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Export Council of Australia | 1

The voice for Australian exporters

The China (Shanghai) Pilot Free Trade Zone and Australia

Summary Report

2 | The China (Shanghai) Pilot Free-Trade Zone and Australia - Summary Report

If it aligns with your China objectives, the time is now to engage

If it makes sense for your business, the time is now to engage with China through the SFTZ. The Zone’s three-year trial period expires in late 2016 and what happens next is an open question.

What is certain is that Australian goods and services exporters have the opportunity now to take advantage of the most liberal policies China has ever offered in a number of areas.

This report highlights the main areas of benefit in the SFTZ, to help Australian goods and service exporters better understand it and decide if this is right for them.

A mobile app accompanies this report, providing an easily accessible synthesised version of the most pertinent content.

We also plan to deliver an online course on the SFTZ through the Australian Institute of Export (AIEx).

We hope you find this report enlightening, and that you consider the SFTZ alongside your China strategy.

In closing, I would like to thank our sponsors Asialink Business, Austrade and the Australia-China Council for their support, and in particular our Head Research Manager Niels Strazdins, who undertook such an ambitious study into what is still a somewhat unknown environment.

Lisa McAuley CEO, Export Council of Australia

The China (Shanghai) Pilot Free Trade Zone (SFTZ) is one of the most ambitious economic and financial reform initiatives China has undertaken in a long time.

It opens new opportunities for Australian goods and service exporters, as well as expands existing engagement options.

It is also little understood. The Export Council of Australia (ECA) encourages Australian businesses to actively research opportunity in the SFTZ, and The Shanghai Free Trade Zone and Australia report provides a unique tool to facilitate understanding of the Zone and what it offers for your business.

The report provides insight into the SFTZ, the reforms it introduces and how these benefit particular industries. It also briefly explores the new Shanghai-style FTZs launched in 2015 in Fujian, Guangdong and Tianjin, as well as how all this impacts Hong Kong as a gateway to the China market.

The SFTZ will not make sense for everyone, but understanding it provides a barometer for the China of tomorrow

The SFTZ is different from the preferential zones that have come before in China. The initiative reflects the needs of a modern China as the country shifts to a new economic model to underpin growth for the decades to come.

The SFTZ will not make sense for all Australian businesses, though at least understanding it will provide hints at what the China of tomorrow may look like. The SFTZ is a pilot area after all, where new and potentially risky liberalisation initiatives can be tested and then expanded nation-wide if proven successful.

We have already seen national adoption of some reforms and policies that were first trialled in the SFTZ, and more are surely to follow.

Operating in the SFTZ, or at least understanding it, will provide your business with broader insight into doing business in China as well as a potential leg-up on your competitors.

THE SHANGHAI FREE TRADE ZONE AND AUSTRALIA


WhatThe SFTZ is one of the most ambitious economic and financial reform initiatives China has undertaken in a long time. It is a pilot zone – a test bed – where new, more liberal economic and financial procedures and reforms can be trialled before being rolled-out on a wider scale.

WhyThe SFTZ introduces reforms to a number of economic and financial policies and procedures that China needs to undertake as it restructures its economy under a new consumption-based growth model, reforms state-owned enterprises, and loosens restrictions on finance and other areas.

These reforms are risky and potentially destabilising to the economy, so testing them in a limited area like the SFTZ allows for trial and error and subsequent national adoption of only the most successful initiatives.

They are based on greater financial openness, fewer government controls on business activities and trade facilitation measures that are meant to simplify doing business in China.

HowThe SFTZ is a trial area, with reforms made legally possible by a three-year suspension of specific regulations in target areas from September 2013.

What happens after this temporary suspension lapses in September 2016 is an open question. Perhaps the SFTZ and the other new SFTZ-style zones may live on with unique policies in place within their defined areas, or perhaps the rest of China may start to look more like these areas.

There have been no “big bang” reform measures in the areas most desired by Western observers, however. Full interest rate liberalisation is not there yet, barriers to China’s capital market still exist and the negative list of sectors for foreign investment – while slimmer than its initial version – is still too long for some.

Such are the realities of a very complex reform process in China however, and should be appreciated as such.

SNAPSHOTWhat are we looking at


SNAPSHOTLocation

Waigaoqiao Free Trade Zone and Bonded Logistics Park A well-established free trade zone, the first in China, and home to 6,000 foreign trade firms and 60 large multinationals.

Pudong Airport Comprehensive Free Trade ZoneAn area just west of Shanghai Pudong International Airport, the third largest airport in China.

Yangshan Free Trade Port Area A deep-water port and major component of Shanghai Port, and the first port in China to offer similar policies to free trade zones.

Lujiazui Finance and Trade Development Zone A financial services hub, Shanghai’s CBD and the economic heart of Mainland China.

Jinqiao Economic and Technological Development Zone An advanced manufacturing and manufacturer services area.

Zhangjiang High-tech Industrial Development Zone

An area specialising in high-tech manufacturing and medical services.

Yangshan Port

Yangshan Port

Waigaoqiao

SHANGHAILujiazui

Jinqiao

Zhangjiang

Pudong Airport

The SFTZ is comprised of seven areas of Shanghai, four original areas at the time of its launch and three additional areas that were added after an early 2015 expansion:


KEY TAKEAWAYSWhat you should know

“By and large, [the SFTZ]

is a big step forward in

creating the conditions

inside China that are

more conducive to

foreign investors.”Dr Geoff Raby, former Australian Ambassador to China

What is the Shanghai Free Trade Zone?

A 120 square kilometre pilot zone comprising seven areas of Shanghai, China’s commercial heart, the SFTZ is a test-bed for more efficient economic policies and procedures.

It offers a simpler and more open approach to foreign investment than the rest of China, with new sectors and opportunities available to foreign businesses. They also enjoy reduced and simplified operating or investment approval and business registration procedures.

Foreign investors have never faced fewer restrictions on their activities in China than in the SFTZ. While the main benefits are still limited to certain sectors, remaining restrictions are gradually being reduced.

The SFTZ introduces a few firsts in China, such as the adoption of a “negative list” approach to foreign investment. This approach means foreign investment is allowed in all sectors unless specifically restricted or prohibited by being featured on the negative list. This creates new opportunities for foreign firms and brings China more in-line with international standards.

Processes and policies are simpler in a number of areas, particularly in foreign investment approval and registration requirements, leading to cost and time savings.

In short, the SFTZ marks the beginning of a new, more open China. Understanding the policies and procedures in the Zone gives you insight into what the China of tomorrow will look like.

Why this and why now?

The need to reform China’s export-led and investment-heavy growth model is evident, but why undertake such an ambitious initiative as part of this process, and why now?

There is no single answer, according to Dr Geoff Raby, former Australian Ambassador to China, but he notes much of it has to do with China’s internal politics.

The genesis of the SFTZ stemmed from the politics of the Communist Party’s Third Plenum meeting in 2013, where China’s leadership

endorsed a larger role for the free market in the country’s economy.

This is a contentious prospect, and the SFTZ may have been a political compromise between the more conservative elements of the Party and reformers who may have lacked the political weight to push through a larger-scale reform experiment, according to Dr Raby.

The SFTZ model achieves the goal of increasing the free market’s role in the Chinese economy, but does so in a defined trial area, thereby limiting potential risks.

Does the SFTZ offer real value to Australian businesses?

Despite its somewhat opaque development and a lack of clarity in some areas, companies operating in the SFTZ do see value for Australian businesses there.

A number of Australian firms have established operations in the SFTZ, including banks like ANZ and Westpac as well as property firms such as Goodman, and establishing operations there appears to have been a fairly smooth process.

Dr Raby notes the SFTZ is “clearly trying to create a much more conducive environment for foreign investors”, such as with the introduction of the negative list approach to foreign investment and a more open regulatory regime than the rest of the country.


KEY TAKEAWAYSWhat you should know

“Businesses really need to look at these

policy initiatives very much in terms of

their business. There’s no one-size-fits-all.”Dr Geoff Raby, former Australian Ambassador to China

The Shanghai FTZ nowBy its first anniversary in 2014, the SFTZ had attracted around 12,000 new businesses (both foreign and domestic), including over 3,000 financial institutions and 1,400 foreign-invested enterprises to it’s original 29sq km area – more than the total number of businesses that had registered in the SFTZ’s individual constituent zones over the past 20 years.

Of these 16,214 total companies, around 15,000 were located in the Waigaoqiao Free Trade Zone alone – one of the SFTZ’s constituent areas. These 15,000 companies saw increases in their operating statistics across the board to February 2015, including imports (+8.3%), exports (+11.2%), foreign trade volume (+11.5%), total sales (+11.5%) and revenue (+11%).

The SFTZ’s total trade volume (imports plus exports) neared RMB 500 billion (USD 78 billion) during the first eight months of 2014, a 9% year-on-year increase.

During the same period, newly-registered companies increased almost 11-fold year-on-year, which the SFTZ management committee said exceeded expectations.

As of September 2014, an average of 700 new companies were set up each month in the SFTZ. Around a quarter of these were foreign.

RMB 740 billion (USD 119 billion) was earned in the SFTZ during its first year of operation.

TOP 3 ORIGIN REGIONS/ COUNTRIESHONG KONGEUROPEAN UNIONUSA

As of February 2015

16,214 TOTAL COMPANIES 2,754 FOREIGN COMPANIES


The model expands

Three new Shanghai-style FTZs were launched in April 2015, located in the wealthy coastal provinces of Guangdong and Fujian, as well as Tianjin – China’s fourth largest city.

Each of these new zones share many of the same reforms first introduced in the SFTZ, including:

• A negative list approach to foreign investment;

• Simplified registration procedures for foreign-invested enterprises;

• Simplified customs procedures through the “first entering, then declaring” policy;

• Financial sector liberalisation, though with different policy approaches in each Zone.

These new zones are unlikely to be the last as many other cities and areas in China are clamouring for their own. The question, Dr Raby notes, is how far will this go? “Either the government is prepared to open these other places in the same way as Shanghai, or the government holds back Shanghai so its doesn’t get such a leg up compared with the other places”, he says.

Does Shanghai now compete with Hong Kong as a gateway to China?

Hong Kong is the traditional gateway to the Mainland market for Australian and other Western businesses. Is this status challenged by the emergence of a more liberal operating environment in the SFTZ and other new FTZs?

Rather than viewing the two as competitors, a complementary relationship may be a more accurate assessment.

The SFTZ shares a number of characteristics with Hong Kong and will continue to build on these with further movement toward open markets and liberalised investment flows.

In areas such as quality of the legal system, corporate governance and transparency, Hong Kong is more advanced than Shanghai and will likely be so for the foreseeable future. Hong Kong will therefore have a lasting attraction for foreign businesses in China which will be difficult for a Mainland competitor to replicate.

Should you be there?

Should you be there is the central question for Australian business.

Some will see significant advantages to establishing or shifting their China operations into the SFTZ, while others may see no impact on their operations from being there. “It’s like the old cliché, beauty is in the eye of the beholder”, Dr Raby notes, as there is no one-size-fits-all in the SFTZ.

What your risk appetite and what your China play is are essential questions to ask. Are you after an entry point to the Mainland market, a platform for other markets or an easier way to do business with Chinese customers, ‘suppliers or partners?

The SFTZ allows businesses more freedom with their RMB usage, the ability to invest more freely in more areas and an easier ability to move goods into and out of China – while potentially saving money in the process, among other benefits.

If these or other areas detailed in this report apply to your business and your goals in China, the SFTZ deserves a look.

Operating in the SFTZ also puts your business in the front row as change comes to China, providing both familiarity with the country’s reforms and a lead over your competition in taking advantage of new opportunities as they arise.

There is no right time to set up in the SFTZ, but sooner is better than later if your business stands to benefit. The SFTZ is a pilot area – reforms are introduced there first and the most successful policies have been and will continue to be rolled out nationwide. Being in the Zone allows you to evaluate reform first-hand and take advantage of it before your competition does.


KEY TAKEAWAYS What this means for Australian businesses

Faster and simpler business registration

Business registration in the SFTZ is reduced from the lengthy and complex approval process in the rest of China, down to a simple filing and registration procedure – saving you time and money.

Easier and simpler foreign investment process

The SFTZ adopts a “negative list” approach to foreign investment – specifying the sectors and activities where foreign investment is restricted or prohibited, rather than where it is allowed – a first in China.

Easier cross-border movement of goods

Moving goods in and out of China is much freer and simpler in the SFTZ than the rest of China, thanks to streamlined procedures and requirements.

Faster customs clearance

A number of policy reforms make customs clearance easier and faster in the SFTZ, including online declaration, single-window filing procedures and a days-faster declaration and inspection process – including 24-hour processing of overseas cargo at Pudong Airport.

Freer cross-border movement of capital

Businesses can freely transfer foreign capital between their offshore and SFTZ accounts, alleviating one of the biggest problems foreign businesses face in China.

Freer RMB usage

Financial innovation and policy reforms allow Australian businesses to more easily integrate the use of RMB into their overall operations through cross-broder treasury solutions, such as RMB cash pooling and netting abilities. This allow businesses to improve the their capital utilisation efficiency, reduce cross-border transaction costs and more easily deal with intragroup financing and foreign exchange needs.

Easier engagement in e-commerce

Foreign investors are allowed full ownership of e-commerce companies in the SFTZ, eliminating the need for a JV with a Chinese partner. Services from this SFTZ base can then be provided nationwide.

Insight into what the China of tomorrow will look like

The SFTZ is a test-bed for reforms China needs to undertake; being there allows your business to experience this first and potentially give you a leg-up on your competition.


SURVEY FINDINGS Australia in the SFTZ

Are you currently operating in the SFTZ, and if so, for how long?

No66%

Businesses operating <12 mths

= 17%

Businesses operating >12 mths

= 17%

Yes34%

If you are not operating in the SFTZ, why not?

Waiting for further liberalisation

Do not see benefits to my business

Other

Do not understand the rules/regulations

0 20 40 60 80 100

RESPONSES (%) 25% 42% 17% 17%

Has the SFTZ altered future plans for your business in China or the wider region?

Yes No

0 20 40 60 80 100

RESPONSES (%) 20% 80%

10 | The China (Shanghai) Pilot Free-Trade Zone and Australia - SUMMARY REPORT

KEY FINDINGS Things to keep in mind

The SFTZ is different from other preferential areas in China. There is no shortage of preferential zones in China – well over 1,000 in fact – though most are local government initiatives that focus on local development needs or goals. The SFTZ focuses on national priorities and reforms instead.

The SFTZ is ultimately run from the top, allowing for more flexibility in reform offerings. This makes the SFTZ model expandable and replicable, as we are seeing with the new FTZs in Fujian, Guangdong and Tianjin.

First-movers will reap the most advantage, with diminishing returns for new entrants thereafter. There are still opportunities for first mover advantage in certain sectors, but they will not be there indefinitely.

Keeping an eye on developments in the SFTZ offers signals of future policy changes. Even if your business is not active in the Zone, reforms and policies that are trialled and tested there are likely to be expanded nationwide.

Businesses are profiting from their SFTZ operations and there is definitely a market for Australian firms in a number of sectors.

Most success stories are not publicised. A low and quiet profile minimises awareness and decreases the likelihood of competition for businesses that profit from their SFTZ operations.

Opportunities will not always be apparent unless you are active in the SFTZ, especially due to its nature as a pilot area. The fact that many businesses stay quiet on their successes for fear of attracting competition makes it difficult to showcase successful examples to promote more to come.

SFTZ authorities have a receptive attitude toward innovative product or service proposals. The SFTZ is after all an experiment: just because a specific product or service delivery mode isn’t specifically mentioned in regulations doesn’t mean you can’t do it. Approval may be assisted by preparing a sound proposal for local authorities highlighting the clear benefits for China’s future development.

You don’t have to be a large or high-profile business to benefit from being in the SFTZ. Smaller businesses can be nimbler with more flexibility to adjust and take advantage of new opportunity better and faster than larger players.

Keep an eye on costs, they may negate policy advantages. The more attractive the SFTZ becomes to foreign businesses, the more costs rise as demand increases for space, talent and infrastructure. Speculators have already driven prices up as investors seek to cash-in on prospective demand. Some businesses may find it cheaper to operate just outside of Shanghai, despite the policy advantages of being in the SFTZ.

Don’t wait for all risks to be removed or for China to work like a Western country. The SFTZ makes doing business in China easier, but risks will remain and it is still up to Australian businesses to be proactive and not wait until competitors move in to capitalise first.

The SFTZ may not determine your China play, but it can make things easier. Companies need to do a China-wide analysis and determine whether the market makes sense for them, and then determine if the SFTZ or the other new FTZs are an ideal entry point.


0 10 20 30 40 50 60 70

N/A

Very important

Somewhat important

Not important

Widened access to the Mainland market for foreign service providers

Simplified customs declaration and

quarantine procedure

Simplified approval procedures for

inward investment

Separate disputeresolution mechanism

Relaxed restrictionson foreign ownership

Looser restrictions oncross-border cargo flows

Increased financingand investment

scope for individuals

Increased financingand investment scope

for enterprises

Enhanced cross-borderfinance, investment and

funds transfer

Eased restrictions onRMB convertibility

Cross-border cashpooling/netting

How important are the following preferential policies in the SFTZ to your business (whether or not you operate in the Zone)?

SURVEY FINDINGS Australia in the SFTZ


ON THE FRONTLINEWhat people are saying

“The SFTZ is a very smart way for China

to approach its reform requirements.

Try something [in a defined area],

then if it work, try it elsewhere. This is

replication and learning-by-doing.

There is no big bang.”

Western official in China

“The SFTZ becoming more and more

popular among foreign businesses is

what we expected, but we have also

become popular among domestic

businesses. This was not as expected.”

Local Chinese official

“There is a realisation of the need to

move on from the old development zone

model in China, and they want the SFTZ

to experiment with that. The model has

been so good for so long that there is

now overcapacity [in the number of

zones], so things have to change.”

Hong Kong researcher

“If you are coming to China anyway, then

why not set up in the SFTZ. You have

[financial centre] Lujiazui, [advancing

manufacturing centre] Jingqiao and

bonded warehouses. There are a variety

of choices in the SFTZ, the question is

where do you want to set up?”

Australian financial institution

“From our perspective, the [reforms

introduced] are very important and

attractive, especially since this reform

and opening-up can be replicated

country-wide.”


“Australian companies should be here.

They should be proactive instead

of waiting for this to be more like a

Western system, by then it will be too

late. This can be risky and a lot can

change, but China is changing. If you’re

the first in, you’re the first to benefit.”

Australian official in China

“China is always like this. It doesn’t start

with a firm concrete idea, instead it’s a

step-by-step process and it takes time to

decide on procedures and consider their

impact in other areas.”

Australian official in China

“For new businesses wanting to come to

China, the SFTZ is a good place to start.

I see a number of benefits, apart from

lower barriers to entry. You can access all

the infrastructure Shanghai already has,

the talent pool and commercial networks

Shanghai already has. Combined with

additional financing benefits in the

SFTZ, this is a big step forward in terms

of improving the general business

environment.”



The 118 sq km Fujian FTZ covers portions of three coastal cities in Fujian province: Xiamen (urban population 1.8 million, 44 sq km), Fuzhou (urban population 4.4 million, 31 sq km) and Pingtan (population 400,000, 43 sq km).

The Fujian FTZ is aimed at facilitating economic ties and cooperation with neighbouring Taiwan, capitalising on existing linkages between Taiwan and Fujian. Aside from the polices and procedures common across all the new zones, some unique ones in the Fujian zone include:

Three new FTZs were launched in April 2015, based on the SFTZ model. These are similar to the Shanghai zone in some respects, but also feature policies and procedures unique to each zone.

Fujian FTZ: Xiamen

Quanzhou

Fujian FTZ: Pingtan

ShantouJieyang

ZhangzhouMeizhou

Longyan

Sanming

Nanping Ningde

Fuijan FTZ: Fuzhou

TAIWAN

FUJIAN FTZ

Business incorporation

First FTZ to implement a “one-form application” system for business registration, whereby an application form is completed online and then a business license can be picked-up in the zone.

Cross-straight trade liberalisation

Taiwanese and Taiwanese-invested firms enjoy special benefits in various sectors, including travel agencies, construction firms, online data processing and more.

Customs Simplified customs and quarantine procedures for goods produced in and imported from Taiwan apply, including exemption from pre-entry customs inspection, as well as simplified import approval procedures for certain Taiwanese products.

Financial sector Businesses and banks can borrow foreign currency and RMB from overseas, and convert borrowed foreign currency into RMB.

Eligible financial institutions may transfer RMB assets and sell RMB wealth management products overseas.

FREE TRADE ZONESThe Shanghai model expands


The 116 sq km Guangdong FTZ spans portions of three cities along the Pearl River Delta – Guangzhou (Nansha New Area and Nansha bonded port), Shenzhen (Qianhai Development Zone) and Zhuhai (Hengqin New Area).

Financial linkages between Guangdong, Hong Kong and Macau are a key feature of the Guangdong FTZ. Aside from the polices and procedures common across all the new zones, some unique ones in the Guangdong zone include:

Zhongshan

Foshan

Guangzhou

Dongguan

Guangdong FTZ: Shenzhen

Guangdong FTZ: Nansha

Guangdong FTZ: Zhuhai

HONG KONG

MACAU

GUANGDONG FTZ

Cross-border services

Restrictions on cross-border service provision between Guangdong, Hong Kong and Macau are lifted in a number of areas, including international shipping, travel agencies and medical services.

Shipping Wholly-owned foreign international shipping management companies are allowed, and the foreign investment cap in international shipping agencies is raised to 51%.

Financial services Financial institutions and enterprises can borrow RMB from overseas lenders.

Hong Kong and Macau parent companies with subsidiaries in the FTZ can issue RMB-denominated bonds on the Mainland.

Non-banking financial institutions can conduct cross-border RMB settlement.

Eligible foreign financial institutions can establish foreign-owned banks, while Qualified Foreign Financial Institutions can set up banking JVs with Chinese enterprises within the FTZ.

Eligible insurance companies and insurance intermediary institutions can conduct offshore foreign currency activities.

Eligible Hong Kong and Macau investors operating non-financial institutions can provide third-party payment services.

FREE TRADE ZONES


FREE TRADE ZONES

The Tianjin FTZ is the largest of the three new zones at nearly 120 sq km. It encompasses three areas of the city: the Binhai New Area along the Bohai Sea coast (47 sq km), Tianjin Binhai International Airport Area (43 sq km) and the Tianjin Port Area (30 sq km).

Geographically, the Zone is a convenient conduit between northern China’s heavy industry and the wider region. Aside from the polices and procedures common across all the new zones, some unique ones in the Tianjin zone include:

NORTHKOREA

SOUTH KOREA

INNERMONGOLIA

LIAONING

SHANDONG

HEBEI

Tianjin FTZ

Beijing

TIANJIN FTZ

IP management North China Intellectual Property Rights Operations Centre to be established, introducing new practices for risk management, insurance and other IP-related services.

Financial services Foreign investors may directly convert RMB to and from foreign currency on the capital account, with increased lending amounts.

Qualified non-governmental parties allowed to establish small and medium-sized banks and other financial institutions; foreign investors may open wholly-owned or Sino-foreign JV banks.

Financial leasing Financial leasing companies are encouraged to set up professional subsidiaries in the Tianjin FTZ, and are allowed to conduct commercial factoring activities relevant to their main business in the Zone.

Customs inspection on purchased and imported aircraft, ships, naval engineering and other equipment can be conducted outside the FTZ for firms operating in the Zone.

Shipping Domestic cabotage is allowed, permitting containers to be shipped from Tianjin along the Chinese coast to other Chinese ports.

Wholly-foreign owned international shipping management companies are allowed, and foreign investment ratio caps in other areas relaxed.


General points:

• Minimum registered capital requirements are abolished across the board

• Capital registration system relaxed, allowing shareholders to determine the

form, amount and period of capital contribution at their own discretion

• One-stop application processing reduces and simplifies business registration

– can be completed in four days

• Filing and approval system eliminated in favour of an annual return filed with

the State Administration for Industry and Commerce

Establishing a business in the SFTZ: One-stop application processing

Source: China Briefing

Issuance of certificates

Company registration, enterprise code registration, tax registration

Obtain approval from the administrative committee of the

Shanghai FTZ

Not on Negative List On Negative List

Log on to the one-stop acceptance platform website

Check business scope against the negative list

Fill in online application form

Submit application materials at the service counter in the Shanghai FTZ’s General Service Hall

THE SHANGHAI FTZKey features




Establishing a business in the SFTZ: Procedures flow-chart

Step Time Frame

Obtain proper leasing contract Depends on client

ê ê

Name registration with AIC 3-5 working days

ê ê

One-stop application processing 4 working days

ê ê

Issuance of record certificate, business licence, enterprise code certificate and tax registration certificate

1 working day

ê ê

Apply for company chop 1 working day

ê ê

Foreign exchange registration 1 working day

ê ê

Open RMB bank account and capital account 5-10 working days

ê ê

Capital injection Depends on client

ê ê

Capital verification report (optional) 9 working days

ê ê

Foreign trade operator registration 5 working days

ê ê

Customs registration 10 working days

ê ê

Commodity inspection registration 1 working day

ê ê

E-port registration 10 working days

ê ê

Financial registration 1-4 working day(s)

ê ê

Statistics registration 1-4 working day(s)

Source: China Briefing

“The SFTZ is absolutely a positive measure. Reforms are

very important for the Chinese economy. High growth

will not continue without reform, especially as there are

still a lot of limitations on foreign companies [in China].”

Shanghai academic


SIGNIFICANCE OF THE ‘NEGATIVE LIST’

• The “negative list” for foreign investment is one of the highlight features of the SFTZ

• It means investment in all sectors is allowed in the Zone except for in those specified on the negative list

• In sectors not on the negative list, the SFTZ replaces a requirement for prior government examination and approval of foreign-invested projects with a filing approach – essentially paperwork and registration formalities

• Foreign investors are treated equal to domestic investors in these unrestricted sectors

• This is typical of foreign investment procedures in most countries, but is the first time such a system has been introduced in China

• This approach to foreign investment has since been adopted in the three new FTZs in Fujian, Guangdong and Tianjin as well, and is likely to eventually be adopted nationwide

• For now, it replaces the “positive list” approach applicable in the rest of China, whereby foreign investment is allowed only in prescribed sectors as per China’s “Guidance Catalogue for Foreign Investment”

• The Catalogue contains lists of industries where foreign investment is either encouraged, restricted or prohibited. What this means is preferential policies may apply to investment in encouraged sectors, pre-approval is required in restricted sectors (and foreign equity caps may apply) and prohibited sectors are closed to foreign investment altogether



INBOUND INVESTMENT

Where foreign investment is still restricted or prohibited

The following sectors are some that remain prohibited or restricted to foreign investment in the SFTZ, as per the negative list:

Agriculture

• Crop seeds, animal husbandry, certain research, fishing and genetic modification is restricted or prohibited

IT and telecommunications

• Basic telecom services are limited to minority foreign shareholdings; value-added telecom services limited to 50% foreign shareholding

• Operating news websites and other online services such as mapping is highly restricted

Manufacturing

• Most motorised vehicle manufacturing is restricted; aircraft, ship and rail transport equipment manufacturing requires Chinese controlling interest, and are subject to other restrictions in some cases

Mining and exploration

• Prospecting and exploration requires government approval; oil and gas exploration and development is allowed only in contractual/equity JVs

• Mining for rare earths, radioactive materials and certain minerals is restricted or prohibited

Utilities and infrastructure

• Mostly restricted, including airports, railroads, power grids and utilities

“For new businesses wanting to come to China, the SFTZ is a good place to start. I see a number of benefits, apart from lower barriers to entry. You can access all the infrastructure Shanghai already has, the talent pool and commercial networks Shanghai already has. Combined with additional financing benefits in the SFTZ, this is a big step forward in terms of improving the general business environment.”Australian financial institution



INBOUND INVESTMENT continued

Where foreign investment is still restricted or prohibited

Finance

• Investors in financial institutions must be in the same field as the intended investment – ie, investors in currency brokerages must be currency brokers themselves

• Equity restrictions apply for non-bank financial institutions, with foreign investors are limited to a 49% stake in securities companies and fund management firms, 50% in life insurance companies and 25% in insurance asset management companies

Professional services

• Accounting: The main partner must be a Chinese national

• Legal: Foreign law firms may only establish representative offices on the Mainland, who in turn may not hire Chinese legal professionals; foreign nationals may not advise on Chinese law, nor become partners at a Chinese firm

Education

• Foreign investment in education institutions is allowed with a Chinese partner, so long as they are not related to military, political or religious education; regular high schools and tertiary institutions must be led by a Chinese party – ie the main administrator must be a Chinese national, and Chinese nationals must comprise a majority of their boards

Healthcare

• Medical institutions may be set up as equity or contractual JVs

Media, culture and entertainment

• Foreign investment is prohibited in most areas, including TV and radio production, establishing and operating broadcast stations, establishing news and press agencies and producing newspapers, books and other

OUTBOUND INVESTMENT

The SFTZ offers the following benefits for outbound investment

Streamlined approval

• Simplified record-filing system for outbound investment

• A single submission to banks can simultaneously cover formalities for foreign exchange registration, account opening and funds remittance

Flexible fund flows

• Special accounts can be used to remit funds out of China at rates closer to those on the international market for the purposes of investment and M&A activities

Alternative financing

• SFTZ businesses are permitted to borrow RMB offshore, so long as the funds are used for projects in the SFTZ or overseas only

External guarantees

• SFTZ businesses may provide external guarantees without prior approval

Domestic investment abroad by Chinese

• New provisions for direct investment overseas by Chinese nationals through the Qualified Domestic Institutional Investment 2 scheme (QDII2) apply

• QDII2 allows Chinese greater freedom to invest abroad, either in financial assets like stocks and bonds, or in physical assets like real estate


BANKING AND FINANCE

Moving money in and out of China is often one of the biggest challenges facing foreign businesses in the country. Reforms undertaken in the SFTZ are aimed at partially alleviating these difficulties.

Free Trade Accounts (FTAs)

• FTAs function as typical bank accounts but allow holders to freely transfer funds overseas, or between FTAs

• Fund transfer between FTAs and a business’ own bank accounts elsewhere in China is allowed for current account transactions

• Outside the SFTZ, a USD 50,000 cap on cross-border fund transfers applies

Independent accounting system

• Banks are required to establish an independent accounting system for their SFTZ branches

Deposit rates

• The cap on foreign-currency deposits under USD 3 million is lifted in the SFTZ

• This was expanded to all of Shanghai in 2014, but only for companies – unlike in the SFTZ, where the cap is lifted for both companies and individuals

Cross-border RMB cash pooling and netting

• Cross-border RMB cash-pooling is permitted, allowing for freer movement of working capital into and out of the SFTZ without having to apply for a foreign debt quota

• Cross-border payment netting is allowed, aimed at reducing transaction costs and increasing efficiencies

Capital account

• Offshore RMB or foreign currency financing can be raised without prior approval

• Borrowers can raise up to two times their capital base, twice the previous limit

TAXATION

The SFTZ offers a few targeted incentives on individual and corporate income tax, value-added tax, customs duties and export tax.

• Corporate income taxes related to non-cash assets used as investments in asset restructuring transactions can be paid in installments

• Individual income taxes related to stock options for certain individuals can be paid in installments

• Import-level VAT is applied to special cases in the aircraft and manufacturing spaces

• Customs duty exemptions may apply for machinery and equipment imported by manufacturing enterprises in the SFTZ

• Export taxes may be refundable under a pilot scheme

DISPUTE RESOLUTION

A separate set of Arbitration Rules applies in the SFTZ than in the rest of China, published by the Shanghai International Arbitration Centre.

• Arbitration hearings are conducted by a a separate body, the China (Shanghai) Pilot Free Trade Zone SFTZ Court of Arbitration

• Non-SFTZ-related cases can be arbitrated according to SFTZ rules

• Rules introduce a number of reforms, including the ability to use outside arbitrators as well as efficient review provisions

COMMODITIES TRADING

Eight international trading platforms for commodities are to be set up in the SFTZ, establishing Shanghai as a global commodities trading centre.

• Shanghai Gold Exchange has been established, allowing foreign investors to participate in China’s physical gold market, the world’s largest

• Foreign investors may use RMB to trade in precious metals and use physical gold services in the SFTZ


LEGAL SERVICES

• Foreign and Chinese law firms can enter secondment agreements to provide advice on foreign and Chinese law, respectively, at each other’s firms

• Commercial associations between foreign and Chinese law firms are allowed on a contractual basis, though only the Chinese party can provide Chinese legal advice



OTHER SERVICES

Construction, design and engineering

• Australian firms may undertake joint construction projects with Chinese counterparts in Shanghai, as per ChAFTA provisions

Credit investigation

• Foreign investors may establish credit investigation firms

Education

• Foreign investors are allowed to establish profit-making educational and occupational training institutions through Sino-foreign cooperative JVs

Gaming and recreation equipment

• Foreign-invested enterprises may engage in the production and sale of gaming and recreation equipment which may then be launched in the domestic market, subject to passing content examinations

Marine insurance

• Marine insurance and reinsurance firms can set up SFTZ branches without prior approval and without placing senior executives in-branch

Medical services

• Foreign investors are permitted to establish wholly-foreign owned medical institutions in the SFTZ

Talent agent services

• Sino-foreign JV talent agencies are allowed in the SFTZ, with a 70% cap on foreign equity and a lowered minimum registered capital requirement of USD 125,000

Travel agents

• Qualified Sino-foreign JV travel agencies for outbound tourism services are allowed, except to Taiwan

SHIPPING, LOGISTICS AND CUSTOMS

Shipping, logistics and customs are areas where the benefits of the SFTZ are especially apparent, as the reforms and policies in this space potentially impact all firms who move goods into or out of China.

Ship transport

• Import tariff exemptions apply at Yangshan Port so long as goods remain in the SFTZ

• Foreign ownership of vessel management firms is permitted

• An international ship registration system is established and a controlled share of foreign investment is allowed in registered entities

• “Age of vessel” standards are relaxed and crew members may be approved via a filing system

• A dual port of registry system is allowed, based on duty status of ships

Transhipment

• Foreign-registered vessels are allowed to carry containers between Shanghai and other Chinese ports, so long as ships are Chinese-owned; previous requirement was Chinese-owned and Chinese-flagged

Customs

• Customs formalities can be delayed for up to 14 days from when goods first enter the SFTZ

• Overseas shipments can be delivered with a shipping bill only, rather than a formal customs declaration

• Paperless declarations can be made online

• Importers may decide on the timing of customs declaration and inspection before goods are transferred out of the SFTZ

• Goods do not have to be transferred out of the SFTZ within six months, as in other bonded areas in China

• China Inspection and Quarantine only monitors whether goods are bonded or not, and different status goods can be stored together


EXPORT COUNCIL OF AUSTRALIAThe Export Council of Australia is the peak industry body for the Australian export community. Owned by its members and steered by a Board and Council of Industry specialists, the ECA is a not-for-profit organisation that has the development of Australia’s resources via the promotion of Australian industry in international markets as its primary goal.

THINK GLOBAL TRADE: THINK ECA.

ABOUT US

The Australia-China Council was established by the Australian Government in 1978 to promote mutual understanding and foster people-to-people relations between Australia and China. The function of the Council is to make recommendations to the Australian Government through the Minister for Foreign Affairs on strengthening the Australia- China relationship in ways that support Australia’s foreign and trade policy interests.

Asialink Business is the National Centre for Asia Capability and supports Australian businesses to build the critical skills, knowledge and networks needed to better understand and engage with Asia. Asialink Business provides high calibre solutions for Australian businesses to build the Asia capability of their staff, including through capability development and training, practical research and events and networking opportunities. Asialink Business is part of Asialink, harnessing over 25 years of expertise in shaping public understanding and creating partnerships Asia-wide.

SUPPORTED BY

The Australian Trade Commission (Austrade) contributes to Australia’s economic prosperity by helping Australian businesses, education institutions, tourism operators, governments and citizens as they develop international markets, win productive foreign direct investment, promote international education, strengthen Australia’s tourism industry and seek consular and passport services.

For further details on the topics discussed in this summary report, the full report is available from the ECA’s website at www.export.org.au.

This report is also available as a mobile app for both iOS and Android devices through the Apple Store and Google Play.

Researchers

Niels Strazdins, Head Research Manager, Export Council of Australia

Dr Yue Wang, Associate Professor, Macquarie University

Editor and Product Development

Collins Rex, Head of Product Development, Export Council of Australia

Published by

Export Council of Australia Level 2, 22 Pitt Street Sydney NSW 2000

[email protected] www.export.org.au

Disclaimer

The information contained in this report reflects the interpretation of publicly-available information, or information supplied by contacts in Australia and China, on the China (Shanghai) Pilot Free Trade Zone as interpreted by the Export Council of Australia (ECA). All due care has been taken to ensure that the publication is free from errors or omissions. At the time of going to the press the publishers believe that all information submitted for publication was correct and accurate. However, the ECA does not guarantee or warrant the accuracy, reliability, completeness or currency of the information in this publication nor its usefulness in achieving any purpose. Readers are responsible for assessing the relevance and accuracy of the content of this publication. No responsibility whatsoever can be accepted by the publishers, editor, researchers or any other person or company involved in the preparation of this publication for accuracy or usefulness of any information contained therein. Any consequential loss or damage suffered as a result of reliance on this information is the sole responsibility of the user. No warranty, express or implied, is given and no legal responsibility is assumed by the ECA, its servants or contractors.

All rights reserved © 2015

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