Shanghai Free Trade Zone: Tips for African Firms

This month’s column highlights some of the policies designed to attract foreign capital and enterprises to China (Shanghai) Pilot Free Trade Zone (SFTZ), the challenges these enterprises may face and the implications for African companies. We hope these tips will be useful in providing a basic understanding of China’s complex business environment and how to best navigate it.

Snapshot of some policies inside the SFTZ

The trial period for the SFTZ has been set at three years, during which regulations will be gradually eased to allow more openness within the zone. There are several liberal policies (vis-à-vis the rest of the Chinese mainland) that are bound to encourage foreign capital and enterprises to enter the zone. A few selected ones include:

• No minimum registered capital requirement for companies;

• A faster registration process and simplified requirements for not only domestic, but foreign enterprises as well (registration is supposed to take a maximum of two weeks);

• A more open service sector that cuts across industries ranging from entertainment to the health sector including various types of insurance;

• A program that will test free RMB convertibility, i.e. firms will be able to use a specialized account to access overseas RMB;

• Flexible interest rates within the zone;

• A more liberal tax system including the ability to make payments in installments;

• A more liberal policy toward the establishment of foreign-funded banks and joint-venture banks. Foreign banks will now be permitted to invest overseas and trade financial instruments with less restrictions;

• Less restrictions for incoming goods including more free time at the port;

• An upgraded international commodity trading and resource configuration platform;

• More level playing field between domestic and foreign firms in that no approvals will be required for activities not on the Negative List, i.e. permitted industries.

As the policies continue to be adjusted and implemented, authorities intend to use lessons learned during the initial trial period to expand some of the policies into other key cities in China.

SFTZ development: Some challenges

As the SFTZ takes off, there are still some areas that present challenges for foreign companies. These include:

1. The existence of a Negative List – the list reaffirms that the SFTZ is not a free-for-all and that some sectors such as mining, power services and education are still restricted for foreign investment. Whereas there are plans to continually reduce the number of sectors on the Negative List over the trial period, the pace and breadth of implementation still remains to be seen.

2. Policy gap between the SFTZ and the rest of China – although the SFTZ itself has liberal policies, these policies are confined to the zone. Companies that have a presence both inside the SFTZ and elsewhere on the Chinese mainland may find limits on what can be done across zone boundaries.

3. SFTZ policies are generally more favorable to domestic firms moving out than foreign enterprises coming in.

4. Given that the zone is still in its initial stages, there are still a number of policies that need to be clarified in the coming years. This includes the criteria for shortening the Negative List as well as some financial policies such as futures trading and various tax regulations.

Implications for African firms

The SFTZ is a large step forward for both domestic and foreign firms. African firms should be ready to explore what opportunities lie in the zone, especially for businesses not on the Negative List.

Those on the Negative List should pay close attention to evolving regulation in case their business areas become permitted. The SFTZ represents a more flexible source of partnerships with Chinese companies, which has the potential to overcome challenges related to currency controls, complicated regulations and bureaucracy that at times hampers the process of Sino-foreign cooperation overseas, especially when capital must originate from the Chinese mainland. Companies engaged in international trade will now be able to engage their Chinese counterparts with fewer restrictions and sidestep cumbersome procedures of the Shanghai Entry-Exit Inspection and Quarantine Bureau. This should ease overall trading between China and Africa. The fact that SFTZ policies are more favorable to outbound investment from domestic companies should encourage African companies to tap into this outflow of capital, especially in the resource sector and other similar areas that the Chinese Government has prioritized for overseas investment. By setting up within the SFTZ, African firms will be able to enjoy more liberal policies hitherto unavailable on the Chinese mainland.

This article originally appeared in the Chinafrica Magazine, Shanghai Free Trade Zone: Tips for Investors

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