The domestic perspective

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Where to invest

The Shanghai FTZ was first launched in September 2013. Based on its successful model, this year the Chinese government rolled out the reform to set up three more Free Trade Zones in Guangdong, Tianjin and Fujian and to expand the Shanghai FTZ to include Lujiazui, Jinqiao and Zhangjiang in addition to four existing areas (Shanghai Waigaoqiao Bonded Zone, Shanghai Waigaoqiao Bonded Logistics Zone, Yangshan Bonded Port Area and Shanghai Pudong International Airport Comprehensive Free Trade Zone).

Each of the four zones has its own unique features according its geographic location. The Shanghai FTZ, as the first FTZ in China and located in the country's economic hub, will continue to take the lead in opening up reforms in investment and trade facilitation and currency convertibility. The Guangdong FTZ, which is adjacent to Hong Kong and Macau, aims to promote economic integration (especially service trade liberalisation) between the mainland and the two SARs. The Tianjin FTZ, which is next to China's political centre Beijing, aims to coordinate the development of the Beijing-Tianjin-Hebei region. Lastly, the Fujian FTZ, which neighbours Taiwan, aims to further cross-strait economic cooperation.

When deciding on which FTZ to invest, investors may also consider each zone's industries and areas of focus.

Sectors off limits

On April 20 2015, the State Council issued the Special Administrative Measures for Foreign Investment Access in Pilot Free Trade Zones (Negative List) (2015 Negative List). This applies to all four FTZs and comprises only 122 special administrative measures for foreign investment, down from 139 measures in the 2014 Negative List and 190 measures in the 2013 List.

Prior to the issuance of the 2015 Negative List, on March 13 2015, the National Development and Reform Commission and Ministry of Commerce jointly promulgated the Foreign Investment Industrial Guidance Catalogue (Amended in 2015) (外商投资产业指导目录) (2015 Catalogue) to apply to foreign investment outside the FTZs.

Compared with the 2015 Catalogue, the 2015 Negative List has lifted certain restrictions and prohibitions for foreign investment in the following sectors:

Establishment procedures

Under the current Negative List approach, establishing foreign invested enterprises (FIEs) in the industries specifically listed in the Negative List of the Shanghai FTZ is still subject to the same approval procedures applicable outside the zone; while setting up FIEs in the industries not listed is only subject to the simplified record-filing procedures. Typically foreign investors need to submit more application documents for review under the approval procedures and are subject to stricter scrutiny by the authorities than under the new record-filing process to establish a FIE. For the latter, foreign investors only submit the documents for the record of the authorities and are not required to provide a feasibility study report and bank reference letter.

In the Shanghai FTZ, the basic steps for both the approval and record-filing procedures are almost identical and greatly streamlined by the “one-stop application” system, which allows foreign investors to obtain the four key FIE certificates (for approval/record, business license, organisation code and tax registration) at one time by submitting only one set of application documents to the General Service Centre of the Shanghai FTZ. While outside the zone, foreign investors need to apply to the various authorities separately to obtain these certificates.

The basic steps for setting up a FIE in the Shanghai FTZ:

• Step 1: Name pre-approval with the Administration for Industry and Commerce of the Shanghai FTZ.
• Step 2: Online application. Log on to the online application platform, check the proposed business scope against the Negative List and fill in the online forms.
• Step 3: Onsite submission of the printed online application forms and other documents to the General Service Centre of the Shanghai FTZ.
• Step 4: Collection of the record (for FIEs engaged in industries outside the Negative List) or approval (for FIEs engaged in industries within the Negative List) certificate, business license, organisation code certificate and tax registration certificate of the FIE from the General Service Centre.

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Looking forward

The FTZs are expected to further facilitate foreign investment in China with measures such as shortening the 2015 Negative List.

But uncertainties still exist. For example, although quite a number of industry sectors are now legally open for foreign investment in the zones, in practice, to what extent foreign investors may be allowed to participate in these sectors and whether they may encounter any special restrictions or requirements in setting up and operating these businesses remains uncertain.

Also, although FIEs in the Shanghai FTZ can now convert all their foreign currency capital funds into renminbi (whereas outside the FTZ, FIEs are only allowed to settle the amount of foreign currency capital funds that is actually needed) and deposit the renminbi in a special renminbi account, FIEs' use of the converted renminbi may be still subject to the restrictions which are applicable to the rest of the country (e.g. the converted renminbi must not be used in activities beyond the approved business scope of the entity). Therefore, it is advisable for foreign investors to conduct a thorough feasibility study to ensure their business goals can actually be achieved in the zone before making the final decision to invest.


Audry Li, Zhong Lun Law Firm, Shanghai

The international perspective

Free Trade Zones (FTZs) are the latest initiatives for the Chinese government to further liberalise the economy and streamline the foreign investment process. After the establishment of the first FTZ – the Shanghai FTZ – in 2013, the State Council approved a further three new pilot FTZs in Tianjin, Fujian and Guangdong in December 2014. The State Council also expanded the Shanghai FTZ to include Lujiazhai, Shanghai's financial district. These new FTZs were officially opened in April 2015. Together with the opening of these FTZs, an updated negative list for foreign investment, revised national securities review rules and overall plans and administrative regulations were also issued. The new zones operate in a similar fashion as the Shanghai FTZ, except that each has different targeted investors and industries. The identity of the foreign investor, and the industry involved, will determine which FTZ a foreign investor should invest in.

The aim of the FTZs is to simplify the investment process for foreign investors by adopting the “negative list” approach. Currently, under Chinese law, foreign investors have to obtain approval from the Ministry of Commerce (or its local counterparts) and other governmental authorities (dependent on the industry involved) to establish a foreign invested enterprise (FIE) and to make certain changes to the company (i.e. setting up an entity, increasing registered capital, liquidation and other major changes). Under the negative list approach, if the foreign investor is not investing in an industry that is on the negative list, governmental approval is not required - only a filing needs to be made within 30 days after the incorporation of the FIE. For investments in most of the industries falling under the negative list, the approval process has been simplified so that foreign investors can submit a single application to the approval authorities in the zone.

Since the establishment of the first FTZ in Shanghai, the negative lists liberalised many industries that were previously closed to foreign investment (e.g. e-commerce, real estate agency services, etc.). The liberalisation and streamlined approval process for FTZs are meant to be pilot projects to guide the future of foreign investment in China. For example, the Foreign Investment Industrial Guidance Catalogue (Amended in 2015), which applies to foreign investment in China generally, has adopted many of the same relaxations as those by the FTZ negative list. Despite this easing in the FTZs, foreign investment is still restricted and/or prohibited in various industries, such as film and television programming.

In addition to the negative list approach, the FTZs also implemented various other initiatives to simplify business operations. For example, customs procedures would now allow products to enter into the zones with examination to follow thereafter. This will save both time and costs for customs clearance. In addition, each FTZ will launch pilot programs to facilitate cross border renminbi payment and to promote financial products and services to serve investors.

While the FTZs offer certain benefits to foreign investors, FDI in the zones is subject to a broader national security review process. Currently in China, national security review generally only applies to M&A transactions involving the military sector or if there is acquisition of control in companies operating in certain sensitive industries, including transport and infrastructure as well as agriculture. In addition to foreign M&A transactions, the national security review process will cover all other forms of foreign investment, including greenfield investments, variable interest entity arrangements, offshore transactions and investments in convertible securities. Furthermore, the industries subject to security review have also been expanded to include acquisition of control in a company involved in key cultural industries or with key information technology products and services. If the authorities find that the potential investment falls within the scope of national security review, they must suspend the filing or approval process and refer the potential investment to a special governmental committee for national security review.

The following is a brief description of the special characteristics of each zone: