Shanghai's pilot free trade zone (FTZ) was officially
launched on September 29, 2013. The FTZ aims at test-running the
opening up of free trade and economic reforms which will, if
successful, be implemented nationwide. Under the FTZ scheme,
certain restrictions on foreign investments will be eased. Some
relaxations have already been implemented, while other announced
improvements are yet to come.
Facilitated company setups
An implemented improvement is that the procedure to set up
foreign-invested enterprises (FIEs) has been eased. To set up an
FIE, only registration, rather than administrative approval, is
required. Outside of the FTZ, company set ups are usually
complicated, involving interaction with various authorities, taking
up copious amounts of time, and expensive. Only enterprises whose
business areas are not on the so-called "negative list"
for foreign investments will benefit from this relaxation. All
business areas not on the negative list (which at the moment is
very long) are exempt from the approval requirement. The
publication of a new negative list with fewer restricted sectors
has been announced for the first half of this year.
Foreign exchange and cross-border finance reforms
The People's Bank of China (PBOC) published a paper
(Opinion) on December 2, 2013, containing various principles in the
area of bank account systems, facilitations in the conversion of
foreign exchange, cross-border usage of RMB, and the speeding-up of
interest liberalisation. These principles need to be implemented by
PBOC Opinion partly implemented
The State Administration of Foreign Exchange (SAFE) issued
implementation provisions with regard to some principles of the
PBOC Opinion on February 28, 2014. Qualified entities in the FTZ
are now allowed to:
Open a domestic bank account through which foreign exchange
funds of its domestic affiliates may be pooled and centrally
Open an international bank account through which the flow of
funds between this account and overseas is free from restrictions
and controls. Funds may be freely transferred between this and
domestic accounts (foreign exchange funds paid from overseas still
Foreign exchange funds in capital accounts may be freely
converted into RMB (a transfer of such amounts to another RMB
account, however, is still subject to certain requirements).
The ceiling for offshore loans denominated in a foreign
currency is raised from 30-percent to 50-percent of the
entity's total equity capital.
Providing securities to offshore parties and payments of fees
for such securities to offshore security providers are not subject
to SAFE approval anymore.
Qualified financial leasing companies are subject to
registration requirements rather than SAFE approval with respect to
their foreign currency receivables from the foreign lease business.
They may freely accept lease payments in foreign currencies from
Finally, an FTZ resident can now make foreign exchange
registrations with respect to foreign direct investments with banks
rather than SAFE, which is less time-consuming and onerous. Further
administrative relaxations are expected.
Enterprises outside of the FTZ may only make foreign exchange
settlements according to "actual needs", which will be
determined by SAFE in a cumbersome procedure.
Other forthcoming reforms
The following reforms announced in the PBOC Opinion still need
to be implemented:
FTZ residents (in particular individuals) may invest offshore,
including in foreign securities, and convert RMB into foreign
currencies for such investments without SAFE approval.
No SAFE approval is required for FTZ resident entities with
respect to loans to their offshore subsidiaries.
The last months since the official launch of the FTZ have shown
that nationwide applicable regulatory restrictions will be
gradually removed. It is not predictable when and how other
announced reforms will be implemented. If the PBOC guidelines are
fully implemented, the FTZ will give real and considerable
improvements to foreign investors and Chinese persons investing
offshore. Investors should now closely observe further developments
in the FTZ.
A German version of this article was recently published in
1 Citibank pioneered to create such a possibility with its
"RMB cross-border pooling solution" in China already
before SAFE published the implementation provisions.
Article co authored by Sonja Bayer, GSK Stockmann +
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