China Free Trade Zone

Negative list, foreign direct investment and how to establish a company in China FTZ

In the past, forming a company in China used to be a complex procedure, with government bureaucracy which could take an unreasonably long time. Moreover, many industries were blocked to foreign companies.

In September 2013, China established its first free trade zone (Pilot) in Shanghai. The zone is designed as a testing ground for deregulation and market-opening reforms all over China. Since its establishment, China has launched three additional free trade zones in Tianjin, Guangdong and Fujian. The free trade zones are intended to drive regional growth by encouraging selected industries to cluster in that area.

The benefits of the Free Trade Zones include:

Simplified establishment procedure: The administrative process for the establishment of a company in the free trade zone and has become simpler and shorter than usual. A company interested in registering will not have to undergo certification procedures in different municipalities, but rather will only need to register at the local Chamber of Commerce, as long as such company does not operate in an industry which is listed in the "Negative List".

Negative list: On September 2013, the Shanghai municipal government published a negative list which covers all restricted and prohibited investments for foreign companies. For investments in industries which are not included in the negative list, foreign investors and domestic investors will receive equal treatment. Since its introduction, the negative list has been reduced and simplified a few time from an initial list of 190 items to the current list of 122 items. The negative list has opened up more areas and opportunities for foreign investors, including in real estate, value added telecommunications, pharmaceuticals, agriculture and more.

Free trade: The free trade zone facilitates and eases some of the restrictions customary in China. This liberalization has made it into a global center of movement of goods, especially the free trade zone in Shanghai due to its relatively central location in China. The zone encourages foreign companies to establish a global warehouse within the zone, while allowing free entry and exit of goods from abroad within the zone, without charging customs duties. Commodities which exits the free trade zone to mainland China will be charged in accordance with customs law.

Foreign investments: Companies operating in the free trade zone are allowed to make foreign investments without government approval (as is the case outside the free trade zone). In order to complete these investments, these companies must submit the documents which are relevant to foreign investments to the local authorities. Thus, the procedure of foreign investment has become much simpler for the listed companies.

Financial liberalism: Easing the conversion of Chinese Yuan (RMB) accounts, money transfers and opening accounts. The zone operates under a free trade account system designed to permit account holders to move funds in and out of China outside of the strict capital controls that apply outside the zone.

The process of establishing a company in China

  • The foreign company must establish the holding structure and check whether the area in which the company intends to engage in China is open to foreign investors in accordance with Chinese law, as well as if there are any restrictions that apply to a foreign company in this area of activity.
  • Generally, any foreign business entity established by law may open a company (WFOE) in China. The investor must provide certain documentation, such as incorporation documents and the company's capital adequacy in the country of incorporation. The documents typically required from the a business entity are: articles of association, a local/ international business license, a letter from the bank attesting to the company's financial history and account status, a description of the business activities of the investor, along with other materials such as an annual report, etc. The documents must be translated into Chinese.
  • Approval of the Chinese government for the project. In China, unlike most Western countries, the approval of projects by the relevant government authority is integral to the process of incorporation. The following documents must be prepared for the process of incorporation and approval of the project: the company's articles of association, a feasibility study, leases/rental agreements, the proposed salaries for personnel and benefits budget, as well as any other documentation required for the specific business. Government approval of the project typically takes between 2-5 months, depending on the location of the project, its size and scope. In large cities like Shanghai and Beijing, the process tends to be slower than in smaller cities. The investor should pay various fees, check the required amount of registered capital, and determine whether special licenses are needed the specific project.