5 minute read 17 Aug 2020
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How will businesses benefit from the rapid development of China’s Free Trade Zones

By EY Greater China

Multidisciplinary professional services organization

5 minute read 17 Aug 2020

A sound business environment, supportive government policies, and a strong talent pool are three key factors for ensuring the success of the Free Trade Zones.

F
ree Trade Zones (FTZs) in China are often seen as an effective approach to widening reforms and further opening up the country’s economy. Following the establishment of China’s first FTZ in Shanghai in 2013, the country has been actively rolling out FTZs throughout the country, from the northeastern “rust belt” to southernmost Hainan and eastern-coastal Jiangsu province.

China has established 18 FTZs to date, with each focused on attaining a specific goal. For example, the Hainan FTZ in southern China, established in October 2018, emphasizes supply-side structural reform and fully leverages the province’s geographic advantage to develop the area into a free trade port. Shanghai’s Lingang FTZ, as an expansion of China’s first FTZ, is well-positioned to rival the most competitive FTZs around the world and become a special economic region in China with significant international influence. Jiangsu’s FTZ, which is among the six pilot zones that were announced in August 2019, is geared towards fostering institutional innovation and overseas investment cooperation.

China’s FTZs

18

FTZs have been established in China since 2013

Great progress has been seen in the development of FTZs through a range of bold measures introduced by the government, underscoring China’s determination to further its efforts in opening up the market and implementing reforms. These measures are centered around establishing a sound business environment for domestic and foreign enterprises alike in order to encourage a higher degree of participation from foreign players and attract a strong talent pool.

Welcoming foreign participation

One of the most fundamental factors for ensuring the vibrancy and prosperity of the FTZs is to have a sound business environment. Foreign businesses can expect to benefit from measures designed to offer equal treatment and to create a more level playing field for them and their Chinese counterparts. These measures include relaxing the restrictions on foreign investment, enabling the free flow of capital, making trade and transportation more convenient, and creating a fair competition mechanism.   

Restrictions on foreign investment are being loosened in various ways. First, FTZs are relaxing restrictions on registered capital and investment approaches for foreign companies in a number of key sectors, such as telecommunications, insurance, science and technology, education, and healthcare.  Second, reputed overseas arbitral and dispute-resolution institutions are allowed to establish offices and conduct business in FTZs. Third, the limits on foreign capital shareholding for financial institutions have been relaxed, in turn expanding the scope of business operations for financial institutions with foreign capital. Finally, eligible foreign investors will be able to establish financial institutions in FTZs.

A fair competition mechanism is an integral part of a sound business environment. One of the necessary steps toward ensuring fair competition that China is making progress on is to achieve the same market-access standards for both domestic and foreign investment, offering fair treatment in terms of government procurement, financial subsidies, qualifications, and licensing, among other aspects, for foreign-funded companies.

In 2019, the Chinese government issued a new edition of the negative list for foreign investment in the FTZs, which further relaxed the restrictive regulations on foreign-funded entities.  The number of industries in which foreign investment is either prohibited or restricted has fallen from 45 to 37, with several industries embracing further opening up. From 2013 to 2019, the FTZ negative list has cut 163 items from the original 190, dramatically reducing the number of restricted industries[1].

The above measures will lower the bar for international companies that wish to enter the China market and will help with the further opening up of FTZs, resulting in a more enabling environment for foreign companies.

Free flow of capital and goods

The free flow of capital is another fundamental factor in unlocking business dynamism. It involves three key aspects: a facilitated cross-border renminbi settlement process, free capital inflows and exchange, and supporting cross-border financial activities. Take Lingang FTZ as an example. This expansion of China’s first FTZ in Shanghai fully supports cross-border financial activities by enabling eligible institutions to provide cross-border bonds and conduct cross-border securities investment and insurance business, demonstrating China’s clear intent to expand the financial openness of its markets in the new era.

In addition, convenient trade and transportation will make FTZs an attractive base for doing business in China. As most FTZs are located close to harbors and airports, measures can be taken to fully leverage the trade and transportation convenience offered by these gateways. Examples include encouraging airlines to provide stopover flights to facilitate the flow of visitors to key cities, or setting up an air cargo service center to provide a one-stop customs service – including delivery of import manifests, customs declarations, and customs inspections – to facilitate the flow of goods.

Protecting intellectual property

Intellectual property (IP) protection is one of the biggest concerns for foreign players participating in the China market. China has unveiled a range of policies to strengthen IP protection within the FTZs. These include setting up a dedicated Intellectual Property Office within FTZs to deal with IP claims regarding patent, trademark, and copyright concerns, while encouraging and supporting professional institutions to provide services such as IP mediation and enforcement assistance.

The Shanghai Free Trade Zone is an example of these policies in action. A “three-in-one” Intellectual Property Office, which carries out both administrative and law-enforcement functions, was established in 2014 to resolve issues including divided administration, multi-pronged enforcement, and the uneven deployment of enforcement powers.

Building a strong talent pool

Talent is a vital driving force behind FTZs. To attract competitive talent with different industry backgrounds, the government has eased restrictions on introducing talent from foreign countries and launched incentives to encourage more talent from overseas countries to work in FTZs. Other measures include fully utilizing local university resources and working hand in hand with universities to nurture talent. Various FTZs are also introducing special benefits for talent. These incentives include tax reductions, allowances, housing, and transportation subsidies, among others.

Shanghai’s Lingang FTZ, among others, has launched tax-reduction plans under which talent from foreign countries can enjoy tax relief from their individual income tax to offset the tax differential between China and their native country.

In a complex and fast-changing world beset by weak economic recovery, FTZs can help weather the storm of a volatile market and boost local economies. Through a sound business environment, supportive government policies, and a strong talent pool, FTZs are expected to achieve sustainable development. 

To further open up the country’s economy, China has established a number of Free Trade Zones (FTZs) across several different regions since 2013. FTZs can help weather the storm of a volatile market and boost local economies. Through a sound business environment, supportive government policies, and a strong talent pool, FTZs are capable of achieving sustainable development and facilitating business across China.

Summary

To further open up the country’s economy, since 2013 China has established a number of FTZs across several different regions. In a complex and fast-changing world beset by weak economic recovery, FTZs can help weather the storm of a volatile market and boost local economies. The sustainable development of FTZs is inextricably linked with a sound business environment, supportive government policies, and a strong talent pool.

About this article

By EY Greater China

Multidisciplinary professional services organization