China's first free trade zone (FTZ) was launched in Shanghai in 2013 as part of the city's plans to transform itself into a global financial center. The Shanghai FTZ was seen as an important breakthrough to promote wider and deeper economic development and financial reforms in China. Since then, three more FTZs have been established in Fujian, Guangdong and Tianjin. Ultimately, the FTZs seek to maintain or accelerate growth through liberalized capital transactions and expedited trade and customs clearance.
FTZs are large geographical areas allowing specific industries to register businesses within their boundaries and thus enjoy the unilateral policy advantages from the government. The FTZs have also proved to be useful testing grounds for future economic reforms, particularly in China's move towards a floating currency. China aims to open seven more FTZs in the near future as a part of its endeavors to encourage investment in the less developed central and western regions. These may present investment opportunities for entrepreneurs looking to enter the market in these regions. China's first cross-border e-commerce comprehensive pilot zone was piloted in Hangzhou in 2015, and the new reforms also aim to establish another 13 e-commerce zones in areas along the country's more developed eastern seaboard.
FTZs have five main points of difference for companies looking to invest in these areas:
Regulations and legislation
Wholly-Owned Foreign Entities (WOFE) as well as cooperative and equity joint ventures between foreign investors and local Chinese partners have China's State Council dispensation, which brings approval and registration requirements more in line with international norms. These are discussed in more detail below.
Customs and trade
China allows decontrolled entry of goods into and freedom of movement within these FTZs. This is a major advantage for companies specializing in assembly, or finishing works on products. Movement of goods outside of the FTZs into the domestic market is, however, subject to the standard import regulations.
FTZs allow duty-free import for capital assets for self-use. Furthermore, the FTZs in Guangdong and Fujian provinces offer a reduced corporate income tax of only 15 percent while the Shanghai FTZ allows corporation tax to be paid by instalments over a five-year period, under certain circumstances.
FTZs offer domestic and foreign currency free trade accounts. Cross-border exchanges that are directly related to domestic investment can be processed directly by banks. This represented the first major step towards liberalization of RMB capital accounts.
When registering a company with foreign interests in China, approval for the scope of operations and the business' objectives would first need to be obtained from the Chinese Government. FTZ authorities hold a negative list of the types of investments that would still require normal approval. However, all investment projects that are not on this list enjoy exemption from this approval process.
FTZ-Belt and Road link
On a practical note, while these advantages exist, it does not necessarily mean that registering in an FTZ is the optimal solution for all potential foreign investors. FTZs are typically on the city outskirts. It would thus be suitable that the majority of the entity's primary operations are to be based within the FTZ. Furthermore, due to the fact that FTZs are usually attractive to finishing goods and products in the manufacturing process, most sites available are large and industrial by nature. This requires higher rent and initial investment. It would be advisable to consult with an industry expert on whether one's planned investment and business scope would enjoy the competitive advantages that FTZs offer.
The continued development and promotion of FTZs is expected to foster the Belt and Road Initiative. This is underscored by the next batch of FTZs being focused in the country's interior. In early 2017, Chinese President Xi Jinping also urged Shanghai to turn its FTZ into a bridgehead for the initiative and thus assist domestic companies to go global.
Jon Newton is a Shanghai-based entrepreneur, China start up specialist, keynote speaker and Adjunct Professor of Chinese business. He can be contacted at email@example.com or on LinkedIn at: www.linkedin.com/in/jonnewton/