Closely mirroring the structural and legislative policies of the Shanghai Free Trade Zone (FTZ), the Guangdong Free Trade Zone was launched in April this year, along with two other FTZs in Tianjin and Fujian.
In Guangdong, investors from Hong Kong and Macau enjoy concessions not extended to other foreign firms. In Shanghai, financial leasing companies are offered perks not granted to other sectors
Shanghai is China’s de facto financial center and Guangdong is one of the world’s major manufacturing and trading centers. No wonder the Shanghai FTZ and Guangdong FTZ have caught the attention of foreign investors seeking to enter a more liberalized Chinese market.
The same national policies regulate the Shanghai FTZ and Guangdong FTZ, but there are important distinctions between the two zones in terms of preferential concessions. Foreign investors must be careful to select the location best suited to their business needs.
Geography and Industries
The Shanghai and Guangdong free trade zones are of comparable size, with the Shanghai FTZ encompassing 120.27 square kilometers and the slightly smaller Guangdong FTZ covering 116.2 square kilometers.
The Shanghai FTZ recently expanded to include larger portions of the city. It is currently divided into three sections: Lujiazui (the city’s financial district), Jinqiao, and Zhangjiang (the city’s high-tech district).
The financial leasing industry is one of the most popular and promising industries in the Shanghai FTZ. To date, more than 400 financial leasing companies have been established within the zone, with a total registered capital of more than RMB30 billion.
For its part, the Guangdong FTZ is also split into three divisions: Guangzhou Nansha New District, Shenzhen Qianhai Shekou, and Zhuhai Hengqin New District.
The Guangzhou Nansha New District was established to allow liberalized foreign investment in finance, shipping, logistics, and international trade. The Zhuhai Hengqin New District focuses on tourism, recreation, and technology.
Benefits of the Guangdong FTZ
The FTZs in China all follow the same “Negative List,” a document detailing the industries where foreign investment is restricted or prohibited. Foreign investment in any sector outside the negative list is treated on par with domestic investment.
That said, the Shanghai and Guangdong FTZs each come with their own exclusive concessions that investors should be aware of to help them decide which one is most appropriate for their needs and objectives.
Preferential Policies for Hong Kong and Macau. One difference between the Shanghai FTZ and Guangdong FTZ lies in the policy regulating investment from Hong Kong and Macau.
From the perspective of the Negative List, investors from Hong Kong and Macau are treated the same as foreign investors elsewhere. However, because the Guangdong FTZ aims to strengthen integration between Hong Kong, Macau and Guangdong, which is directly adjacent to the two territories, investment from these two jurisdictions is liberalized to a larger extent.
For example, foreign law firms are largely restricted in their ability to practice law in China, and need to work through a local law firm. Law firms from Hong Kong or Macau may, however, establish limited liability partnerships with Chinese entities to provide full legal services in mainland China.
Other special policies for Hong Kong and Macau investors include:
- Hong Kong and Macau service providers are allowed to set up wholly foreign-owned international shipping enterprise within the Guangdong FTZ
- Hong Kong and Macau service providers may set up intermediary service institutions for studying abroad at one’s own expenses within the FTZ
- Hong Kong/Macau-invested travel agencies (capped at a number of five, separately) are allowed to provide overseas group travel services (with the exception of Taiwan)
- Hong Kong/Macau investors are allowed to provide high-end medical services and launch pilot schemes to exchange patients
- Hong Kong/Macau-invested non-financial institutions are allowed to provide third-party payment services
Apart from these, investors may use Hong Kong dollars and Macau patacas directly within the Guangdong FTZ.
As of 13 July 2015, investors currently operating or building operations in the Guangdong FTZ’s Nansha New District or Hengqin New District may now also borrow RMB funds from Hong Kong or Macau. They were previously limited to borrowing RMB only within mainland China.
Tax Policies. Eligible enterprises located in the Qianhai Development Zone and Hengqin New Area are able to enjoy a reduced corporate income tax rate of 15%, which is very close to what is offered in Hong Kong and Macau. This is not, however, applicable to other parts of the Guangdong FTZ.
Specifically, investors engaged in technology services, modern logistics, the creative industry and information services are eligible for the tax incentives. The preferential tax policies will last until December 31, 2020.
Benefits of the Shanghai FTZ
In order to attract more foreign investment, Shanghai has sought to lessen restrictions for foreigners seeking visa or residence permits, particularly within the Free Trade Zone.
Visa Policies. Starting end of September, foreign qualified individuals may receive employment offers from Shanghai FTZ companies via electronic invitation, and will be provided port visas upon arrival. Under the new regulations, companies based in the Shanghai FTZ may also arrange exit and entry proceedings directly with China’s Exit and Entry Bureau.
Special Preferential Policies for Financial Leasing Companies. As mentioned, the financial leasing industry is one of the biggest industries in the Shanghai FTZ. To keep its leading position, the following preferential policies have been implemented exclusively in the Shanghai FTZ:
- Financial leasing companies are allowed to conduct commercial factoring businesses that are relevant to their main business
- Financial leasing companies may open a special account for cross-border RMB and are free to borrow money overseas
- Financial leasing companies seeking to provide external guarantees are no longer required to obtain the pre-approval with the State Administration of Foreign Exchange.
- Foreign-invested financial leasing companies may make foreign exchange account settlement at their own discretion
Financial leasing companies in the zone are freed from quota restrictions on foreign lending and can open special foreign-lending accounts at local banks. This type of account can be used to retain leasing revenue from overseas and is subject to a simplified settlement procedure.
The Shanghai FTZ is charged with handling the approval procedures for the establishment of foreign-invested financial leasing companies whose registered capital is less than US$300 million. The processing procedure normally takes five business days.
As China continues to expand FTZ locations and trim investment restrictions, foreign investors are beginning to enjoy increased access to China’s economy. However, growing foreign investment opportunities also come with key market differences across China’s FTZs.
Due to their size and location, the Shanghai FTZ and Guangdong FTZ are of particular appeal to investors, and foreign companies must take care when determining the most appropriate zone to establish operations.
About the Author
Dezan Shira & Associates, a specialist foreign direct investment practice that provides advisory services to multinationals investing in emerging Asia. This article was first published in China Briefing and was reedited for clarity and conciseness. For further details or to contact the firm, please visit www.dezshira.com.
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