In September 2013, the China (Shanghai) Pilot Free Trade Zone (referred to more commonly as the Shanghai Free Trade Zone, SFTZ) was opened with great fanfare, to further encourage foreign investment and as a pilot area for economic experiments that would, if successful, be copied in the rest of the country. Two years on, has the zone lived up to its promise? And in particular, what benefits does the SFTZ offer foreign investors that want to establish in China?
Economic & Financial Reform
Pilot measures have been adopted regularly to allow corporations in niche industries - especially in the area of finance and trade - to try out new things. Paired with the expansion of the geographical area of the SFTZ to include the Lujiazui Financial Area, the Jinqiao Export Processing Zone and Zhangjiang High Tech Park, the reforms have allowed companies to expand fundraising channels and facilitate trade and investment.
Fewer Restrictions for Foreign Investment
For many foreign investors, however, the SFTZ provides advantages in two other areas. First, the SFTZ has lowered barriers to foreign investment in a number of industries which remain restricted in the rest of China. An example is advertisement business: in other parts of China foreign investors must partner with a Chinese company or meet certain challenging requirements, but in the SFTZ they foreign investors can establish a wholly foreign-owned enterprise (WFOE) providing advertisement services without meeting any requirements. In the medical industry, the SFTZ has abolished the minimum total investment of CNY 20 million for a foreign-invested company in healthcare and medical services, paving way for foreign clinics and private practitioners.
The reforms are aimed to ease policies in favor of these 12 industries:
- Banking & Financial Services
- Value-added Telecommunication
- Shipping & Logistics
- Credit Investigation/Reporting
- Engineering & Construction
- Medical/Healthcare Services
- Educational & Vocational Training
- Legal Services
- Video Game Console Sales & Services
- Travel Agencies
For foreign investors in industries that are (more) restricted elsewhere, the SFTZ thus offers an attractive place to start their China business. Since the SFTZ is expected to always be the first mover (pilot) when it comes to easing restricted / prohibited industries, foreign investors active in a currently restricted / prohibited industry, may benefit from having a presence in the SFTZE already, as this would allow them to promptly anticipate on eased restrictions.
Virtual Offices and Simplified Procedures
Another category of companies is also finding the SFTZ a good place to start their China business: smaller trading and service companies. An increasing number of smaller companies from Europe and North America is finding its way to China, often to support Chinese and multinational companies in areas such as recruitment, multimedia services, design, sourcing and trading. One of their priorities is often to keep initial costs down while they explore the market.
Two features of the SFTZ contribute to its favorable
First, the option of having an (affordable) virtual office in the SFTZ - not permitted in the rest of China - is a key reason to choose for the SFTZ.
Second, procedures to establish a company in the SFTZ are also simpler and quicker than in most other places, resulting to lower incorporation fees. While this may not make much of a difference for a manufacturing company, it does for a three-person service company that wants to get started as soon as possible.
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