By Elizabeth Leclaire and Rainy Yao
Closely mirroring the structural and legislative policies of the Shanghai Free Trade Zone (FTZ), the Guangdong Free Trade Zone was launched in April of this year, along with two other FTZs in Tianjin and Fujian. With Shanghai as the nation’s de facto financial center and Guangdong as one of the world’s major manufacturing and trading centers, both the Shanghai FTZ and Guangdong FTZ have caught the attention of foreign investors seeking to enter a more liberalized Chinese market. While the Shanghai FTZ and Guangdong FTZ are regulated by similar policies, important distinctions exist between the two zones, and foreign investors must be careful to select the location best suited for business needs.
Geographical and Industrial Comparison
The Shanghai and Guangdong Free Trade Zones are of comparable size, with the Shanghai FTZ encompassing 120.27 meters squared and the slightly smaller Guangdong FTZ covering 116.2 meters squared. The Shanghai FTZ recently expanded to include larger portions of the city and 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 RMB 30 billion.
Similarly, the Guangdong FTZ is split into three subdivisions: Guangzhou Nansha New District, Shenzhen Qianhai Shekou, and Zhuhai Hengqin New District. The Guangzhou Nansha New District was established to allow for liberalized foreign investment in finance, shipping, logistics, and international trade. The Zhuhai Hengqin New District focuses on tourism, recreation, and technology.
Restrictions and Opportunities Comparison
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, both the Shanghai and Guangdong each come with their own exclusive concessions.
Benefits of the Guangdong FTZ
Preferential Policies for Hong Kong and Macau
One of the greatest differences between the Shanghai FTZ and Guangdong FTZ lies with the policy regulating investment from Hong Kong and Macau. For the purposes of the Negative List, investors from Hong Kong and Macau are treated the same as foreign investors. However, as 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 fully provide 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 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 among one another
- Hong Kong/Macau-invested non-financial institutions are allowed to provide third-party payment services
As of July 13th, 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, compared to the previous restriction of borrowing RMB only from within mainland China.
Though not applied to the other parts of the Guangdong FTZ, eligible enterprises located in the Qianhai Development Zone and Hengqin New area are able to enjoy a reduced corporate income tax rate of 15 percent, which is very close to what is offered in Hong Kong and Macau. 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. Starting in the end of September, foreign qualified individuals may receive employment offers by 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 above, 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.
- Support overseas financial leasing, encourage different types of financial leasing companies to expand the cross-border use of RMB.
- 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 decrease investment restrictions, accessibility to China’s economy increases for foreign investors. However, with growing foreign investment opportunities also comes 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.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
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