- What is the background of Free Trade Zones in China, and Shanghai in particular?
- How the purpose and benefits offered to foreign companies has changed over time.
- The situation today – what are the benefits of setting up a WFOE in the Shanghai Free Trade Zone?
What is a Free Trade Zone in China?
The global concept of a Free Trade Zone is a controlled region in which goods can be imported and stored duty-free in bonded warehouses. Rather than clear customs and pay duty on arrival in the country, this can take place at the time of later distribution (or in many export cases, not at all). The first such modern zone was at Shannon airport in Ireland, and these are now common in many countries.
A Free Trade Zone in China is a similar concept, but slightly different! Whilst this principle of simpler import, duty and customs is still true, a main use of Free Trade Zones in China is to test out new policies and regulations in certain regions. In a diverse and complex market as large as China, this gives an opportunity for new industry policies or government procedural changes to be trialled in one controlled area before (possibly) being implemented nationwide. .
Shanghai Free Trade Zone – history and development
The process of opening up China to foreign trade and investment began in the 1980s with the economic reforms introduced by Deng Xiaoping. One of the first major policies put in place at this time was the creation of Special Economic Zones (SEZs). The first SEZs were set up in Shenzhen, Zhuhai, Xiamen, and Shantou as early as 1980, with Shanghai (and others) following in 1984, and have since expanded to many coastal regions and later inland and western regions.
The SEZs are essentially a simpler pre-cursor to the Free Trade Zones. They allow local authorities to set more specific regulations for international trade and offer special tax incentives to attract foreign investment. They do not, however, offer the customs and duty-free advantages that the Free Trade Zones offer, and have not been used to the same extent to trial new policies.
The Shanghai Free Trade Zone was the first of the FTZs to be setup up in China, opening in September 2013. The original zone covered four main bonded warehouse locations in the eastern Pudong district – Waigaoqiao Free Trade Zone, Waigaoqiao Free Trade Logistics Park, Yangshan Free Trade Port Area, and Pudong Airport Comprehensive Free Trade Zone. The aims were to further encourage foreign investment and to promote economic reform.
After its initial success, Shanghai FTZ has expanded significantly since 2013. It now covers a total of over 120 square kilometers, including other key areas of the city – Lujiazui financial zone, Shanghai Jinqiao Economic and Technology development zone and the Zhangjiang High Tech Park.
Following expansion in 2017 to include seven new regions key to China’s “One Belt, One Road” trade and growth scheme, there are now 11 FTZs in China. With the concept working well, there are plans to designate further FTZs, including possibly a large part of the island of Hainan.
Why register a WFOE in the Shanghai Free Trade Zone?
Registering and locating a WFOE in the Shanghai FTZ offers several advantages. Many of these benefits change over time – one of the main purposes of the Free Trade Zones in China has been to test out new policies and relax regulation, often benefits are offered nationwide after a period of time. We list here some of the most important to consider:
Simpler duty payment and customs
The original incentive of FTZ locations was duty-free importing and warehousing within the zone (with duty paid at the time of onward sale). This is still a major advantage for many companies which can save significant time and money from this. Manufacturing and logistics companies benefit from this, as do importers of goods such as wine.
Reform testing for certain industries
As a testing ground for national policy reforms, new policies are often put in place in a FTZ. These can open up certain previously banned industries to foreign investment. Recent examples of this include the sale of video game consoles and participation in the e-commerce market, which were both initially offered in the Shanghai FTZ before expanding nationwide.
Other specific industries are offered relaxed restrictions too. For example, the legal, medical and insurance sectors are some of the most tightly controlled in China. Yet in the Shanghai FTZ foreign companies are allowed to operate in certain legal areas (albeit at this stage just in partnership with Chinese lawyers). WFOEs are permitted to operate in the medical industry, and are also able to offer insurance services in the marine industry..
Business approval using a “Negative List.”
One of the early changes made by the Chinese government to simplify WFOE setup was the introduction of a so-called “Negative List.” This is used by local government in approving WFOE registrations, with any business not operating in a restricted or banned industry generally being approved (provided other requirements are met of course). At the same time, the industries on the list are being gradually reduced – in 2015, for example, the total restricted industries fell from 190 to 120.
Prior to using this method, a more extensive individual evaluation of proposed business activity was carried out. The Shanghai Free Trade Zone negative list is now being implemented in many other regions of China as well.
Other incentives for faster WFOE registration and setup
When it first started in 2013 one of the key attractions of the Shanghai FTZ to foreign investors was the simpler WFOE setup procedure offered. Shanghai put in place a “5 in 1” single application for five key business licenses and also allowed setup with no prescribed minimum capital amount or injection schedule. These policies have now been applied nationwide. The government’s positive attitude to WFOE setup and commitment to improving the process means that further changes are more than likely in the near future, and these may well be implemented again first via the Shanghai FTZ.
Simpler foreign exchange policies
Companies located in Shanghai FTZ are also freer to convert Renminbi and foreign currency. Accounts are able to receive both Renminbi and foreign currency payments, without approval being needed each time through SAFE (State Administration for Foreign Exchange). Note that this policy is also being expanded nationwide.
Clusters of similar industries and a prestigious location
No matter what financial and regulatory changes come and go for FTZs, one benefit that remains is the specific focus on certain industries. There are advantages for many companies in being located in close proximity to others in their industry. There are also brand and reputation associations that go along with certain regions too – important considerations in Chinese business! Shanghai FTZ offers many different industry clusters. Whilst financial services have been a long time focus, there are also strong groupings in other industries – such as high tech companies, logistics, and medical companies.The information contained in this article is valid on July 4th, 2018. For updated information, please contact us via email at [email protected].