On January 9th, the State Council announced its decision to relax foreign investment restrictions in the countries free trade zones. The nation’s 11 free trade zone form a project to deepen economic reforms and encourage foreign investment. The recent announcement signals China’s commitment to maintaining foreign investor interest in China’s free trade zones.
One the one hand, free trade zones exist for economic experimentation and gradual liberalization. This limits the ability of the authorities to liberalize and reform very quickly. On the other hand, in order to attract significant investment (a requirement for the policy experimentation to yield meaningful results), authorities need to liberalize quickly enough to signal a commitment to foreign investors economic reform. With this in mind, the January 9th announcement illustrates that the authorities are carefully handling this predicament. This measure reforms a large number of industries and liberalizes investment in a variety of ways. However, it does so in a piecemeal fashion and in many cases only offers liberalization in specified niches within industries. Additionally, many of the liberalization measures are temporary.
Free Trade Zones: Core Features
China’s free trade zones act as pilot areas to experiment with further economic reforms, internalize the RMB, and limit capital outflows. There are currently 11 free trade zones. They are located in Shanghai, Zhejiang, Fujian, Guangdong, Hubei, Henan, Shaanxi, Chongqing, Sichuan, Tianjin, and Liaoning. There are differences in rules, incentives, and programs between the free trade zones. Free trade zones offer a wide variety of features including arbitration courts, expedited registration processes, relaxed foreign exchange requirements, streamlined customs clearance, and, in some cases, relaxed visa rules.
Broad Investment Liberalization
The free trade zones operate on a “negative list” basis, that is, industries on the negative list continue to face foreign investment restrictions. Within free trade zones, companies outside of the negative list are exempted from the approval process that foreign investors outside of the free trade zone face.
While China’s authorities intend to experiment with lower taxation in Free Trade Zones, there are currently relatively few tax incentives offered. The Guangdong and Fujian free trade zones offer a reduction of the corporate income tax to 15% given the fulfilment of certain requirements. Companies registered in the Shanghai free trade zone may pay corporate income taxes in instalments over five-years, subject to requirements.
The State Council’s Recent Liberalization Measures
Foreign Ownership Restrictions
The State Council has relaxed domestic ownership requirements in a number of industries. This may be especially of interest to companies particularly reliant on proprietary technologies and know-how. The measure eliminates the requirement for the Chinese partner to maintain a controlling stake in some civil aviation businesses. The measure permits wholly foreign ownership in entertainment venue enterprises, some civil aviation niches, the construction and operation of petrol stations, some maritime transportation niches, some aircraft-related activities, and some performance brokerage businesses.
Foreign Experience Requirements
Previously, the authorities required foreign enterprises in select industries to have a number of years of experience outside of China and/or be recognized in their countries of origin. The new measure temporarily eliminates the foreign experience requirement for businesses in certification and accreditation industries, direct sales, and petrol stations.
Relevant content requirements are temporarily scrapped for shipping, printing, civil aviation, entertainment venues, education, travel agencies, maritime transportation, retail, wholesale, aircraft, urban rail, internet cafés, banking, performance brokerage.
The State Council’s announcement covers at least 16 industries. The announcement, for the most part, does not offer broad liberalization to entire industries but instead liberalizes particular business areas within industries.
Under new measures, wholly foreign-owned enterprises are now permitted to move into previously restricted business segments, namely international shipping, ship management, international marine cargo handling, international maritime container freight stations, and container yards.
Foreign investors may now establish a wholly foreign-owned venture in the design, maintenance, and manufacturing of small aircrafts (6-ton general aviation aircraft with 9 or fewer seats). The previous investment ratio restriction for the design and manufacturing of civil helicopters (3 or more tons) is eliminated by the measure.
In addition to the suspension of relevant content requirements, investors in civil aviation are permitted to establish wholly foreign-owned sales agencies and enterprises handling freight storage, in-flight meals, parking garages, and in-flight services. For aircraft maintenance enterprises, the recent measure relaxes the requirement for the Chinese partner to maintain a controlling stake. The measure abolishes the requirement for foreign-invested civil aviation companies to invest in local aircraft maintenance companies and engage in international sales with those local companies.
Foreign-invested certification companies are temporarily free of the certification agency qualification requirement. The measure temporarily halts the requirement for the enterprise to be authorized and recognized in the investor’s country of origin. Lastly, the measure temporarily removes the requirement for the company to have 3 or more years of direct experience in the industry outside of China.
While many of these measures are technically temporary, they are, in all likelihood, for long-term purposes. The temporary nature of these measures gives authorities a chance to experiment and adjust China’s free trade zones. After the expiration of these measures, relevant government departments will review and likely decide to amend or renew the regulations.