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China – Getting In The Zone.

29 January, 2014

 

Legal News & Analysis – Asia Pacific – China – International Trade

 

Thirty years after China began a process of economic reform with the introduction of special economic zones, it is launching a new ground breaking economic experiment. Inside a new type of free trade zone it is attempting to test run an opening up of its financial system, easing restrictions in foreign and private investment, loosening controls on its currency and permitting markets to set interest rates. The plan is that if this experiment in financial reform succeeds, then it will be replicated in other parts of China. At the official launch of the trial zone 36 Chinese and foreign companies were granted licences to register. In the two months since then around 700 companies have registered.

 

Economic Ambitions


While China continues to attract inward investment, with foreign business looking to capitalise on growth in the Chinese consumer market, it has always been a challenge dealing with the country’s red tape and bureaucracy. The new leadership in China is seeking to overcome these difficulties by easing economic restrictions in a pilot free trade zone in Shanghai. This is an ambitious project to cut red tape for foreign companies, as the government aims to re-position Shanghai as an international financial centre. At its official launch, Commerce Minister Gao Hucheng said “The establishment of the Shanghai free-trade zone is a significant move for China to conform to new trends in the global economy and trade”.

 

Currency Conversion 


The new free trade zone covers 29 square kilometres (11 square miles) and combines four existing bonded zones in Waigaoqiao and Yangshan ports and the Pudong airport. While foreign exchange convertibility remains under tight control in China, the new free trade zone will be given special treatment, with full convertibility of the Renminbi. In particular, foreign exchange connected with capital account (investment inflows and outflows) will be relaxed, which until now has been tightly regulated compared with monies flowing into and out of China for trading purposes. This signals a bold move for China, which has always been wary about foreign exchange speculations on the Renminbi.

 

Encouraged Sectors 


At this stage, detailed rules and regulations are yet to be published, but the broad brush governmental blueprint emphasises that the goals are, among others, to ease restrictions on foreign investments, open up the services sector and improve the taxation system.

The China Banking Regulatory Commission said it would encourage banks in the zone to carry out cross-border financing services. The China Securities Regulatory Commission also announced fresh policies for the zone, saying it would allow the establishment of an international oil futures trading platform to facilitate foreign participation in domestic commodities futures trading.

A list of encouraged service sectors has been published. These are highlighted in the table below.

 

Negative List Approach


Rather than listing areas where investment is allowed, the Shanghai government has published a “negative list” of sectors still subject to restrictions on foreign investment. If a sector is not on the list, then foreign companies can invest, just needing to register their project rather than having to seek Chinese government approval for it. What is the significance of being on the encouraged list, with this “permissible-if-not-on-the-negative-list” approach? While details are not yet confirmed, it is possible that companies in the encouraged sectors may enjoy special tax and fiscal incentives.

 

Looking Forward To The Details

 

Although this would appear to signal a renewed commitment to economic reform in China, a more detailed outline of how the zone will operate in practice is yet to be published. Questions remain as to how financial activity and flows will be controlled, how the zone will interact with other parts of China and the expected timescales for any roll out of the reforms across the rest of the country. It is a bold and encouraging experiment for China and a combination of governmental support and private sector initiatives should help propel further growth in the China market.


Encouraged Sectors

 

1.Financial Services

 

  • Banking services
  • Financial leasing
  • Specialised health and medical insurance

 

2. Shipping services

 

  • Ocean cargo transportation
  • International ship management

 

3. Commerce and trade services

 

  • Value-added telecommunications
  • Entertainment and gaming consoles sales and services

 

4. Professional services

 

  • Legal services
  • Travel agencies
  • Investment management
  • Construction services
  • Credit investigation

 

5. Cultural services

 

  • Performance agencies
  • Entertainment venues

 

6. Social services

 

  • Education and training, vocational skills training
  • Medical services

 

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For further information, please contact:

 

Chunfai (CF) Lui, Partner, Stephenson Harwood

cf.lui@shlegal.com

 

Homegrown International Trade Law Firms in China

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