Shanghai Free Trade Zone to include significant foreign investment liberalisation.
On 26th September, a European Chamber delegation led by Vice President and Shanghai Board Chairman, Stefan Sack, met with the Chairman of the Shanghai Commission of Commerce (SCOFCOM), Ms Shang Yuying. During the meeting, the European Chamber learnt much valuable information about intended liberalisations to be piloted in the Shanghai Free Trade Zone, which will be officially inaugurated on Sunday 29th September.
Subsequent to the European Chamber’s meeting with SCOFCOM, the State Council officially published the official plan for the Shanghai Free Zone. The Chamber has developed a basic unofficial English translation of the State Council announcement which is available to download free of charge for Chamber members.
The Shanghai Free Trade Zone will be more ambitious than China’s other free trade zones and will be used as a testing ground for significant reforms including:
- The abolition of the Foreign Investment Catalogue and replacement with a negative list;
- Significant steps towards financial liberalisation;
- Eventual expansion to other areas.
1. The abolition of the Foreign Investment Catalogue: the introduction of a negative list
The Foreign Investment Catalogue will not be applied within the Shanghai Free Trade Zone. Instead, it will be replaced with a negative list of sectors in which companies wanting to undertake activities would still require approval. Investments into any sectors not included in the negative list will not be subject to an approval process and will instead only require a filing process.
Although initially quite long, the list will be reduced in length over time in line with a gradual liberalisation of the tertiary sector.
Further opening of service sectors: the European Chamber is aware that 23 previously restricted tertiary sectors will not be included in the negative list and foreign investments into these sectors will therefore only be subject to filing. Sectors for which investment will only require a simple filing process include:
- Value-added telecoms operations
- Construction (Chinese project portfolios will not be required)
- Private equity
- Healthcare insurance
- Gaming industries
- Asset management
- Law firms
- Financial leasing
- Joint education institutes
The European Chamber has been asked to give input on which industries should be removed from the negative list. All regulations and processes must be completed within a year and SCOFCOM regards the zone as a trial for which failure is not an option.
The European Chamber has long called for the abolition of the Foreign Investment Catalogue. Its replacement with a negative list in the Shanghai Free Trade Zone is therefore a positive step forwards towards creating a level playing field between domestically- and foreign-invested enterprises and could represent a potential breakthrough in China’s future management of foreign investment.
2. Financial liberalisation: a new financial hub
A number of steps towards financial services liberalisation will be piloted in the zone, including renminbi convertibility, capital account opening, deposit interest rate liberalisation, the permittance of individual cross border transactions, free flow of currencies and foreign exchange settlement and reinsurance.
3. Eventual expansion to other areas: a precursor to reforms
It was confirmed that the central government hopes that the experiences of the Shanghai Free Trade Zone will be scalable and replicable for free trade zones in other cities and that the primary rationale of the zone is to act as an area to spearhead reforms that will gradually be applied to the whole country.
The European Chamber understands that Pudong will likely be incorporated into the zone within a few years and other cities that are currently bidding for similar free trade zones will likely also soon be approved.
The free trade zone is still in large part a work in progress and although the full details have yet to be revealed, the zone itself seems to be a first-step victory for those in China who are aware that serious and meaningful economic reforms are urgently required for China to remain on a sustainable growth path.
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