Shanghai Free Trade Zone to Include Significant Foreign Investment Liberalisation Go back »
2013-10-08 | All chapters
On 26th September, a European Chamber delegation led by Vice President and Shanghai Board Chairman, Stefan Sack, met with the Chairman of the Shanghai Commission of Commerce (SCOFCOM), Ms Shang Yuying. During the meeting, the European Chamber learnt much valuable information about intended liberalisations piloted in the Shanghai Free Trade Zone, which was officially inaugurated on 29th September.
Subsequent to the European Chamber’s meeting with SCOFCOM, the State Council officially published the official plan for the Shanghai Free Zone. You can find the official plan at the following link. The Chamber has developed a basic unofficial English translation of the State Council announcement, members can get a free English version by contacting Xiaowen Ma at xwma@europeanchamber.com.cn.
The Shanghai Free Trade Zone will be more ambitious than China’s other free trade zones
The zone will be used as a testing ground for significant reforms.
1. The abolition of the Foreign Investment Catalogue and replacement with a negative list
2. Significant steps towards financial liberalisation
3. Eventual expansion to other areas
1. The abolition of the Foreign Investment Catalogue: the introduction of a negative list
The Foreign Investment Catalogue will not be applied within the Shanghai Free Trade Zone. Instead, it will be replaced with a negative list of sectors in which companies wanting to undertake activities would still require approval. Investments into any sectors not included in the negative list will not be subject to an approval process and will only require a filing process.
The negative list will be quite long at first, but will be reduced in length over time in line with a gradual liberalisation of the tertiary sector.
Further opening of service sectors: the European Chamber is aware that 23 previously restricted tertiary sectors will not be included in the negative list and foreign investments into these sectors will therefore only be subject to filing. Sectors for which investment will only require a simple filing process include:
· Value-added telecoms operations
· Construction (Chinese project portfolios will not be required)
· Private equity
· Healthcare insurance
· Gaming industries
· Asset management
· Law firms
· Financial leasing
· Joint education institutes
The European Chamber has been asked to give input on which industries should be removed from the negative list. All regulations and processes must be completed within a year and SCOFCOM regards the zone as a trial for which failure is not an option.
The European Chamber has long called for the abolition of the Foreign Investment Catalogue. The replacement of the Foreign Investment Catalogue with a negative list in the Shanghai Free Trade Zone is therefore a positive step forwards towards creating a level playing field between domestically- and foreign-invested enterprises and could represent a potential breakthrough in China’s future management of foreign investment.
2. Financial liberalisation: a new financial hub
A number of steps towards financial services liberalisation will be piloted in the zone, including renminbi convertibility, capital account opening, deposit interest rate liberalisation, the permittance of individual cross border transactions, free flow of currencies and foreign exchange settlement and reinsurance.
3. Eventual expansion to other areas: a precursor of reforms
It was confirmed that the central government wishes that the experiences of the Shanghai Free Trade Zone will be scalable and replicable for free trade zones in other cities and that the primary rationale of the zone is to act as an area to spearhead reforms that will gradually be applied to the whole country.
The European Chamber understands that Pudong will likely be incorporated into the zone within a few years and other cities that are currently bidding for similar free trade zones will likely also soon be approved.
The free trade zone is still in large part a work in progress and although the full details have yet to be revealed, the zone itself seems to be a first-step victory for those in China who are aware that serious and meaningful economic reforms are urgently required for China to remain on a sustainable growth path.
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Three days following the State Council release of the General Plan for the Shanghai free trade zone on 27th September, which will serve as the policy framework for the zone, the Shanghai municipal government released a number of administrative measures relating to foreign and overseas investment filing on 30th September.
The hotly-anticipated Municipal Government Announcement of the << Special Administrative Measures on Foreign Investment Access into the Free Trade Zone (Negative List)>> (hereafter Negative List) was also included in today’s batch of notices released by the Shanghai municipal government. Investments to establish companies in the zone producing goods or services not included in the negative list will no longer require government approval, but will instead only require a filing.
The development of a negative list for foreign and private investment is a pre-condition for participation in the Trans-Pacific Partnership free trade agreement negotiations currently ongoing between the US, Canada, Mexico and Peru and numerous countries in the Asia Pacific region, including Japan, Malaysia, Singapore, Vietnam and Australia.
An in-house European Chamber translation of the Negative List is available to members by contacting Xiaowen Ma at xwma@europeanchamber.com.cn.
The Negative List vs the Foreign Investment Catalogue
The Negative List contains nearly 200 items for which foreign investment will still require approval. Of these, 80 are included in the most recent Foreign Investment Industrial Guidance Catalogue (hereafter Foreign Investment Catalogue) that was released in 2011. Twenty-five of the items are included in the list of ‘prohibited’ sectors in the Foreign Investment Catalogue, while the remaining 55 are included in the list of ‘restricted’ sectors. The remaining 120 items in the Negative List are newly introduced.
Nearly all of the items that are currently included in the ‘prohibited’ list of the Foreign Investment Catalogue are also included in the Negative List. Likewise, most of the sectors listed as ‘restricted’ in the Foreign Investment Catalogue are also included in the Negative List. Only approximately 10% of the sectors that are ‘restricted’ in the Foreign Investment Catalogue are not included in the Negative List. These include items such as ‘construction and the operation of large-scale agricultural products’, the ‘distribution of video products’ and ‘performance agencies’, amongst others.
While most restricted items in the Foreign Investment Catalogue are included in the Negative List, some barriers have been removed. For example, while all ratings agencies were restricted in the Foreign Investment Catalogue, only investment rating agencies are included in the Negative List. Likewise, while the printing of publications was not allowed in the Foreign Investment Catalogue, only publication printing companies with less than RMB one million of investment are included in the Negative List.
In the European Chamber’s meeting with the Chairman of the Shanghai Commission of Commerce on 26th September, we were informed that the Negative List is currently long, but were reassured that the list will become gradually shorter, in particular in view of a gradual liberalisation of the tertiary sector. The Negative List will be updated annually and the European Chamber has been invited to give input to the Shanghai authorities regarding which items should be removed.
In addition to the six sectors included in the Free Trade Zone Service Industry Opening-up Measures that was included as an attachment to the State Council’s General Plan, another positive development is that the registration process for foreign investments should be much simpler due to the removal of three key foreign investment laws in the zone.
The six notices released 30th September by the Shanghai municipal government are:
· Order No.7: Shanghai Free Trade Zone Administrative Measures (中国（上海）自由贸易试验区管理办法（市政府令第7号）
· Municipal Government Announcement of the <<Special Administrative Measures on Foreign Investment Access into the Free Trade Zone (Negative List)>> (市政府关于公布《中国（上海）自由贸易试验区外商投资准入特别管理措施（负面清单）（2013年）》的公告)
· Municipal Notice No.74 issuing the <<Free Trade Zone Administrative Measures on Setting up Overseas Investment Business Filing>> (市政府关于印发《中国（上海）自由贸易试验区境外投资开办企业备案管理办法》的通知)
· Municipal Notice No.73 issuing the <<Free Trade Zone Administrative Measures on Foreign Investment Business Filing>> (市政府关于印发《中国（上海）自由贸易试验区外商投资企业备案管理办法》的通知)
· Municipal Notice No. 72 issuing the <<Free Trade Zone Administrative Measures on Overseas Investment Project Filing>> (市政府关于印发《中国（上海）自由贸易试验区境外投资项目备案管理办法》的通知)
· Municipal Notice No. 71 issuing the <<Free Trade Zone Administrative Measures on Foreign Investment Project Filing>> (市政府关于印发《中国（上海）自由贸易试验区外商投资项目备案管理办法》的通知)
