Shenzhen Announces Comprehensive Pilot Reforms Plan amid 40th SEZ Anniversary

Shenzhen SEZ is completing four decades this year and the city has announced a comprehensive pilot reforms plan for 2020-2025 that will increase market access for foreign investors, introduce legal and finance reform measures, and implement specific business-friendly policies.

On October 11, 2020, the general offices of the Communist Party of China (“CPC”) Central Committee and the State Council issued the Implementation Plan for the Pilot Comprehensive Reform of Building a Pilot Demonstration Zone of Socialism with Chinese Characteristics in Shenzhen (“Pilot Reforms Plan”), which consists of a detailed plan for comprehensive pilot reforms to be implemented in Shenzhen.

The release of the Pilot Reforms Plan coincides with the 40^th anniversary of Shenzhen’s establishment as a special economic zone (SEZ) and showcases the city’s role as a Socialist Demonstration Pilot Area.

Over the last four decades, Shenzhen has witnessed an incredible pace of development, making it the ideal location for implementing such business-friendly pilot reforms.

Starting from 1980, when Shenzhen was declared China’s first SEZ, the city has made tremendous progress, transforming from a small fishing village to a bustling technopolis with a population of over 20 million.

Last year, on August 9, the CPC Central Committee and the State Council issued the Guidelines on supporting Shenzhen in building a pilot demonstration area of socialism with Chinese characteristics that sought to improve the implementation of the development strategy of the Guangdong-Hong Kong-Macao Greater Bay Area – to enrich the “One Country, Two Systems” policy and explore a new path in the construction of a strong and modern socialist country.

Shenzhen’s Pilot Reforms Plan thus appears to be a further step towards the goal of increasing innovation in and internationalization of the city.

What is proposed in Shenzhen SEZ’s Pilot Reforms Plan?

The Pilot Reform Plan provides that, over a five years period, from 2020 to 2025, Shenzhen will be governed by a specific set of policies that will make the city among the biggest megalopolis’ in the world, characterized by outstanding competitiveness and innovative capacity.

More specifically, the Pilot Reforms Plan foresees three different phases:

• In 2020, several reforms will be launched in key sectors, such as the market-orientation, the optimization of the business environment, and the overall utilization of urban space. The list of the first batch of comprehensive authorized pilot reforms was released on October 19.
• In 2022, important progress will be made in system construction, and a batch of significant institutional achievements that can be replicated and promoted shall be made in all relevant aspects.
• In 2025, landmark achievements shall be scored, with the pilot reform tasks basically completed and providing an essential paradigm for institution-building throughout the country.

The reforms to be implemented in Shenzhen will cover legal, financial, technological, institutional, and social sectors – providing further measures to improve market access in the sectors of energy, telecommunications, public utilities, transportation, and education.

Driving objectives behind the reforms plan

Improve the market-oriented allocation system

According to the Pilot Reforms Plan, Shenzhen will make efforts to improve its resources allocation system to make it more market oriented in land, labor, and capital management.

Among others, Shenzhen is supported to carry out a series of pilot programs to improve its capital market. To be more specific:

• The city will pilot the registration-based stock-issuing system in the Growth Enterprise Market (GEM) and conduct pilot innovative measures in the domestic issuance of stocks or depository receipts (CDR);
• It will establish a mechanism for companies listed on the National Equities Exchange and Quotations (NEEQ) to transfer to other boards; and
• It will establish a financial technology innovation platform to support the pilot tests of digital currency and promote the R&D application and internal cooperation of digital RMB.

Besides, Shenzhen will also optimize the market access and development environment for private funds, venture capital, as well as real estate trust funds.

Create a market-oriented legalized business environment

The reforms will strengthen the fair competition and market openness of the city either by relaxing some of the restrictions under the Negative List (in the fields of energy, telecommunications, public utilities, transportation, education, and technology) or by providing a more robust regulation and protection of intellectual property rights (“IPR”), which will include a punitive compensation system in case of IPR infringement.

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Another signal showing the city’s intention of further opening-up its market – is the objective of introducing facilitated procedures concerning visa issuance to talented foreigners.  More specifically, the Pilot Reforms Plan states that the approval process for foreigners’ working and residence permits will be optimized, and specific standards for selecting talented foreigners will be set.

Beside this, the Pilot Reforms Plan also provides that, in order to create a better working environment for overseas professionals, some restrictions on overseas personnel (excluding healthcare personnel) in taking professional examinations will be removed.

Moreover, Shenzhen will improve the approval mechanism for operating postal communications services and in the energy sector. It will also promote comprehensive and supporting reforms of the bankruptcy mechanism, piloting bankruptcy pre-reorganization systems, and improving the bankruptcy system for natural persons.

Establish a highly open economy

The Pilot Reforms Plan aims to further open the financial and shipping industry with the aim of creating a highly open economy.

Concerning the financial industry, the government shall support qualified domestic enterprises to go public overseas and, at the same time, shall also support qualified foreign financial institutions to initiate the establishment of securities companies and fund management companies in Shenzhen. Beside this, it is also foreseen that Shenzhen will take the lead in advancing the internationalization of the RMB and improve the foreign exchange management system.

On the other hand, with reference to the shipping industry, the Pilot Reforms Plan states that the international ship registration system will be improved, the right of bonded bunkering permission for international sailing ships will be granted in Shenzhen, and the bonded fuel oil supply market will be further liberalized.

Improve the supply system of people’s livelihood services

Among the most important objectives of the Pilot Reforms Plan, is the intention of innovating the healthcare and education sectors.

More specifically, the Plan states that the cross-border connection of medical services will be improved, while new standards, in compliance with international requirements, for medical personnel training and hospital accreditation will be enacted.

Concerning the education sector, the Pilot Reforms Plan may open the sector to foreign investors, by enabling high-level cooperation between Chinese and foreign entities and professionals involved in the administration of schools and universities.

The Plan also mentions that Shenzhen will support the construction of an auction center for cultural art (non-cultural relics) that is subject to international general rules. It will also promote innovative experiments in the sports industry to promote the development of sport events.

Improve the environmental protection and urban space governance system

The Pilot Reforms Plan also pays attention to environmental protection, indicating that mandatory local standards will be set and a green industry certification system established.

A compulsory liability insurance system for environmental pollution will also be implemented and the process for building up a demonstration zone for sustainable development will be sped up.

With reference to the urban space governance system, the Pilot Reforms Plan introduces the possibility of establishing separate use rights on the construction land, surface, and underground and suggests that better regulations on the exploitation of natural resources will be executed.

List of the first batch of comprehensive authorized pilot reforms

As provided under the Pilot Reforms Plan, the list of the first batch of comprehensive authorized pilot reforms (“List”) has been released this year, on October 19.

The List contains forty items categorized under six different sections reflecting the scheme introduced by the Pilot Reforms Plan. It includes market-oriented allocation of factors,  business environment, technological innovation,  further opening of the Chinese market to foreigners, public service system, and environmental protection and urban space governance.

Key provisions of the List are summarized below.

Market-oriented allocation factors

• Introduce an approval mechanism for the conversion of agricultural land into construction land that will have to be approved by Shenzhen Municipality.
• Reform the special working hours management system with the aim of meeting the development needs of new technologies, new formats, new industries, and new models.
• Promote the reform of the Growth Enterprise Market, implement the pilot registration system, and establish a mechanism for transferring companies listed on the NEEQ.
• Improve the domestic issuance of shares or depository receipts (CDR) and listing of innovative enterprises on the Shenzhen Stock Exchange.
• Improve and facilitate the procedures applicable to private equity funds. Implement reforms with the purpose of protecting investors’ rights and interests by increasing the applicable penalties and by strengthening the control mechanisms.
• Liberalize the communications industry by gradually removing the foreign equity ratios in value-added telecommunications services and by setting up dedicated platforms to monitor and analyze the market.
• Launch public real estate investment trust funds in infrastructure fields, such as transportation, water conservancy, logistics and storage, and industrial parks.

Business environment

• Implement a new type of intellectual property legal protection system and improve the protection of IPR, including digital IPR, by establishing a punitive damage system and by reducing the evidence requirements for law enforcement against trade secret infringement. Improve and guarantee fair competition.

Technological innovation

• Promote the establishment of technology transfer departments in universities and scientific research institutions and introduce a mechanism for public disclosure of scientific and technological achievements of universities, scientific research institutes, and state-owned enterprises.
• Formulate standards to identify ‘high-tech and high-end talented foreigners’, simplify the procedure to apply for ‘R visas’ and working permit for qualified foreigners, and implement the reforms needed to make working in China more convenient for talented foreigners.
• Authorize Shenzhen to implement new regulations concerning overseas professional management, with the aim of allowing professionals with overseas international professional qualifications to provide professional services in Shenzhen in accordance with relevant regulations. Relax restrictions on foreign personnel (excluding medical and health personnel) from having to take various professional qualification examinations.

Further opening the market to foreigners

• Improve the jurisdiction system for foreign-related commercial disputes, in particular through the role of the Supreme People’s Court, which has already strengthened its professional guidance on major and difficult foreign-related commercial cases to improve the quality and effectiveness of trials.
• Improve international legal services and coordination mechanisms by building the Guangdong-Hong Kong-Macao Greater Bay Area International Arbitration Centre, by improving dispute resolution methods, and by establishing international joint arbitration centers, international mediation organizations, and cooperation mechanisms.
• Establish a master account for a combined domestic and foreign currency fund pool in order to handle foreign exchange settlement, sales, and related hedging derivatives transactions. The use of amounts deposited in the fund pool shall be regulated by a negative list.
• Implement the144-hours visa free policy for transiting in Shenzhen for foreign travelers entering the city via port and 15-day visa exemption policy for cruise passengers.

Public service system

• Explore and improve the cross-border connection mechanism of medical services by setting a standard system in line with the international standards for medical personnel training and hospital accreditation.

Environmental protection and urban space governance

• Authorize Shenzhen to implement the reform of the environmental assessment system and formulate a list of key projects that have to carry out such environmental assessment, thus excluding from the said list the construction projects that shall not be subject to the above mentioned assessment.

The List reiterates the principles set under the Pilot Reforms Plan and indicates which are the pilot reforms that will be adopted in Shenzhen in the next five years. However, seeing as the List does not provide details about each reform, it will be necessary to wait for the implementing regulations to practically understand what will be the impact on the Chinese market.

Advantages for foreign investors looking at Shenzhen SEZ

The Pilot Reforms Plan paves the way for the creation of a market that is based on fair competition, rule of law, and open to foreign investors.

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In fact, as mentioned earlier, the Pilot Reforms Plan proposes a list of special measures to be released in Shenzhen to lift the restrictions on foreign investment introduced at the national level by the Negative List – covering energy, telecommunications, public utilities, transportation, education, and technology sectors.

Moreover,  in order to ensure fair competition and protection of foreign investors’ rights, other measures will be adopted – including but not limited to – reinforced legal protection of IPR, strengthened business guidance for major and difficult foreign-related commercial cases, and further improvements on cross-border cooperation, international legal services, and dispute resolution mechanisms.

Hence, at a first glance, the Pilot Reforms Plan seems to grant additional guarantees and particularly favorable treatments to foreign investors compared to those applicable at the national level. Still, how these concrete advantages will benefit foreign investors at the ground level will become clearer only after the promulgation and implementation of the specific reforms indicated under the Pilot Reforms Plan.

Shenzhen shows China’s market opening and reforms are here to stay

The Pilot Reforms Plan’s purpose is to transform Shenzhen into a demonstration pilot area of socialism with Chinese characteristics, and, at the same time, to accelerate the cooperation between Shenzhen and Hong Kong, thus boosting the innovation and growth of the Guangdong-Hong Kong-Macao Greater Bay Area.

Considering Shenzhen’s achievements supporting the growth of advanced local industries and technology capacity and implementing business-friendly reforms, the Pilot Reforms Plan will likely play a key role in the Chinese government’s management of, both, internal and external relations.

Indeed, the Pilot Reforms Plan will not only promote the integration of Hong Kong and Macao in the context of the Greater Bay Area Initiative – which intends to transform nine mainland cities and the two special administrative regions into a technology and innovation hub – but it will also transform the city itself into a mega-hub that is able to attract massive foreign investments.

While the details of the reforms to be implemented based on the Pilot Reform Plan are still being worked out by authorities, given the short timeline from 2020 to 2025, these may be released sooner than usually is the case.

At his speech to mark the 40th anniversary of the Shenzhen SEZ (on October 14), President Xi Jinping insisted that China “will further open up in a comprehensive manner” and that the country would not be “stopped by the reversing trends and tides”.

Xi said, “We need to unswervingly implement an innovation-driven development strategy…so as to build a technological and industrial innovation high-ground with global influence.”

This looks like Shenzhen SEZ will be expected by the country’s top leaders to continue its constant development and innovative growth strategies, and pilot reforms and market openings that have enabled its transformation over the last forty years.

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