Perspective on foreign investment in the Shanghai free trade zone


The China (Shanghai) Pilot Free Trade Zone has introduced a raft of new policies to facilitate foreign investment. The table below attempts to summarise significant reforms that the zone has to offer, and we will analyse some of these in further detail in this article, along with more complex issues that require further clarification.

AnJie_pp_Fig_1&2Reinvestment by foreign invested enterprises (FIEs) in the zone may surmount the restrictions imposed by document No. 142. Document No. 142 of the State Administration of Foreign Exchange requires that renminbi proceeds derived by an FIE from the conversion of capital can only be used within the scope of business approved by the relevant authority, and may not be used for domestic equity investments, thereby hampering the flexibility of foreign investment. For a foreign enterprise that has not established a foreign-invested investment company in China, when it wishes to invest in multiple projects it is usually required to establish multiple foreign-invested project companies (see Figure 1) in parallel, making it difficult to carry out management and resource integration for the different investment projects through its China investment platform. As for a foreign enterprise that has established an investment company in China, as only one investment company may be established, when multiple PRC investment platforms are required to manage different projects, it faces the quandary of not being able to establish other investment companies.

戴志文 Jeremy Dai
戴志文 Jeremy Dai

Pursuant to relevant regulations, the zone will implement free convertibility by FIEs on the capital account and explore innovative exchange control models. Given this, when FIEs registered in the zone reinvest, they may soon be able to surmount the restrictions imposed by document No. 142 by establishing multiple wholly foreign-owned enterprises (WFOEs) in the zone to serve as the platforms for investments in different projects in China, giving them more flexibility in their investments (see Figure 2).

FIEs in the zone may soon be able to participate directly in Shanghai’s local securities trading market. At present, most foreign investment in China’s securities markets is done through either the Qualified Foreign Institutional Investor (QFII) programme or strategic investments, however the former is restricted by applications for qualifications and investment limits, and the latter requires approval based on specific matters. Pursuant to the Several Policy Measures for Support and Promotion of the China (Shanghai) Pilot Free Trade Zone by Capital Markets, proposed by the China Securities Regulatory Commission (CSRC), FIEs in the zone will in future be permitted to directly participate in investment and trading on the local Shanghai securities exchanges. It can be foreseen that the restrictions on investment by FIEs in the zone in domestic securities exchanges will gradually be relaxed, offering a new route for foreign enterprises wishing to invest in China-listed companies.

Perspective on foreign investment in the Shanghai free trade zone-table 2Will FIEs in the zone be able to surmount industry and geographical restrictions to operate outside the zone? The zone is adopting an administration model that combines pre-investment national treatment and the negative list, whereas the administration model outside the zone remains that, using examination and approval. This will lead to policy conflicts. Will FIEs in the zone that engage in business not enumerated on the negative list be able to go outside the zone and operate business in the restricted or prohibited categories? How this conflict will be smoothed over deserves watching. Among the industries that have been opened on the current negative list, the value-added telecoms and cultural service industries are stringently restricted to foreign investment outside the zone. For these industries, will the approval of the relevant authorities be required when their products or services enter the PRC proper from the zone? Furthermore, how will operations in the zone and outside the zone be demarcated? We will have to wait for the specific harmonising policies.

陆群威 Wilson Lu
陆群威 Wilson Lu

Can enterprises established outside the zone enter the zone? The Administrative Measures for the Recordal of Foreign-Invested Enterprises in the China (Shanghai) Pilot Free Trade Zone specify that an FIE outside the zone and not caught by the negative list may carry out the procedures for the amendment of recordal via the zone’s FIE recordal acceptance platform, and submit its approval certificate to the recordal authority for cancellation. In other words, FIEs from outside the zone wishing to enter the zone do not require approval, giving them a relatively wider choice. They can compare the pros and cons of operating in and outside the zone, e.g. industry restrictions, operating convenience, tax breaks, etc., before selecting the place of establishment and operation. However, support from the tax authority from where the outside FIE’s operation is originally located is compulsory for the FIE to relocate into the zone.

Jeremy Dai is a partner at AnJie Law Firm. He can be contacted on +86 10 8567 5971 or by email at: [email protected] Wilson Lu is a lawyer with the firm. He can be contacted on +86 10 8567 5991 or by email at: [email protected] Wang Xin is also a lawyer with the firm. He can be contacted on +86 10 8567 5993 or by email at: [email protected]