On September 27, 2013, the State Council, the government’s top policy-making body, released new rules to govern the Shanghai Pilot Free Trade Zone (the “Zone”). As indicated by the title however, “General Plan for the China (Shanghai) Free Trade Zone” (the “Plan”), most of the detailed rules needed to give practical effect to these changes are still to come.
Encouragement of Foreign Investment and Innovation in the Financial Services Sector
According to the Plan, key programs will be implemented in the Zone to open up the financial services sector. These programs will include trial programs to set market-oriented interest rates and allow RMB convertibility on capital accounts, measures to facilitate cross-border RMB financing, steps to open the financial services industry to qualified private capital and foreign financial institutions, and ways to encourage the establishment of foreign invested banks and joint venture banks and to gradually allow foreign enterprises to participate in commercial derivatives transactions within the Zone. The language in the two paragraphs announcing these programs is conceptual in nature, amounting to a general guidance about future intentions rather than actual rules.
Encouragement of Foreign Investment in the Services Sectors
The announced steps to be taken to facilitate investment by both domestic and foreign firms in 18 service sectors in the Zone are more specific, but these too fall short of operational rule making:
China’s current Catalog for the Guidance of Foreign Invested Enterprises that separates inbound foreign investment into “encouraged,” “allowed,” “restricted” and “prohibited” categories will be replaced with a “negative list” approach in the Zone. Under the negative list approach, the current foreign investment approval procedures will not apply. Instead, if a sector is not listed on the negative list, a foreign company can invest in that sector following a registration process (as is applicable to domestic investments by Chinese entities).
On September 29, 2013, the Shanghai government released implementing rules including:
(i) the “Special Administrative Measures on the Entry of Foreign Investment into China (Shanghai) Free Trade Zone (the “2013 Negative List”) which lists 18 sectors and as many as 1,069 specific business areas where foreign investments are either restricted or prohibited;
(ii) the “Registration Administrative Measures on Foreign Invested Enterprises in China (Shanghai) Free Trade Zone” (the “Administrative Measures on Foreign Invested Enterprises”); and
(iii) the “Registration Administrative Measures on Foreign Investment Projects in China (Shanghai) Free Trade Zone” (the “Administrative Measures on Foreign Investment Projects”).
Under the Administrative Measures on Foreign Invested Enterprises, the Zone’s Administrative Committee is responsible for the registration of foreign invested enterprises in the Zone. A foreign invested enterprise, after obtaining a pre-approved corporate name, then registers through the Administrative Committee’s online system. The Administrative Committee must review and approve the registration within one business day. The Administrative Measures on Foreign Invested Enterprises became effective for three years on October 1, 2013.
Under the Administrative Measures on Foreign Investment Projects, the Administrative Committee is responsible for the registration of foreign investment projects that are not on the negative list. Such foreign investment projects include joint ventures, Sino-foreign cooperatives, wholly-foreign-owned projects, foreign investors’ acquisitions of China domestic enterprises, and new investments by foreign invested enterprises (excluding, however, certain domestic investment projects as specified by the State Council). To register a foreign investment project, an applicant is required to complete a registration form and submit other specified materials to the Administrative Committee. The Administrative Committee must respond within 10 business days after receiving complete application materials. According to Dai Haibo, a deputy director of the Zone Administrative Committee, the new registration procedure could reduce the time it takes to obtain a foreign investment business license from approximately 29 days to as few as 4 days. The Administrative Measures on Foreign Investment Projects became effective on October 1, 2013.
Since the State Council’s goal to make Shanghai an “international finance center” by 2020 was announced in March 2009, it can be argued that both Hong Kong and Shenzhen have outpaced Shanghai in the race to the top. The State Council’s recent decisions to establish the Shanghai Free Trade Zone provide an opportunity to reinvigorate the effort to make Shanghai a truly global financial center. Whether all the detailed rules needed to give effect to the State Council’s announced objectives will flow quickly or slowly remains to be seen, but its most recent steps, most especially its prompt action adopting definitive rules to implement the “negative list” approach for foreign investment licenses in the Zone, provide good reason to hope.
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This article was originally published by Bingham McCutchen LLP.