In the News: 6 New FTZs; Fintech Development Plan; Corporate Social Credit; and Shenzhen's Relaxed Forex Rules

Chinese President Xi Jinping announced plans to launch six new FTZs, without disclosing their locations, in a speech at the G20 in June – where he and U.S. President Trump agreed a truce after trade talks collapsed in May. President Xi highlighted the new FTZs as a critical part of Beijing's efforts to further open up the nation's markets and attract foreign investment, a sticking point in the ongoing China-U.S. trade war. This latest addition of six new FTZs brings the total number of FTZs in the nation up to 18. The first pilot FTZ was launched in Shanghai in 2013 and recently doubled in size with the addition of Lingang on Aug. 6, with new tax incentives and import duty exemptions also introduced. In a press conference about the latest move, officials said the new FTZs will "serve national strategies such as the Belt and Road Initiative" which countries bordering the new FTZ provinces such as Vietnam and Myanmar are already signed up for. The Beijing-based consultancy Trivium writes that the government is trying to boost its economically "left-behind" regions, evidenced by where the new FTZs will be launched – mainly poorer inland provinces with the exception of Jiangsu and Shandong.

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New FTZs Announcement: Legislation roundup: Free Trade Zones

Shanghai FTZ expansion: China Expands Shanghai FTZ to Attract More Hi-Tech Firms

FTZ Negative List: Special Administrative Measures for Foreign Investment Access in Pilot Free Trade Zones (Negative List) (2019 Edition)

Central bank issues 3-year fintech development plan

China's central bank published a three-year plan to develop and manage the nation's burgeoning fintech industry. The People's Bank of China (PBOC) wants to accelerate the application of science and technology in the financial sector, increase public satisfaction with fintech products and services, while curbing industry risks by 2021. Such a plan was first mooted in March on the back of discussions at the "Two Sessions", the annual meeting of China's top lawmakers and political advisers, where fintech development was highlighted.

The PBOC highlights six priorities in the development of technology-driven financial innovation, also known as fintech. These include helping the industry become globally competitive, bolstering cross-industry financial risk control, and developing a basic regulatory framework with accompanying rules, monitoring and assessment processes. Fintech development should serve the real economy, the plan says, and consumers should enjoy diversified financial products and services along with lower costs. China already leads in the world in some fintech applications such as e-payments and is looking to bolster its credentials in emerging areas such as blockchain.

A theme of the new plan to develop the fintech industry is the balancing of accelerated development on the one hand and prudent management and risk-control on the other. China's fintech industry has expanded rapidly in recent years, and regulators have arguably failed to keep up in terms of regulation. Numerous fintech-related scandals have dominated headlines in recent years such as the dramatic collapse of several high-profile peer-to-peer lending platforms which left hundreds of thousands of investors unable to access their money. In July, the PBOC released draft rules to regulate financial holding firms for the first time, including fintech giants such as Ant Financial, Tencent, and Suning.com. In its announcement of the draft rules, the PBOC said that a "regulatory vacuum" surrounding these companies which operate across several sectors has led to increased systemic risks, something the new fintech development plan also says must be prevented and mitigated.   

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Plan's first mooting: China Accelerates National Fintech Development Plan

Foreign fintech rules: In the News: Local Permits for Foreign Fintech Firms

P2P crackdown: China Ramps up Enforcement Against P2P Lending

Corporate social credit will impact foreign companies, new report warns

China's corporate social credit system (SCS) will be the most comprehensive system created by any government to impose a self-regulating marketplace, a new report says. The corporate dimension of the SCS, first announced by the State Council in 2014 and scheduled to be fully implemented by the end of 2020, will affect both foreign and domestic companies according to the European Union Chamber of Commerce in China (EUCCC), the report's lead author.

A multinational company (MNC) in China can expect to face 30 different regulatory ratings and compliance records based on more than 300 requirements once the system is fully operating. Ratings cover areas such as tax, environmental protection, e-commerce and cybersecurity, the report says. A separate report by the consultancy Trivium estimates that around 80% of the data in the National Credit Information Sharing platform, the SCS national database, relates to companies rather than individuals, of which the majority is marked as publicly available. Companies will also face SCS "blacklists" consisting of companies who fail to comply with rules and regulations, Trivium says. Companies blacklisted by one government agency will be handed down "unified punishments" whereby other government agencies also blacklist and punish them. On Aug. 30, the State Council held a meeting with representatives from several state institutions including China's central bank, the Ministry of Justice and numerous local governments to strengthen the top-down legal framework of the SCS.

Much attention has been paid to China's SCS as it relates to individuals – less so to its corporate dimension. Now two reports published within a day of each other make similar points: a year out from when the SCS is scheduled to be fully implemented, the system's rollout so far indicates that shaping corporate behavior and regulatory compliance are major aims if not its central goals. The State Council introduced an online information disclosure platform to standardize information disclosure for all companies at the national level in Oct. 2014. The State Administration for Market Regulation (SAMR) has since developed a blacklisting mechanism for "seriously delinquent and discredited enterprises" which will punish companies who fail to comply with disclosure requirements among other infractions. Jeremy Daum, scholar of Chinese law and expert on China's SCS, highlights a ramification of corporate SCS that ties the credit of companies to that of its legal representatives and management personnel. Both the EUCCC and Trivium say that sanctions on companies under the corporate SCS can affect company personnel's social credit and therefore personal lives.

More from CLP:

Corporate SCS launch: Updating the credit system 

Standardizing information disclosure: Tentative Regulations for the Publication of the Information of Enterprises

SAMR Discredited List: Tentative Measures for the Administration by the List of Seriously Delinquent and Discredited Enterprises

Currency conversion rules relaxed across Shenzhen

China will allow foreign currencies to be convertible into the yuan throughout Shenzhen without prior permission by banks under a pilot program. Rather than pre-approving every currency conversion which was the case before, regulators will conduct spot checks under the new approvals system according to the Shenzhen branch of the State Administration of Foreign Exchange (SAFE), China's foreign exchange regulator.

The rule change marks the expansion of a pilot program introduced in Feb. 2018 in Qianhai, a pilot FTZ area in Shenzhen, to the entire city. In July, SAFE said that 71 companies have already joined the pilot program, with a total of $1.49 billion converted into yuan for payments. A circular posted on SAFE's website says that companies will see waiting times for approvals fall from hours to minutes, delivering greater efficiency and lower costs.

This latest move is part of the government's plan to build Shenzhen into a model global city. The State Council plan announced on Aug. 18 reinforces the city's central role in China's Greater Bay Area strategy and specifically states that the central government will support increased foreign exchange reforms in Shenzhen. SAFE has affirmed on several occasions this year its commitment to improve China's foreign exchange rules as part of wider efforts to liberalize the nation's economy. In July, SAFE announced that it would allow foreign investors to invest in domestic equity using foreign exchange revenues in the Shenzhen FTZ.  

Model Shenzhen: In the News: Shenzhen Designated Model City

Shenzhen FTZ reform: Legislation roundup: Shenzhen Free Trade Zone