China to establish new Free Trade Zones in Tianjin, Fujian and Guangdong

The countdown to the opening ceremony of three new free trade zones (“FTZs”) in Tianjin, Fujian and Guangdong has started.

Following Shanghai's lead, Tianjin, Fujian and Guangdong were approved to establish new FTZs in each area by the State Council at the end of last year, and are expected to be opened this month. All of the new FTZs are established upon an extended version of the existing bonded zone and new development area, and are all located in the coastal regions of Northern and Southern China.

The Standing Committee of the Twelfth National People’s Congress authorised the State Council to temporarily adjust the application of certain administrative procedures for the examination and approval of foreign investment, required by Chinese laws and regulations for a trial period of three years, within the three new FTZs. As a result, a simpler administrative examination and approval procedure will apply for foreign investors establishing foreign-invested enterprises (“FIEs”) in the new FTZs upon their opening.

Although no detailed policies for investment within the new FTZs have yet been released, it was implied in the State Council’s meeting regarding the approval of the new FTZs that these are likely to follow the model of the Shanghai Free Trade Zone (“SFTZ”), established in 2013, albeit taking the local characteristics into consideration.

1. Geographic Scope of the new FTZs

The Tianjin FTZ includes the areas around Tianjin port and airport, and the Binhai New Area district. The total geographical area covers 119.9 sq.km.

The Guangdong FTZ is 116.2 sq.km. in size and is spread across Nansha Development Zone of Guangzhou, Qianhai New Area of Shenzhen (connected with Hong Kong) and Hengqin New Area of Zhuhai (connected with Macau).

The Fujian FTZ covers a total of 118.04 sq.km., including areas in Pingtan County, Xiamen City and Fuzhou City.

2. Potential Benefits

Although it is not certain that all of the favourable policies released in SFTZ will be adopted by the new FTZs, it is generally expected that they will adopt many of the key policies, including the following:

Simpler procedures for establishing a FIE

Generally speaking, foreign investments made outside the FTZs are subject to prior approval by the competent Authority of Commerce. As the adjustment of the application of laws and regulations on foreign investment has taken effect, foreign investors will not need to procure prior approval from the relevant commercial authorities to establish a FIE within the new FTZs, unless the FIE would relate to a specially regulated industry. The previous approval process has been replaced by a filing/recording procedure.

Following SFTZ’s approach, it is expected that a negative list approach will also be adopted for foreign investments in new FTZs. This negative list specifies industries for which foreign investment is restricted or prohibited. Foreign investments in industries which do not fall within the scope of this negative list do not require prior approval. Rather the establishing of the company can be registered directly with the competent Administration for Industry and Commerce.

Customs check and transportation

It is likely that the new FTZs will make customs check procedures much simpler. The “First Entering and Then Declaring” policy adopted in the SFTZ postpones customs checks from taking place before entering the SFTZ, to after entering it. This reduces the cost of customs clearance in terms of both time and money, even though certain procedures still must be performed. Enterprises may transport goods from abroad into the SFTZ, and then handle the customs declaration formalities for them within 14 days. However, if enterprises move the goods to Chinese territory which exists outside the SFTZ, then customs checks will still be required and customs duties will be levied.

Free Conversion of Foreign Exchange Registered Capital into RMB

In most areas of China the settlement and use of the foreign exchange registered capital of FIEs is strictly regulated by. However, policies in the SFTZ enable FIEs to convert the entirety or a part of its foreign exchange registered capital into RMB, at their discretion, without needing to prove for the conversion how these funds will be used. This assists FIEs in the SFTZ in reducing the fluctuation risk associated with foreign exchange.

In addition, the registration procedures for foreign exchange by FIEs in the SFTZ are also simpler.

This favourable policy has been extended to 16 other regions or areas in China, by a circular issued by the State Administration of Foreign Exchange (“SAFE”) on 15 July 2014.

Equity Investment by Registered Capital

In China, only foreign invested holding companies, foreign invested venture capital enterprises and foreign invested equity investment enterprises are allowed to use their registered capital for equity investment. Other FIEs are not allowed to do so.

The SFTZ’s policies allow all FIEs registered within it to use the RMB converted from their registered capital to make equity investments in China.

Again, this favourable policy has been extended to 16 other regions or areas in China, by the same circular issued by SAFE in July last year.

3. Local Characteristics

In contrast to the SFTZ, which particularly focused on boosting the financial sector, the government aims for each new FTZ to have different features according to its geographic advantage.

The Tianjin FTZ is positioned to develop economic integration of the region encompassing Beijing, Tianjin and Hebei Province. Consequently, it seems likely that shipping and financial leasing will take lead in the Tianjin FTZ.

The Guangdong FTZ may enhance cooperation with regions and countries from contiguous Hong Kong and Macau, through to Southeast Africa and Europe. The focus of Guangdong FTZ will be customs clearance and the finance industry due to its geographic proximity with Hong Kong and Macau.

The Fujian FTZ will obviously be served as a connection point on the cross-strait economy and trade with Taiwan. It is likely that Fujian FTZ will focus on producer services and high-end service sector.

The new FTZs are good news for foreign investors as they can take advantage of relaxed procedures and other favourable policies likely to be in place.

It has been reported that the provinces of Shanxi, Gansu and Hubei have also applied for permits to launch their own FTZs. It remains to be seen whether this is the path to true opportunities in China, or just a passing trend.