The Shanghai Free Trade Zone – what did you expect?
October 08, 2013 | BY
clpstaffShanghai's Free Trade Zone has been called one of the largest reforms since Deng Xiaoping's era. But how free will it really be? It is best thought of as an area where the government can focus on ways to achieve its long term goals
On September 27, China's top policy-making body, the State Council, released the General Plan for the China (Shanghai) Pilot Free Trade Zone (国务院中国（上海）自由贸易试验区总体方案). The Plan is more of an outline than a specific guide for how the Zone will operate.
It covers six industries with 18 sub-sectors that are open for investment in the Zone, with very few details of how investment in the areas will work. This lack of detail has led to criticism from some observers after unrealistic hopes of what the Zone would look like for investors failed to be realised.
The Shanghai Municipal Government has said more details would follow in the coming months. However, the authorities were happy to distribute a negative list of sectors that foreign investors are not permitted to invest in the Zone during the conference.
It feels as if the excitement over the past few months has coming to a sudden halt and many are now wondering what all the fuss was about. This is especially true when looking more closely at two of the sectors that have been opened up and how they align with government plans.
|Legal services
The Plan states that mechanisms will be explored to enhance business cooperation between mainland law firms and foreign firms (including firms in Hong Kong, Macau and Taiwan). The Plan fails to give any further details of these mechanisms.
This move is not new. Earlier in the year it was proposed that Hong Kong law firms be allowed to advise on PRC law in the Qianhai Special Economic Zone. This included international firms that had local branches in Hong Kong.
For the Qianhai Zone, foreign firms had to merge with domestic firms in order to qualify. It is thought that a similar merger would be required for the Shanghai Zone, which would limit foreign law firms. Such a merger would also ensure that foreign firm would still be controlled within the zone.
The Qianhai example also shows that it is government policy to allow foreign firms to operate more freely in China. This is something that has to and will happen; it just a case of when the rules will be relaxed and control unleashed.
|HR agencies
The Plan states that Sino-foreign joint venture HR agencies will be allowed in the zone with an equity cap of 70%. Hong Kong and Macau-based service providers can establish wholly-owned human resource agencies in the Zone. In addition, the minimum registered capital for foreign-owned HR agencies has been reduced from $300,000 to $125,000.
The 70% cap should be enough to entice foreign investors as they are getting a majority stake, but it is still not wholly-owned. The government is keeping control by forcing the foreign party to partner with a domestic enterprise. This is a step in the right direction, but it has not let HR agencies be completely free in the Zone.
The government has wanted to push HR agencies since the amended PRC Employment Contract Law (中华人民共和国劳动合同法) came out. The Law requires companies to switch to direct hires as opposed to using dispatch workers. This has created a bigger burden the HR department within businesses.
The move is also in line with the government's desire to move China from a manufacturing hub for the world to a more service sector oriented country. This was previously seen in the VAT pilot programme that included great benefits for companies that engaged in service sectors in the hopes of transforming the economy.
|Negative list
Just like the Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录), Shanghai's Free Trade Zone has a list of industries where foreign investment is prohibited or restricted. The usual sectors are included: online gaming, investment and operation in delivery or mail courier services and auction sales of cultural relics.
It is hard to promote a free trade zone when a negative list is released alongside the encouraged sectors. If anything, the negative list reinforces the point that the Shanghai Free Trade Zone is not really free at all.
|Patience is a virtue
The Zone is still in its early stages of development. It cannot be completely dismissed just yet and there is a chance that greater reform and opening will lend some momentum. For the moment, however, the Zone is not a big step forward – it's just an area that marginally eases foreign investment while keeping government control and policy intact.
By David Tring
Further reading:
This premium content is reserved for
China Law & Practice Subscribers.
A Premium Subscription Provides:
- A database of over 3,000 essential documents including key PRC legislation translated into English
- A choice of newsletters to alert you to changes affecting your business including sector specific updates
- Premium access to the mobile optimized site for timely analysis that guides you through China's ever-changing business environment
Already a subscriber? Log In Now