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Shanghai FTZ Attracts World Attention

(MCI CLT Zhejiang, 2013-09-02) Shanghai phenomenally succeeded as China Mainland’s first Municipality with its 28.78 km² huge Shanghai FTZ (Free Trade Zone), last week finally enabled by the Standing Committee of the National People's Congress, China’s top legislative body.

ShanghaiLogoThis is the result of Shanghai’s nearly 12 years ongoing piloting efforts against multiple resistance: Starting with the kick-off for Waigaoqiao Free Trade Zone in November 2001, going ahead with Waigaoqiao Free Trade Logistics Park, Yangshan Free Trade Port Area and finally Pudong Airport Comprehensive Free Trade Zone till now all efforts of Shanghai stuck in local easements only, without national legislature support.

The Shanghai FTZ will be the first Free Trade Zone on the Chinese mainland. Within the experimental Free Trade Zone, goods can be imported, processed and re-exported without the intervention of customs authorities. The new zone will adjoin all four existing bonded zones in Shanghai. The central government wants it to serve as a testing ground for foreign-related reforms in investment, trade, financial services and regulations.

The State Council approved this Pilot FTZ on July 3, 2013. Since it shall take about three years to establish the FTZ to international standards, on August 30, 2013, the NPC Standing Committee authorized the State Council to suspend 11 different administrative approvals regulated in three different laws – covering foreign-capital enterprises, Chinese-foreign equity joint ventures and Chinese-foreign contractual joint ventures. This suspension shall be valid for the pilot period of three years, with effect of October 1, 2013.

 

PENT - Pre-Establishment National Treatment

According to the Ministry of Commerce, after these laws are suspended, foreign investors in the FTZ will be treated same as Chinese in the pre-establishment phase of their business.

Shanghai-FZ-Map“Currently, doing so requires the foreign investors to prepare a feasibility report, get the ministry's approval and register with local branches of the industry and commerce administration. Setting up a Chinese company requires only the last step”, said Wang Zhile, an economics and trade expert with the Ministry of Commerce. “An exemption from the laws will also mean looser restrictions on the share of ownership, a foreign investor can have in a Chinese business.” Following this statement, foreign investors in the FTZ will have no need of government approval before setting up, as long as they formalize their arrangements after the fact, and do not operate in any sectors on a “Negative List”.

“Compared with the rest of China Mainland, where foreign investments are broken into three categories – ‘encouraged’, ‘restricted’ and ‘prohibited’ –, this new method is much simpler. The negative list approach is a very innovative way of opening up the Chinese economy. It is a way of deciding what not to do, rather than what to do. This will reduce the legal ambiguity, faced by many foreign and Chinese companies”, so Martin Kraeter, CEO and Group Head of MCI CLT.

In the Shanghai FTZ everything will be much simpler, with a few industries from the restricted and prohibited categories on the negative list – and everything else eligible for PENT. This should appeal to foreign investors.

Zhu Jianfang, chief economist at CITIC Securities, said: “Sectors including innovative financing, business services, culture & entertainment, education, medicine & healthcare will all attract investment through this new regime.”

If the trial operation of administrative approval suspension shows applicability, the concerned laws will be amended and improved. Otherwise, the laws will resume.

 

The move leads to significant potentials

Shanghai-View“The Economist” judges the Shanghai FTZ plan as a “top-level design”, predicting the project “would help boost China's efforts to become a pan-Asian supply chain hub,” and “could allow Shanghai to develop world-leading commodities exchanges.” The zone is expected to help Shanghai cut trade costs, improve efficiency, and promote financial services.

Martin Kraeter draws a further picture, relevant and important for many overseas investors: “The establishment of Shanghai FTZ – especially focussed on Shanghai-Pudong with its already existing Lujiazui Financial and Trade Development Zone – is in combination with China’s bank secrecy regulation, banking stability and banking quality the starting point to transform Shanghai’s financial district to the future’s leading Financial Centre in the world!”

Since the function of Shanghai FTZ will involve interest rate liberalization, currency free exchange, financial industry's opening-up, financial service innovation and some other offshore financial services, especially Shanghai’s Finance Sector will become a bridgehead which enjoys easy capital control, and becomes a “free port” for the Chinese Yuan (RMB) exchange and internationalization.

MCI CLT is capable to assist interested partners through its own regional footprint with offices in Zhejiang, Hong Kong . . . and soon in Shanghai-Pudong.

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