Opinion: Shanghai chooses free trade

September 10, 2013 | BY

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The details of the Shanghai Free Trade Test Zone reveal that approvals and monetary flows will ease. Market participants are still waiting for clarification, but it looks like the Zone will be what the market wants and China needs

On July 3 2013, the State Council formally approved the establishment of the China (Shanghai) Free Trade Test Zone (SFTZ). An area of 28.78km2 consisting of four existing free trade areas (FTAs): Waigaoqiao Free Trade Area ,established in 1990, Waigaoqiao Free Trade Logistics Park, established in 2004, Yangshan Free Trade Port, established in 2005 and Pudong Airport Comprehensive Free Trade Area, established in 2010.

Pursuant to the SFTZ related laws and policies published recently and those still in the legislation process at the central and local Shanghai levels, there are many benefits for foreign investors in the SFTZ.

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Benefits for investors

The SFTZ will lead to some breakthroughs in financial interest rate liberalisation, cross-border renminbi settlement and free convertibility of the renminbi capital account. In addition, the SFTZ will promote the business of offshore finance and expand the scope of financial investment available to foreign capital. It purports to allow qualified foreign financial institutions (QFIIs) to set up foreign-invested banks and foreign-invested payment institutions by applying to the People's Bank for a permit of payment services in accordance with the Administrative Measures for the Payment Services Provided by Non-financial Institutions (非金融机构支付服务管理办法).

The SFTZ will allow trading within the SFTZ and trading between the SFTZ and foreign jurisdictions freely and trading between SFTZ and other domestic areas outside SFTZ to be supervised in a more efficient way. However, we have to await the release of the Supervision Scheme for Customs and other innovative policies on border inspection and quarantine for more details.

On August 30, as authorised by the National People's Congress (NPC) Standing Committee, the State Council has approved the suspension of administrative approvals regulated in three foreign investment laws for foreign-capital enterprises, Chinese-foreign equity joint ventures and Chinese-foreign contractual joint ventures. Therefore, 22 administrative approvals provided by the three above-mentioned foreign investment laws will be suspended, and the joint venture contracts and articles of association will no longer be required to be approved and only need to be filed with the relevant SFTZ government agencies. However, we will need to wait and see whether the requirements for the scale of investment could be lifted, whether foreign invested enterprises (FIEs) can borrow foreign debt exceeding their total-investment and registered-capital quotas, and whether an FIE established in the SFTZ in the originally prohibited or restricted investment categories can be allowed to do business with parities outside the SFTZ.

Companies registered within the SFTZ may be taxed at a reduced business income tax rate of 15%, the same rate will be applied for the offshore business income of a qualified company within the SFTZ, and financial institutions may also enjoy additional tax breaks. Individual income tax rate may be reduced at the flat rate of 10% for people working in the SFTZ.

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Plans for expansion

By comparing the original name, Shanghai Free Trade Zone, with the recently announced name of the China (Shanghai) Free Trade Test Zone, the addition of the first word China should definitely reflect the intention of the PRC Central Government to expand the scope of the Zone. The impact and the spirit of reform and innovative policies of the SFTZ will be expanded to Free Trade Zones in the Yangzi delta region and other Free Trade Zones across China, which will dispel the concerns of competition among different rival Free Trade Zones in mainland China.

The SFTZ will conduct exploratory experiments in four major fields: investment, trade, finance and administrative legal system in the SFTZ, in order to meet international standards. However, the most challenging thing for the State Council and the People's Government of Shanghai is how to set up a risk control and prevention system to replace the pre-approval administration system originally adopted in these four major fields. Therefore, antitrust review, prudential supervision of financial industries, city planning, protection of environment and ecology, labour protection of workers' rights and promulgation of technical rules and standards may be used by the PRC government in connection with risk control and prevention in the SFTZ.

We believe the SFTZ will help Shanghai in its quest to be a trade, maritime and financial centre. Strategically, the Zone will offer advantages to achieve the China dream of Shanghai to become the centre of the world economy. In addition, the SFTZ will also play an important role in the negotiation of China's participation in the Trans-Pacific Partnership Agreement (TPP) and, hopefully, will open the door for China to step into the family of TPP and accelerate the Chinese economy.

Haixiao (Helen) Zhang, Zhong Lun Law Firm, Shanghai

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