The Free Trade Zone in Shanghai is a pilot program undertaken by the Chinese government to put a number of reforms on trial in a bid to modernize certain industries, revitalize the Chinese economy (whose growth rate slowed to just above the 7.5% minimum) and spread the influence of the Chinese currency, the Renminbi.
The reforms will deal with customs and tax supervision, simplification of administrative processes for licensing and the financial industry.
The FTZ, opened on the 29th of September 2013, is actually divided into 4 separate areas: the original Waigaoqiao Free Trade Zone (opened in 1990), the Waigaoqiao Bonded Logistics Park, the Pudong Airport Bonded Logistics Centre and the Yangshan Bonded Port Area.
There are unique advantages the SH FTZ presents over other special trade and customs zones.
Financial Reforms: i) Foreign banks will be able to establish WFOE or majority-controlled subsidiaries within shorter time frames; ii) The financial institutions are expected to progressively be granted licenses for cross-border financial products; iii) The promotion of renminbi convertibility and relaxed administrative controls will greatly facilitate treasury cross-border fund management for companies –financial and non-financial alike – with regional headquarters in China.
Different than other bonded areas, the biggest feature of FTZ is the special custom monitoring system called “Domestic but out of Customs”, which means “open the A line (Free Trade Zone and boarder line) and control the B line (Free Trade Zone and Non Free Trade Zone)”. This expedited clearance of goods and materials is beneficial in terms of cost and time for logistics companies specifically.
Upgrading of customs supervision frameworks: Overseas shipments will not need customs clearance until a later stage, simplifying the operation of logistics companies within the FTZ. Reducing costs and complexities involved in the logistics could further encourage international manufacturers to set up a regional manufacturing and logistics hub in Shanghai.
Simplification of administrative systems: An important reform which will attract foreign investors is a drastic simplification of the administrative burden of applying for approval and registration within the FTZ. Foreign investors within the zone will be subject to the same application procedure and requirements as domestic investors and the process will require a single application at a single location, provided their business scope is not contained within the “Negative List” for which special approval is needed.
Competitive regulatory and tax environment: generally reducing tax rates in the FTZ is not an option which could be implemented across the country, so, instead, new tax policies are being adopted to support innovative business models. Firms may choose to pay Import taxes that apply to imported components, or the Import taxes applying to the finished components.