promote trade.

4. Organize and Implement Effectively

The State Council will lead and coordinate the promotion of the China (Shanghai) Pilot Free Trade Zone. The Shanghai Municipal People’s Government is responsible for organizing implementation, improving the working mechanism, and allocating detail responsibilities. Based on the targets which were clearly set out in the Framework Plan and pilot tasks, in accordance with the principle of “go ahead with the matured ones and follow by perfection”, the Shanghai Municipal People’s Government can create a practical implementation plan and enforce without delay.

Negative List [2]

Shanghai FTZ is departure from the earlier mechanism where foreign investors can only invest according to the sectors open for investment as defined by MOFCOM [3]. Shanghai FTZ will follow a negative list approach where investors can invest in any sectors not covered in this list. This means all the sectors except in negative list are open for foreign investment in Shanghai FTZ. The list covers 1,069 sectors across 18 broad categories of industry and contains 190 special regulatory measures. Some of the sectors are highlighted below:

  1. Agriculture, Forestry, Animal Husbandry and Fishery Industries
  2. Mining Industry
  3. Manufacturing Industry
  4. Production and Supply Industries for Power, Gas and Water
  5. Construction Industry
  6. Wholesale and Retail Industries
  7. Transportation, Warehousing and Postal Service Industries
  8. Information Transmission, Computer Service and Software Industries
  9. Finance Industry
  10. Real Estate Industry
  11. Leasing and Commercial Service Industries
  12. Scientific Research and Technical Service Industries
  13. Water Conservancy,
  14. Environmental, and Public Facilities Management Industries
  15. Education Industry Health and Social Industries
  16. Cultural, Sports and Entertainment Industries

Following provisions make it bit difficult for technology Startups in Shanghai FTZ compared to Hong Kong, Singapore are:

  1. Investment is prohibited in Internet Data Center Services Industry.
  2. Prohibited Online Game Services
  3. Foreign Investment in eCommerce shall not exceed 55%
  4. Foreign Investment in Data Processing and Online Transaction processing shall not exceed 50%.
  5. Foreign Investment in IP-VPN services shall not exceed 50%.
  6. Foreign Investment in Mobile App Store shall not exceed 50%

Shanghai FTZ in Business

Shanghai FTZ opened enterprise registration on Tuesday 9 th October 2013. Following are the updates so far:

  • On the opening day of registration in Shanghai FTZ 577 people applied for business registration and 1480 people ask for advice and additional information at the service lobby. [4]
  • HSBC and Bank of East Asia (BEA) received regulatory approval to open a sub-branch in Shanghai’s pilot free trade zone, joining Citigroup and DBS Bank who already got the approval. [5]
  • buyeasi.com, operated by payment service provider Easipay will launch e-commerce platform in the Shanghai FTZ to allow consumers from China’s mainland to buy foreign brands at lower prices. [6]
  • Since the opening 600 people visit Shanghai FTZ service desk daily with almost 2000 people seeking advice and information every day. [7]
  • Shanghai FTZ mau allow foreign companies to raie capital by selling shares and try to tap the world’s fourth largest stock market. [8]

Special Provision for Company Registration in FTZ

Shanghai FTZ offers many reforms and one of the key reforms is related to Company Regitrations. Based on opinions published for Shanghai Free Trade Zone following reforms will be tested:

Business Registration System Reforms

  1. Capital Registration System

    All companies in Shanghai FTZ in the sectors and services not in negative list are covered under the capital registration system on trial basis. The authorities will register the subscribed capital contribution of the initiators or the total subscribed shares of the shareholders instead of the paid-up capital of the company.

    1. Relaxing the Capital Registration Requirement

      The following capital registration requirements have been canceled in Shanghai FTZ:

      • The minimum registered capital of limited liability companies (RMB30, 000).
      • The minimum registered capital of one-person limited liability companies (RMB100,000).
      • The minimum registered capital of joint stock limited companies (RMB5,000,000).
      • The period within which the shareholders shall fully pay up their capital contribution.

      Moreover, the restrictions on the initial capital contribution amount and proportion of all shareholders upon company incorporation, and those on the proportion of monetary contribution in the registered capital have been removed.

    2. Companies can start operation after obtaining the business license. Do not need to wait for certificate

  2. Optimize the business registration and and setup process

    In Shanghai FTZ the business registration process and setup will be optimized and according to information and guideline the time will be reduced from current 30 days to 4 working days.

  3. Build and manage shared credit supervision system

    Shanghai FTZ will setup information sharing system for credit supervision of business registered within the zone.

Footnotes:

[1]Best Location for Startups in China - Shanghai FTZ
[2]Startups and Shanghai FTZ - Negative List
[3]Ministry of Commerce PRC (MOFCOM) - Laws & Regulations
[4]Shanghai FTZ starts offering registration services
[5]HSBC, BEA win approval to open outlets in Shanghai FTZ
[6]Free trade zone trial for e-commerce site
[7]Simplicity in FTZ proves a boon
[8]China May Allow Foreign Firms to Sell Shares in Free-Trade Zone
[9]Framework Plan for the China (Shanghai) Pilot Free Trade Zone