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Interpretation on China (Shanghai) Pilot Free Trade Zone

Insights of China（Shanghai）Pilot Free Trade Zone

EY China (Shanghai) Pilot Free Trade Zone Publications

Series Inaugural Issue

Interpretation on China (Shanghai) Pilot Free Trade Zone Interpretation on China (Shanghai) Pilot Free Trade Zone

Overview 1

The background and location of the CSPFTZ 3

Milestones for CSPFTZ establishment 4

Key points in the Plan:

I. Finance and foreign exchange

II. Tax policies

III. Investment management

IV. Others

5

Appendix I

Measures on expanding the opening up of CSPFTZ

service businesses

9

Appendix II

Part of main regulations released on CSPFTZ

10

Appendix III

PBOC’s opinions on financial reform: Our

interpretation

11

Appendix IV

PBOC’s circular on the cross-border use of RMB: Our

interpretation

13

Appendix V

PBOC’s opinions on liberalizing the interest rate

ceiling for small-denomination deposits in foreign

currencies: Our interpretation

14

Appendix VI

SAFE Shanghai Branch’s opinions on exchange rate

reform: Our interpretation

15

Appendix VII

PBOC’s opinions on anti-money laundering and anti-

terrorism financing: Our interpretation

16

What services EY can provide 17

EY’s advantages 18

Table of contents Overview

Located in the Pudong New Area of Shanghai, the China

(Shanghai) Pilot Free Trade Zone (the “CSPFTZ” or the

“FTZ”) is mainland China’s first free trade zone. Approved

by China’s State Council on 22 August 2013, the CSPFTZ

was officially lunched on 29 September 2013.

The establishment of the CSPFTZ, as part of the national

strategy of more proactively opening up China, is a big step

forward in the country’s desire to adapt to new global

economic trends and trade developments. Replacing the

traditional “low-cost policy land” approach, where an area

is founded on benefits and special policies, will be a robust,

independent and comprehensive innovation system driving

CSPFTZ’s focus in taking on the core responsibilities of

implementing pilot schemes, exploring governance

systems, modernizing system capabilities and furthering

reform.

The impact of establishing an open economic system to

promote the facilitation of trade and investment will be

broad and far-reaching. Gradually developing a series of

replicable and promotable new systems will serve nation-

wide development and promote an internationalized and

legalized business environment, nurturing new boundaries

in global competition to expand economic growth.

The establishment of the FTZ involves many restructuring

tasks such as transforming government functions, further

opening up financial and investment areas, promoting

trade development and improving legal security.

Investment, trade, finance, administration and legal are

among the pilot change areas the general plan covers. To

help create, improve and standardize specific rules, as well

as an action program for implementing them, the national

Ministries and State Commissions, along with the Shanghai

municipal government and its related authorities, issued

successively a series of regulations under the general

plan’s provisions and principles framework . Approximately

30 relevant regulations were released in 2013, including

those on investment access and business registration,

finance (opinion framework), transportation, customs,

quality inspection and tax. Since the beginning of 2014,

nearly 10 regulations have been issued, including policies

related to finance and foreign exchange administration.

Following are highlights of the CSPFTZ’s current innovation

system plan:

1. Market access and trade facilitation

Exploring the “Negative List” management’s establishment

is a highlight in the reform of CSPFTZ’s investment

management system. “Accessible unless limited“ is

adopted in managing investment and market access in the

CSPFTZ for the first time, with the prevailing “Approval”

requirement leveled down to a “Registration” mechanism.

These are positive signals that China is further opening up

to overseas investors and integrating with international

rules.

1


Under the general program, the CSPFTZ is further

opening up six major areas: financial services, shipping

services, commercial services, professional services,

cultural services and social services. Of the six, banking

services from financial services is most impacted by the

opening up.

Meanwhile, the qualification criteria for investors from

most sectors has been loosened or is suspended, with the

prevailing “paid-in capital registration” system leveled

down to a “subscribed capital registration” system, along

with “annual inspection” changed into an “annual report

public announcement” mechanism, to create a sound

market access environment for investment and trade

facilitation. Some replicable and promotable

experiences related to exploring the management

system, operation mechanism and operating model linked

to international rules, have formed or are taking shape.

2. Finance and foreign exchange administration

The establishment of the CSPFTZ is a milestone, marking

a fresh start to China’s financial reform. The FTZ’s

opening-up innovation system has drawn global

attention. On 2 December 2013, to promote the reform

of the foreign exchange and financial sectors in the

CSPFTZ, the People’s Bank of China (PBOC) published its

opinions in support thereof (the PBOC’s “30 opinions”).

Within three months after the PBOC issued its 30

opinions, in late February 2014, the Shanghai Head

Office of PBOC along with the State Administration of

Foreign Exchange Shanghai Branch issued related

supporting documents on the expansion of RMB cross-

border usage, foreign exchange implementation rules,

and anti-money laundering and anti-terrorism financing

work. Support on the expansion of RMB cross-border

business is rendered through defining a series of

implementation rules. Pilot programs, in terms of RMB’s

convertibility under capital account, facilitating foreign

investment and financing, cross-border two-way RMB

cash pooling business, facilitating transactions of

commodities derivatives, interest rate liberalization and

more will be launched through financial innovation, to

positively promote the reform of the foreign exchange

administration system.

3. Transformation of government functions and

supervision of the innovation model

The FTZ’s innovation plan covers: (1) Transforming

government functions by working to shift the

administrations’ focus from prior approval to in-event

and after-event supervision and to enhance

administrative transparency accordingly. a custom’s

regulatory system that features an innovative

management model known as “Frontier Opening” and

“Second-tier Safe and Efficient Control,“ adopting

centralized and categorized electronic monitoring to

facilitate the efficient and smooth flow of people and goods

in the CSPFTZ. (3) Supporting trading sector enterprises

within the CSPFTZ in offshore business, finance leasing

business development. (4) Suspending the implementation

of certain laws and regulations for foreign enterprises in

the CSPFTZ.

Since its launch, the CSPFTZ has experienced a

successfully smooth and orderly progression in operations,

with its overall development exceeding expectations. The

following graphs illustrate FTZ’s current enterprise-

registration status as at March 2014.

As of 25 March 2014, around 7492 enterprises are newly

established. （Data source: Xinhuanet.com)

Domestic enterprises

91.6%

WFOEs 8.4%

Above 60%

Wholesale and retail enterprises

Others

Domestic enterprises 6864

Wholly Foreign Owned Enterprises (WFOEs): 628

At present, various innovative policies in the CSPFTZ are

awaiting improvement. Though facing major challenges,

including a relatively long Negative List and how to perfect

a comprehensive system combining in-event and after-

event supervisions, these challenges also create

opportunities. We expect the CSPFTZ to have tremendous

development appeal to the trading and service sectors, and

especially to the financial sector. As reforms progress, we

are convinced that CSPFTZ will become an important

vehicle in China’s drive to be further involved in economic

globalization to create new opportunities for sustainable

economic development.

A leading global professional services organization

specializing in assurance, tax, transaction and advisory, EY

helps to explore innovative policies and systems for the

CSPFT. We serve as special counsel to the Shanghai

Banking Association and maintain a good working

relationship with the CSPFTZ Management Committee and

related Shanghai authorities. We also participate in

discussions on relevant policy development for the CSPFTZ,

conducted by governmental bodies, offering our

professional opinion.

At the half-year point, since the launching of the FTZ, will

be an assessment and summary of practical experiences

learned in its initial stage. The aim is to form new policies

that are replicable and promotable come the CSPFTZ’s first

anniversary. We ask you to stay tuned to these subsequent

developments of the CSPFTZ through our timely

publication of this CSPFTZ update series.

2


On 22 August 2013, China’s State Council officially approved the establishment of the China (Shanghai) Pilot Free Trade

Zone in Shanghai, China.

On 27 September, the State Council published the General Plan for the CSPFTZ, which sets out the specific principles on

supervisory measures, tax policies and further opening up of the sector.

Supporting numerous reforms in investment, trade,

finance and administrative perspectives, the CSPFTZ

covers a geographical area of 28.78 square kilometers

and comprises the following four customs supervisory

zones: Waigaoqiao Bonded Zone, Waigaoqiao Bonded

Logistics Park, Yangshan Bonded Port and Pudong

Airport Comprehensive Bonded Zone.

► Domestically:

With its economic growth rate slowing and its labor

costs climbing, China was no longer able to rely on

exports alone to support its economic growth. With

its economy flagged by excess production capacity

and high energy consumption, the country needed a

way to deepen its financial reform and transform its

economic structure.

► Internationally:

The United States was actively promoting TPP

(Trans-pacific Partnership Agreement). In 2013, the

United States and European Union began

negotiations on TTIP (Transatlantic Trade and

Investment Partnership), the world’s largest bilateral

trade deal ever negotiated.

How the CSPFTZ came to be CSPFTZ at-a-glance

Waigaoqiao Bonded Logistics Park

Waigaoqiao Bonded Zone

Pudong Airport Comprehensive Bonded Zone

Yangshan Bonded Port

3


Milestones of CSPFTZ’s establishment

December 2003

Mr. Siwei Cheng, former National People’s Congress Vice Chairman, proposes that China is ready

to set up a reform pilot for the transformation from bonded zones to free trade zones. The

selected date of the reform pilot is soon to be advised.

At the end of March

2013

Mr. Keqiang Li, Premier of the State Council, during his research trip to Shanghai’s Waigaoqiao

Bonded Zone encourages the city to establish a pilot free trade zone on the basis of the existing

comprehensive bonded zone.

14 May 2013 The CSPFTZ is approved to become a national-level project.

June 2013 Having been revised and improved, the General Plan for China (Shanghai) Pilot Free Trade Zone

(the “Plan”) is submitted for approval to the Ministries and Commissions under the State Council.

3 July 2013 The plan is approved in principle by The State Council executive meeting.

10-11 July 2013

At the fifth round of China-US Strategic and Economic Dialogue, China State Councilor Yang

Jiechi and US Secretary of State John Kerry agree to take measures to deepen bilateral trade

and investment relations, as well as to establish an open environment for trade and investment.

22 August 2013

The Press Office of the Ministry of Commerce announces that the State Council has approved the

establishment of the CSPFTZ and that the Plan would be published after the completion of

relevant legal procedures.

27 September 2013 The State Council publishes the Plan on its official website in its release of Guofa [2013] No. 38.

29 September 2013 The Shanghai government publishes the Administrative Measures for CSPFTZ in: Shanghai MPG

Order [2013] No. 7.

November 2013 The Third Plenum of the 18th CPC Central Committee proposes to relax its restrictions on

admittance of foreign investment and to speed up the development of the CSPFTZ.

2 December 2013 The PBOC releases: Opinions of the People’s Bank of China to Support CSPFTZ in Financial Sector.

(See Appendix III)

6 January 2014

The Chinese Central Government’s Official Web Portal publishes: Decision of the State Council on

Temporary Adjustments to the Administrative Approval Items or Special Administrative Measures

on Access Prescribed in Relevant Administrative Regulations or State Council’s Documents in

CSPFTZ.

20 February 2014

The PBOC Shanghai Head Office issues: Circular of the People’s Bank of China Shanghai Head

Office on Supporting the Expansion of RMB Cross-border Business in CSPFTZ (see Appendix IV);

and Circular of the People’s Bank of China Shanghai Head Office on the opinion of Shanghai

payment institutions conducting Cross-border RMB payment business.

25 February 2014 The PBOC Shanghai Head Office issues: Circular of the PBOC on removing the ceiling of interest

rate for small-denomination deposits in foreign currencies in CSPFTZ. (See Appendix V)

28 February 2014

The State Administration of Foreign Exchange Shanghai Branch issues: Circular of the State

Administration of Foreign Exchange Shanghai Branch on Issuing Implementing Rules for Foreign

Exchange Control to Support the Construction of CSPFTZ. (See Appendix VI)

The PBOC Shanghai Head Office issues: Circular of the People’s Bank of China Shanghai Head

Office on Practically Conducting the Anti-money Laundering and Anti-terrorism Financing Work in

CSPFTZ. (See Appendix VII)

5 March 2014

At the Shanghai group discussion of the second session of the 12th National People‘s Congress,

President Xi Jinping stresses the construction CSPFTZ as a national strategy and should

“construct bravely ,try boldly, reform freely” as long as in accordance with international rules.

And, thereafter, summarize the experiences learned on constructing CSPFTZ which can be

promoted nationwide.

4


Key points in the Plan: I. Finance and foreign exchange

Financial services

areas

► Creating “controllable risk” opportunities in the CSPFTZ for piloting in such areas as foreign

exchange (i.e., Renminbi [RMB]) conversion, piloting market-determined financial interest

rates and piloting cross-border RMB usage

► Achieving market-determined pricing in financial institutions asset prices in the CSPFTZ.

► Encouraging enterprises to take full advantage of both home and abroad resources and

markets to achieve free cross-border financing; deepening the reform of foreign debt

management; and promoting the facilitation for cross-border financing

► Promoting multinational company (MNC) HQs to pilot centralizing operations and management

of foreign exchange; encouraging MNCs to establish global/regional fund management centers

► Encouraging the set up of foreign banks and joint venture banks in the CSPFTZ.

► Establishing the linkage mechanism between the financial reforms and innovation in the

CSPFTZ and the development of the Shanghai International Financial Center

► Allowing the financial market to establish international trading platforms in the CSPFTZ;

gradually allowing foreign enterprises to participate in commodity futures trading.

► Supporting equity trading institutions to establish platforms for a comprehensive financial

service platform in the CSPFTZ

► Supporting cross-border RMB re-insurance business; developing the reinsurance market.

Foreign exchange

administrations

► Exploring pilot reform for international foreign exchange administrations; establishing a

matching foreign exchange administration for the CSPFTZ; fully realizing the facilitation of

trading and investment

5


Key points in the Plan: II. Tax policies

Pursuant to the Plan, special tax policies will be implemented in the CSPFTZ to promote investment and trade development, which mainly include related policies in various tax categories:

Corporate Income

Tax (CIT)

► In an asset restructuring transaction, for the appreciation of non-cash assets used as

investments, the related income taxes may be allowed to pay by installments over a period of

up to five years

Individual Income

Tax (IIT)

► High-end talent and talent in short of supply who receive stock options in the form of share

stock or capital contribution from enterprises in the CSPFTZ, may be allowed to pay related IIT

by installments; this has been implemented in regions including Zhongguancun

► In an asset restructuring transaction, for the appreciation of non-cash assets used as

investments, the related enterprise/individual shareholders may be allowed to pay related

income taxes by installments over a period of up to five years

Value Added Tax

(VAT)

► Aircraft with a loading capacity of 25 tons or above purchased from overseas by leasing

enterprises or project finance leasing subsidiaries incorporated in the CSPFTZ; and leased to

domestic airlines with approval from related authorities, can benefit from the import-level VAT

policy

► Import-level VAT and Consumption Tax will be applicable to goods which are produced,

processed by manufacturing enterprises located in the CSPFTZ and sold via “second tier” to

mainland China

Custom duty

► Based on the enterprises’ application, a policy that customs duty will be levied on goods for the

domestic market if the corresponding import materials and parts or their actual condition for

declaration will be introduced on a pilot basis

► Under the existing policy framework, machinery and equipment imported by manufacturing

enterprises (or service enterprises with manufacturing functions) located in the CSPFTZ may

be exempt from Customs duty/Import-level VAT/import-level Consumption Tax. But the goods

imported by life-related service enterprises and those specifically stipulated as non-tax exempt

by relevant laws and regulations are excluded

Export tax refund ► Finance leasing enterprises or project finance leasing subsidiaries incorporated in the CSPFTZ

will be eligible to enjoy the pilot export tax refund policy granted to finance lease businesses

6


Key points in the Plan: III. Investment management

※Negative List

► Full name : Special Administrative Measures (Negative List) on Foreign Investment Access to the CSPFTZ (2013)

► The “Negative List” sets out those areas and industries which enterprises are prohibited to invest in. Oversea enterprises can invest in other industries, areas, economic activities, without any restrictions or conditions of joint venture except those prohibited in the “Negative List.”

► Currently, the industries foreign enterprises can invest in are generally categorized as encouraged, permitted, restricted and

prohibited. For the “Negative List”, its form is converted into the form of listing “accredited business” from the “unaccredited business” as listed in Catalogue of Industries for Guiding Foreign Investment (i.e. The businesses outside the scope of unaccredited ones will be accredited in principle. The axis of administration is converted from “prior scrutiny” “into “post supervision.”

Inbound investment

► Further opening up the following six industry sectors: financial services, shipping services, commercial services, professional services, cultural services and social services. (See Appendix I)

► A Pre-establishment National Treatment (PENT) mechanism will be introduced for foreign investment in the CSPFTZ on a pilot basis. A "Negative List"※ will be discussed and developed in the zone to lay out foreign invested activities to which national treatments do not apply; and the management model of foreign investment will be reformed

► For those areas which do not operate in the “Negative List" sectors, the prevailing “Approval” requirement will be leveled down to a “Registration” mechanism (excluding where “Approval” is still required even for the inbound investment projects as stipulated by the State Council); and this procedure will be administrated under Shanghai local authorities

► The prevailing “Administrative Approval” requirement for the foreign investment enterprises’ contracts and resolutions will be leveled down to a “Registration” mechanism by Shanghai local authorities, with the same follow-up procedures finished according to the relevant regulations

Outbound investment

► The Plan is aiming at the reform of outbound investment administration by principally implementing the “Registration” mechanism on the setup of overseas companies and on the general outbound investment projects. The “Registration” mechanism will be administrated under Shanghai local authorities to facilitate outbound investment

► The Plan also encourages investors to establish companies in the CSPFTZ that would engage in outbound equity investment; and supports qualified investors establishing outbound FOF (Fund of Funds)

7


※ “Frontier” refers to Chinese boundary line

※ “Second-tier” refers to the boundary between the CSPFTZ and the outside world

Custom’s regulatory system

► Facilitating the implementation of “Frontier Opening,” the imported goods will be allowed to

enter into the CSPFTZ prior to getting customs declared with entry and exit filing checklist

► Optimizing and improving the e-information network and accounting book management of

the customs administration process by strictly applying a “Second-tier Safe and Efficient

Control” methodology. Proactively facilitating the smooth flow of goods movement between

the CSPFTZ and other domestic regions under the administration of local customs offices

Trading perspectives

► Supporting CSPFTZ enterprises in developing offshore business

► Exploring the establishment of an international commodity trading platform and resource

allocation to develop international trade, covering energy products, basic industry raw

materials and bulk agricultural commodities

► Assisting finance leasing companies in establishing project subsidiaries and in developing

inbound and outbound lease business

Government functions

► Allowing unrestricted investment income transfer for qualified foreign investors

► Establishing settlement mechanisms, including resolution and assistance for intellectual

property right disputes

► Establishing comprehensive evaluation mechanisms including tracking industry information,

supervising and summarizing

Legal perspectives

► Adjusting temporarily certain “Administrative Approval” requirements provided in the Wholly

Foreign Owned Enterprises (WFOE) Law, Sino-Foreign Equity Joint Venture (JV) Law and

Sino-Foreign Cooperative JV Law. The decision will be enforced on a trial basis for three

years, as at 1 October 2013

Key points in the Plan: IV. Others

8


Industries Types of services Details of opening up aspects

Financial

services

Banking services

► Allow qualified foreign financial institutions to set up foreign banks

► Allow qualified private capital and foreign financial institutions to establish

joint venture banks

► Allow qualified domestic banks to engage in offshore business

Health and medical

insurance

► Allow foreign investment of health and medical insurance institutions on a

pilot basis

Finance leasing ► Remove the minimum threshold requirement of registration capital and

expanding business scope

Shipping

services

Ocean shipping

► Relax the restriction of the equity ratio between foreign funds and domestic

funds for joint venture international marine business

► Expand business scope

International ship

management ► Allow for wholly foreign-owned enterprises (WFOE)

Commercial

services

Value-added

telecommunication

► Allow foreign investment enterprises to engage in certain value-added

telecommunication services

Professional

services

Law firms ► Innovate cooperation methods between foreign and domestic law firms

Credit investigation ► Allow foreign investment

Travel agency ► Expand the business scope of the Sino-foreign Equity Joint Venture travel

agencies

Headhunting service

► Increase the limitation of equity ratio of foreign investors to 70%

► Allow it to be wholly owned by Hong Kong or Macau investors

► Reduce the minimum threshold requirement of registered capital

Investment

management ► Allow the establishment of joint-stock foreign investment companies

Engineering design ► Relax application criteria

Cultural

services

Artists agency ► Remove restrictions of the equity ratio between foreign funds and domestic

funds; allow WFOE to engage

Entertainment ► Allow WFOE to engage

Social

services

Education and

training employment

skills training

► Allow Sino-foreign cooperative joint ventures to engage

Medical services ► Allow for establishing WFOE medical institutions

Appendix I – Measures on expanding the opening up of CSPFTZ service businesses

9


Circular No. Circular name Issue date

Shanghai MPG Order [2013]

No. 7 Administrative Measures for CSPFTZ 22 Sep 2013

Jiaoshuifa [2013] No. 584 Implementation Opinions of Accelerating the Construction of the Shanghai International

Transport Center 27 Sep 2013

Yinjianfa [2013]No. 40 Circular of the China Banking Regulatory Commission on Issues Concerning Banking

Supervision in CSPFTZ 28 Sep 2013

Hufufa [2013] No. 71 Circular on Issuing Administrative Measures on the Documentation Filing for Foreign

Investment Projects in CSPFTZ 29 Sep 2013

Hufufa [2013] No. 72 Circular on Issuing Administrative Measures on the Documentation Filing for Outbound

Investment in Projects by the Enterprises Registered in CSPFTZ 29 Sep 2013

Hufufa [2013] No. 73 Circular on Issuing Administrative Measures on the Documentation Filing for Foreign Invested

Enterprises (FIEs) in CSPFTZ 29 Sep 2013

Hufufa [2013] No. 74 Circular on Issuing Administrative Measures on the Documentation Filing for Outbound

Investment in Enterprises by the Enterprises Registered in CSPFTZ 29 Sep 2013

Hufufa [2013] No. 75 Notice on Publishing Administrative Measures for Admission of Foreign Investment in

CSPFTZ (Negative List) (2013) 29 Sep 2013

Approvals by the China Insurance Regulatory Commission to Support CSPFTZ 29 Sep 2013

Polices and Measures of the China Securities Regulatory Commission on Capital Market for

Supporting and Promoting CSPFTZ 29 Sep 2013

Caishui [2013] No. 91

Circular of the Ministry of Finance and the State Administration of Taxation on Enterprises

Income Tax Polices Concerning Asset Restructuring Activities including Non-monetary Assets

for Investment Purposes in CSPFTZ

15 Nov 2013

Opinions of the People’s Bank of China to Support CSPFTZ in Financial Sector 2 Dec 2013

Guofa [2013] No. 51

Decision of the State Council on Temporary Adjustments to the Administrative Approval

Items or Special Administrative Measures on Market Entry Prescribed in Relevant

Administrative Regulations or State Council’s Documents in CSPFTZ

21 Dec 2013

Yinzongbufa [2014] No. 22 Circular of the People’s Bank of China Shanghai Head Office on Supporting the Expansion of

RMB Cross-border Business in CSPFTZ 20 Feb 2014

Yinzongbufa [2014] No. 23 Circular of the PBOC on removing the ceiling of interest rate for small-denomination deposits

in foreign currencies in CSPFTZ 25 Feb 2014

Huifa [2014] No. 26 Circular of the State Administration of Foreign Exchange Shanghai Branch on Issuing

Implementing Rules for Foreign Exchange Control to Support the Construction of CSPFTZ 28 Feb 2014

Yinzongbufa [2014] No. 24 Circular of the People’s Bank of China Shanghai Head Office on Conducting Anti-money

Laundering and Anti-terrorism Financing Work in CSPFTZ 28 Feb 2014

Appendix II – Key circulars issued on CSPFTZ

10


On 2 December 2013 the People's Bank of China (PBOC) published: Opinions of the People’s Bank of China to Support

CSPFTZ in Financial Sector. We summarize our interpretation of the key points below:

1. General principles

► Facilitate trade and investment, expand financial

openness to foreign investors and elevate CSPFTZ to a

high-level participant in international competition

► Strive to promote pilot reforms in cross-border use of

RMB as well as the RMB’s convertibility under capital

account, interest rate liberalization and foreign

exchange administration

► Manage risk and steadily advance the reform process;

carry out the pilot in a timely and organized manner

2. Innovation in banking system to facilitate risk management

► Resident and nonresident businesses in the CSPFTZ may

open domestic/foreign currency free trade accounts

(FTAs)

► Free fund transfer is allowed among various accounts

► Cross-border financing and guarantee businesses may be

carried out through resident and nonresident FTAs.

Domestic and foreign currencies in such accounts will be

freely convertible when conditions permit

► Financial institutions in Shanghai may help qualified

CSPFTZ entities open FTAs and provide relevant

financial services

3. Exploration of convenient convertibility for investment

and financing

► Facilitating cross-border direct investments of

enterprises: For cross-border direct investments

made by CSPFTZ enterprises, relevant parties may

directly arrange cross-border receipts, payments and

foreign exchange conversion with banks

► Facilitating individual cross-border investments:

Qualified individuals working in the CSPFTZ may

make various outbound investments including

investments in securities pursuant to relevant

regulations

► Allowing financial institutions and enterprises in the

CSPFTZ to invest and trade in the securities and

futures exchanges in Shanghai pursuant to relevant

regulations. Foreign parent companies of CSPFTZ

enterprises may issue RMB bonds in domestic capital

market pursuant to relevant laws and regulations

► Facilitating the process of overseas financing

► Offering diversified risk-hedging tools: Qualified

CSPFTZ enterprises may be allowed to conduct

foreign securities and foreign derivative investments

pursuant to relevant regulations

Appendix III – PBOC’s opinions on financial reform: Our interpretation

11


Our view:

These opinions further refine the reforms in the areas of finance and foreign exchange based on the Plan and will have a

profound influence on the reform of Chinese financial system, further reflecting the determination of the Chinese

government for financial system reform. Restrictive terms such as “qualified” and “when conditions permit” are

frequently mentioned in the opinions, which aims to raise the entry requirements for CSPFTZ risk control. Meanwhile,

instead of issuing detailed implementation rules, the opinions are only a rudimentary reform framework. The PBOC

Shanghai Head Office thereafter issued Circular of the PBOC Shanghai Head Office on Supporting the Expansion of RMB

Cross-border Business in CSPFTZ on 20 February 2014 (Appendix IV) and Circular of the PBOC Shanghai Head Office on

Practically Conducting the Anti-money Laundering and Anti-terrorism Financing Work in CSPFTZ on 28 February (Appendix

VII), among others. A series of new regulations in future are highly anticipated and we will continue to pay close attention

to further movements.

Appendix III – PBOC’s opinions on financial reform: Our interpretation (cont’d)

4. Enhancement of cross-border use of RMB

► Based on the three principles (i.e. “know your client”,

“know your business” and “due diligence”) of anti-

money laundering (AML), banking institutions in

Shanghai may directly arrange cross-border RMB

settlements for CSPFTZ institutions and individuals

(except for those entities on a monitoring list for

cross-border RMB settlement purposes) for the items

of current accounts or direct investments, according

to their fund receiving or payment instructions

► Banking institutions in Shanghai may cooperate with

payment service institutions whose business scope

includes online payment service to provide RMB

settlement service for cross-border e-Business

(goods or service)

► Borrowing RMB funds from overseas is allowed in

accordance with the usage scope as prescribed

► CSPFTZ enterprises may develop two-way RMB cash

pooling within the group

5. Steady progression of interest rate liberalization

► The establishment of a liberalized interest rate

system will be promoted

► The monitoring mechanism on the market pricing of

interest rate for funds will be further improved

► Qualified financial institutions will be allowed to issue

large-denomination negotiable certificates of deposit

► When conditions permit, the interest rate ceiling for

small-denomination deposits in foreign currencies

under general accounts will be removed

6. Deepening the reform in foreign exchange administration

► Administration of foreign currency cash pooling will be

further simplified to facilitate trading and investment

► Foreign exchange registration formalities for direct

investments will be simplified

► Domestic and overseas leasing services will be

supported

► Pre-approval for payment of guarantee fees to

overseas parties by CSPFTZ institutions will be

removed

► Banks carrying out over-the-counter transactions of

commodities derivatives for domestic clients will be

supported

7. Monitoring and administration

► Financial institutions and specified non-financial

institutions in the CSPFTZ should fulfill their

obligations in respect of anti-money laundering, anti-

terrorism financing and anti-tax evasion in compliance

to laws and regulations

► A comprehensive information monitoring platform will

be established to supervise non-financial institutions

► Business under the CSPFTZ separated accounting unit

will be taken into account in calculating the capital

adequacy ratio of the legal entity bank

► A macro-prudential supervision will be implemented in

the CSPFTZ

► To help PBOC keep risk under control and steadily

advance its reforms, detailed rules on implementation

will be issued

12


1. Simplifying cross-border RBM use

► Cross-border RMB settlement procedures under

current accounts and direct investments in the CSPFTZ

will be simplified

► Individuals employed or operating in the CSPFTZ are

allowed to open personal bank settlement accounts or

an entity settlement accounts for individual businesses

and arrange cross-border RMB receipt or payment of

funds under current accounts

2. Deepening financial reform to support real economy

development and facilitating cross-border investment

and trading

► Non-banking institutions and enterprises will be

permitted to borrow RMB from overseas

► The development of Shanghai business headquarters

will be supported and CSPFTZ enterprises will be

allowed to launch cross-border two-way RMB cash

pooling within the group. Qualified enterprises will be

able to launch cross-border RMB centralized payment

and receipt businesses

► The development of cross-border e-Business will be

promoted. Banks in Shanghai will be encouraged to

cooperate with payment service institutions that hold

“Payment Business Permit” or to provide RMB

settlement service to cross-border e-Business

operators

► Off-site monitoring and on-site inspection will be

enhanced and the monitoring of cross-border fund flow

by the State Administration of Foreign Exchange (SAFE)

will be strengthened

► The China Foreign Exchange Trade Center and the

Shanghai Gold Exchange will be supported in providing

cross-border RMB trading service in the CSPFTZ

3. Strengthening macro-prudent financial management

► An information sharing platform will be established

► The scale of offshore RMB borrowing will be adjusted

based on the needs of credit control, by setting

macro-prudent policy parameters

► The responsibilities and obligations of anti-money

laundering, anti-terrorism financing and anti-tax

evasion will be fulfilled

On 20 February 2014, the PBOC Shanghai Head Office issued Circular of the PBOC Shanghai Head Office on Supporting

the Expansion of RMB Cross-border Business in CSPFTZ (The Circular). We summarize our interpretation of the key

points below:

Our view:

This circular further simplifies the procedures of

direct investment and RMB cross-border use under

current accounts, in the CSPFTZ. For the first time,

innovative business including the scale and use scope

of offshore RMB borrowing, cross-border e-Business

settlement, RMB trading services is specified.

The circular reflects a preliminary development of

macro-prudent regulatory supervision. We think that

it will help enhance the innovative capability of banks’

cross-border RMB services, reduce financing costs for

multinational enterprises, and provide strong support

in facilitating trade and investment, in the CSPFTZ.

Appendix IV – PBOC’s circular on the cross-border use of RMB: Our interpretation

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On 25 February 2014, Shanghai Head Office of the People’s Bank of China published Circular of the PBOC on removing

the ceiling of interest rate for small-denomination deposits in foreign currencies in CSPFTZ. We summarize our

interpretation of the key points below.

► The ability to reasonably price the interest rate of

foreign currency based on market supply and demand

will improve

► An interest rate risk management (IRRM) mechanism

will be established, to determine administrative

measures including objectives, assessment methods,

organizational systems, interest rate risk limitations,

stress testing and so on

► Close attention will be paid to the developments of

interest rates and exchange rates in domestic and

overseas financial markets; plans to prevent the risk

of interest rate fluctuation will be developed

► Relevant management methods will be formulated

and submitted to Shanghai Head Office of PBOC

promptly for filing

► Financial institutions should be formulating detailed

rules on customer qualification reviews; setting

strict account-opening standards; and preventing

illegal behavior including asset appropriation and

arbitrage using false identification

► A monitoring and analysis mechanism should be

established and the “Monitoring Form for CSPFTZ

Foreign Currency Transactions” should be filed as

required and submitted to the interest rate

management system of the People’s Bank of China

Shanghai Head Office

► Unusual transactions should be tracked and

monitored, with reports being provided

► Financial institutions should make preparations for

risk prevention and control and develop business in

accordance with these policies

Our view:

This circular underscores the CSPFTZ becoming a pioneer in the full liberalization of interest rate for foreign currency

deposits in China. Based on the interest rate liberalization path designed and promoted by the PBOC, a “four-step”

strategy featuring “loans followed by deposits and foreign currencies followed by local currencies” has been confirmed,

with the Circular being welcomed as a critical step. Meanwhile, it also lays a solid foundation for driving interest rate

liberalization reform across the nation in future. As interest rate liberalization has just commenced, its healthy

development should rely on risk prevention. The opening of small-denomination deposits in foreign currencies means the

matching with overseas markets. Therefore, the interest rate trend links to both the market pricing of neighboring

countries and regions as well as to the supply and demand status of foreign currencies in domestic markets. As an

export-oriented trading economy, the CSPFTZ has witnessed tremendous demand for foreign currencies, with fierce

price competition. This circular serves as an effective monitoring and preventive measure against unscrupulous

competition and sharp fluctuations in interest rates during the liberalization process, hence laying a tone of stable

development for interest rate liberalization.

Appendix V – PBOC’s opinions on liberalizing the interest rate ceiling for small- denomination deposits in foreign currencies: Our interpretation

14


1. Deepening the reform of foreign exchange

administration and facilitating trading and investment

► Document review procedures for the collection and

settlement of foreign exchange and purchase

payment documents under current accounts will be

simplified, elevating the CSPFTZ to a higher level of

participation among international competition

► Foreign exchange registration formalities will be

simplified; the foreign exchange registration

business processing channel for direct investments

will be expanded.; foreign exchange funds under

foreign direct investment may easily be converted

to RMB. The foreign exchange registration under

direct investments, and relevant changes, will be

delegated to banks

► Foreign credits and liabilities administration will be

relaxed. The administrative approval for foreign

guarantee and payment of guarantee fees to

overseas parties will be removed. The loan ceiling

amount for overseas foreign exchange will be lifted

from 30% to 50% of its shareholder’s equity.

Creditor’s rights approval for overseas finance

leasing business will be removed. Receipt of rental

payments in foreign currencies for domestic finance

leasing business will be allowed

► Centralized cash management of foreign exchange

for multinational headquarters will be improved; the

policies of pilot foreign exchange administration for

foreign exchange cash pooling and international

trading and settlement center enhanced; the

requirement to qualify as a pilot enterprise relaxed;

and the approval process and account management

simplified

► The administration of foreign exchange will be

improved; banks carrying out over-the-counter

transactions of commodity derivatives for clients in

the CSPFTZ will be supported

2. Enhancing statistical monitoring and analytical

warning to effectively prevent balance risks of foreign

exchange receipts and payments

► The obligation of submitting information on foreign

exchange administration will be strengthened

► Off-site monitoring and on-site inspection will be

enhanced; and the monitoring of cross-border fund

flow by SAFE strengthened

Our view:

Foreign enterprises are used to settling exchange

based on demand and providing evidence of payments.

However, this limit has been removed upon the

publication of this circular. The circular provides

investors with many new options in anticipation of an

RMB appreciation. In the medium term, owing to the

exchange fluctuations, enterprises should determine

settlements based on a more international and

market-oriented perspective. This circular reflects a

new idea of financial regulation, namely the concept of

after-event supervision, representing the new

direction of financial reform. The circular plays a

prominent role in facilitating trading and investment,

financial leasing and the trading of commodities.

Therefore, it will be more convenient for enterprises

and banks in the CSPFTZ to conduct foreign exchange

business. Furthermore, the Circular will contribute to

the development of the real economy and better

support the national strategy; as well as accelerate

the transformation of the supervision model of foreign

exchange.

Appendix VI – SAFE Shanghai Branch’s opinions on exchange rate reform: Our interpretation

On 28 February 2014, SAFE Shanghai Branch issued Circular of the State Administration of Foreign Exchange Shanghai

Branch on Issuing Implementing Rules for Foreign Exchange Control to Support the Construction of CSPFTZ. We

summarize our interpretation of the key points below:

15


► Strictly fulfilling the obligation of anti-money

laundering pursuant to relevant laws and regulations,

while establishing and perfecting an internal control

system of anti-money laundering in connection with

business in the CSPFTZ

► Improving system construction to ensure the reporting

elements of mega-deals and suspicious transactions

are gathered completely

► Adopting customer due diligence (CDD) and risk

disposal measures tailored to risk levels, and focusing

on the enhancement of due diligence of clients’ actual

controllers or actual beneficiaries in transactions.

Increase the level of risk for CSPFTZ clients

appropriately based on facts and circumstances

► Strengthening the monitoring and analysis of FTAs

and entities, and conducting scrutiny on the

background of fund flow among FTAs

► Reinforcing the anti-money laundering scrutiny

requirements for innovative business and launching

innovative business after implementing control

measures that correspond to the relevant risks

► Enhancing risk management of anti-money

laundering for the whole process of cross-border

business in the CSPFTZ, and conducting anti-money

laundering scrutiny, fund monitoring and “watch list”

supervision

Our view:

This circular clearly indicates that anti-money laundering and anti-terrorism financing efforts have significant

implications for the steady and healthy development of the CSPFTZ. The smooth progress of those works helps to

cultivate an internationalized and legalized market environment for the CSPFTZ, make reasonable assessment and

effectively control the potential implicit money laundering risks of business in the zone. The circular also requires various

institutions to bear the anti-money laundering obligation, to fully carry out various regulations and measures for anti-

money laundering and anti-terrorism financing and to pioneer and innovate as well as proactively explore creating

replicable and promotable anti-money laundering experiences in the CSPFTZ.

Appendix VII – PBOC’s opinions on anti-money laundering and anti-terrorism financing: Our interpretation

On 28 February 2014, the People’s Bank of China Shanghai Head Office issued Circular of the People’s Bank of China

Shanghai Head Office on Practically Conducting the Anti-money Laundering and Anti-terrorism Financing Work in CSPFTZ

and signed a memorandum of cooperation with Shanghai CSPFTZ Administrative Committee to establish effective

cooperation mechanisms of anti-money laundering. We summarize our interpretation of the key points below.

16


We suggest that you not take a wait-and-see attitude, but instead take the initiative to understand and analyze the market

changes, challenges and opportunities relating to CSPFTZ. If you are interested or are intending on developing relevant

businesses in the CSPFTZ, we can provide you with one-stop service.

Areas Your needs Our solutions

Entering CSPFTZ

feasibility study

stage

► Developing entry strategies and preparing

relevant plans

► Communicating with regulatory authorities,

discussing the possibility of making investment

and analyzing its impacts on enterprises

► Assist you in analyzing existing group structure and business

arrangements, comprehensively taking into considerations

such aspects as the feasibility of regulations, investment and

financing capabilities, business model, shareholding structure,

tax efficiency and cross-border payment for the platform you

may construct in the CSPFTZ

► Assist you in preparing your investment feasibility reports or in

raising review recommendations

► Assist you in communicating with regulatory authorities,

through EY’s sound working relationships

Establishing and

approving procedures

and other legal

advisory services

► Studying and understanding the requirements

and related regulations of establishment in the

CSPFTZ

► Proactively communicating with regulatory

authorities to obtain permits for establishment

and processing relevant procedures

► Help you to interpret the relevant laws and regulations.

► Check and review the gap between your actual situations and

the requirements of regulatory authorities

► Assist you in communicating with regulatory authorities,

through EY’s sound working relationships

► Help you to author related legal documents during the process

of company incorporation, alternation and de-registration,

providing relevant business registration services

Tax and business

advisory services

► Mastering current tax laws and various relevant

regulations as well as their corresponding

impacts

► Under the overall environment of constantly

changing tax laws, proactively acquiring the

latest information related to tax laws and taking

appropriate countermeasures

► Provide you with tax and business advisory services during

your company’s incorporation stage, offering services such as

financial subsidies application and tax assessment

► Provide you with regular tax and tax-related business advisory

services during daily business operation:

► Services like tax compliance filing, accounting

bookkeeping, payroll policy design and release, and annual

report’s public information preparation and submission

► Advisory services related to tax planning based on our rich

engagement experiences; conducting interpretation as

relevant regulations change.

► Update tax-related information and suggestions on

reasonable measures to take in response to changes in

regulations

Risk management,

internal control and

accounting advisory

services

► Establishing and improving internal control

mechanisms in accordance with CSPFTZ

standards and regulations

► Understanding CSPFTZ accounting requirements

related financial statements and preparing

corresponding financial statements

► Provide you with advisory services for improving effective

internal control mechanisms in accordance with relevant laws

and regulations

► Support you in improving your internal anti-fraud and anti-

money laundering mechanisms, including making assessments

and offering advice on the implementation of anti-money

laundering control measures); helping to improve overall the

anti-money laundering system construction and process design

according to PBOC requirements

► Explain related accounting standards and provide you with

assistance in preparing financial statements

Assurance ► Based on the rules of regulatory authorities,

selecting accounting firm(s) to conduct audit on

prepared financial statements in the CSPFTZ

► Conduct capital verification for the paid-in status of registered

capital and changing status of paid-in capital and registered

capital

► Conduct audit on financial statements in terms of authenticity,

accuracy and compliance

► Provide other related assurance services including internal

control

Our services

17


► We provide a wide range of professional services to international and domestic leading institutions

► We have extensive experiences on the free trade zone

► We maintain good working relationships with regulatory authorities in many areas

Our professional team

Contact us

For more information, contact your EY contact person or one of the following EY executives below in Greater China:

Finance

Jack Chan Greater China Finance

Managing Partner

Tel: +86 10 5815 4086

Email: [email protected]

Julian Yu Greater China Finance

Managing Director

Tel: : +852 2849 9112


Joyce Xu Shanghai Finance

Partner

Tel: +86 21 2228 2392


Alex Jiang

Shanghai Finance

Partner

Tel: +86 21 2228 2963


Tax

Walter Tong Greater China Tax

Managing Partner

Tel: +86 21 2228 6888


Vickie Tan

Central China Tax

Managing Partner

Tel: +86 21 2228 2648


Linda Liu

Shanghai Tax & Business Advisory

Partner

Tel: +86 21 2228 2801


David Wu

Shanghai Tax & Business Advisory

Director

Tel: +86 21 2228 2823


Advisory

Philip Rodd

Greater China Advisory

Partner

Tel: : +852 2846 9028


Jerry Wu

Shanghai Advisory

Senior Manager

Tel: +86 21 2228 3965


18

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