USCBC Urges Dropping Investment Restrictions in the Shanghai FTZ

In its recently completed recommendations for the Shanghai Free Trade Zone (FTZ), the US-China Business Council (USCBC) urged China’s central and Shanghai’s local governments to substantially reduce investment restrictions, encourage fair and open market competition, and enact equal treatment for foreign and domestic enterprises operating in the zone. The Shanghai FTZ is expected to be a testing ground for broader economic reform schemes that could eventually be rolled out across the rest of China, but companies to date have seen minimal progress and openings in top areas of concern.

The recommendations were compiled from USCBC member companies’ feedback and will be submitted to the FTZ authorities in mid-March. The recommendations will also be submitted to central government agencies including the Ministry of Commerce (MOFCOM), the National Development and Reform Commission (NDRC), and local authorities such as the Shanghai Commerce Commission and the Shanghai FTZ Administrative Commission.

General recommendations

USCBC recommended comprehensive measures for improving the business operating environment in the zone in areas like administrative approval, logistics, taxes, and permitted scopes of business for services provided in the FTZ.

One major task of the Shanghai FTZ is to facilitate trade that is overseen by the FTZ customs authority. Recommendations from member companies in this area concentrate on improving the efficiency of customs clearance procedures and easing commodities transfer between bonded zones. Specific suggestions include:

• Enacting minimum customs controls for transshipment processes in the FTZ;

• Establishing a cost recovery system for customs processing to enable 24-7 customs handling; and

• Applying a fully electronic clearance procedure.

However, one challenge to adoption of USCBC’s recommendations is the current structure of the new FTZ customs authority, which is in the process of integrating personnel from four previous bonded zones into one organization. Significant reform measures will likely only be implemented after the completion of this integration.

Although tax reform was not listed as a major focus of the FTZ, USCBC has suggested changes in this area. For example, zone authorities should standardize the process for making non-trade payments in foreign currencies and they hope that zone authorities will recognize receipts other than formal customs declarations for the purpose of value-added-tax (VAT) rebates.

Financial services recommendations

Given the government’s interest in testing financial reform in the zone, USCBC recommended several changes in this area. Recommendations focus on market access, banking services, insurance, and auto financing, and generally call for greater openness and market access in these tightly regulated sectors. Some specific recommendations include:

• Removing stock investment, future market services, non-financial institution payment services, and the trading of RMB and RMB-linked products from the negative list;

• Allowing FTZ-registered, foreign-invested finance companies to provide financial services to companies outside the zone and throughout the rest of China; and

• Harmonizing China’s rules for foreign exchange markets and aligning Shanghai FTZ collateral and netting rules with international standards and practices.

 Negative list recommendations

The 2013 FTZ negative list—released in October—incorporated a majority of existing restrictions to foreign investment in China, such as ownership caps and registered capital requirements. USCBC recommended that the government revise the list at least once a year and reduce its length in line with international best practices for foreign investment. Sector-specific suggestions focus on agriculture, financial services, information technology and telecommunications, media and publishing, transportation, and vehicle and equipment manufacturing.

USCBC’s recommendations reflect its longstanding advocacy efforts to relax foreign investment restrictions in China. According to the Shanghai Commerce Commission, which is revising the 2013 negative list, the 2014 version should be released in the first half of this year. USCBC will continue to track updates to Shanghai FTZ policies and regulations, and report them to member companies in a timely fashion.