The China (Shanghai) Pilot Free Trade Zone (the
"SFTZ") was officially launched on 29 September 2013.
Although the press has applauded many policy breakthroughs in
respect of the SFTZ, the SFTZ may not be appealing to many
international businesses initially due to some practical
constraints. But the SFTZ will function as a policy reform test
field, and could have significant impact if it proves to be
successful and the policies are replicated outside the SFTZ.
The SFTZ was officially launched on 29 September 2013. The press
has applauded many policy breakthroughs in respect of the SFTZ,
including the abolishment of the foreign investment approval
system. Foreign companies can now set up subsidiaries or joint
ventures in the SFTZ without having to apply for prior approvals
from the Chinese government, as long as the business does not fall
under the negative list published for the SFTZ.
Despite favourable changes of direction in policy, the SFTZ
currently lacks many implementing rules for its policies. At this
stage, the SFTZ may not be appealing to many international
businesses due to two major practical constraints, the customs
control and foreign exchange control.
The SFTZ is a special customs supervision area, which is
considered "outside" China for customs control purposes.
Though movement of goods between the SFTZ and abroad is duty free,
goods moving between the SFTZ and the rest of China is considered
importation or exportation. This is why customs checkpoints
surrounding the SFTZ are necessary to ensure that duty-free
products from abroad into the SFTZ are not illegally brought into
China without import duty being paid.
The customs control could be an administrative burden if a
business needs to frequently move goods and products in or out of
the SFTZ within China. Chinese customs authorities have indicated
that they will adopt a smart duty-free product monitoring system
for the SFTZ, the effect of which is yet to be tested.
Foreign exchange control
Foreign exchange control has been a major restriction on
international businesses's operations in China. This is why the
Renminbi capital account convertibility in the SFTZ has attracted
so much attention.
Disappointingly, the SFTZ has not released any implementing
rules for the financial liberalisation policies regarding Renminbi
convertibility, market interest rates and Renminbi cross-border
settlement. In the State Council's General Plan for the SFTZ,
any pilot programme regarding financial liberalisation must be
under the condition of "risks being controllable."
General understanding is that any liberalisation of foreign
exchange control may be strictly "ring-fenced" in the
SFTZ. It remains unlikely that an international business can
achieve free convertibility of Renminbi for its China operations by
setting up a subsidiary in the SFTZ.
These constraints are largely due to the SFTZ still being at an
early stage of development. Many implementing rules need to be
developed to clarify those new policies. Despite this, the SFTZ
will function as a policy reform test field. Policies such as
replacing foreign investment approvals with the negative list can
be easily rolled out to the entire country if the government views
the experience in the SFTZ positively. For now, the best approach
is to be aware of the limitations of the SFTZ and to stay abreast
of policy developments in the SFTZ.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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