Officially launched on the 29th of September 2013, the China (Shanghai) Pilot Free Trade Zone (Shanghai FTZ) celebrated it’s 3 years yesterday. The PFTZ is the first free trade area in mainland China and an incubator for economic reform. It is part of the plan to develop special economic zones across the country

24436788 - container terminal with sunset glow in shanghai east china sea

The FTZ covers a geographical area of 120.72 square kilometers (46.61 sq mi), comprising the following four customs supervisory zones: Waigaoqiao Bonded Zone, Waigaoqiao Bonded Logistics Park, Yangshan Bonded Port and Pudong Airport Comprehensive Bonded Zone.

Since 21 April 2015, Shanghai FTZ’s areas are expanded, including Lujiazui Financial and Trade Zone, Shanghai Jingiao Economic and Technological Development Zone and Zhangjiang Hi-Tech Park.

The Shanghai FTZ has been created to stimulate relations to foreign investment and international trade in both goods and services, with the objective of promoting and leading the development of an open Chinese economy

Domestically, as China moves from an export-driven economy toward increased domestic consumption, many foreign-invested manufacturers have transferred their operations to elsewhere in Asia, which pressures Chinese government to offer new incentives for Foreign Direct Investment (FDI) and thereby transform its economic structure and sustain growth. Against the backdrop of the USA actively promoting TPP (Trans-pacific Partnership Agreement) and the United States and European Union starting negotiations on TTIP (Transatlantic Trade and Investment Partnership), Chinese authorities hope the Shanghai FTZ, among other measures, will boost China’s competitiveness with respect to TPP and TTIP.

Should you set up your business in a Free Trade Zone?

Overview

  • First China FTZ rolled out in 2013, starting in Shanghai
  • Currently 4 FTZs in China – Shanghai, Guangdong, Fujian and Tianjin
  • All FTZs in China share the same goal: simplified company registration procedures and relaxed foreign exchange regulations
  • Each China FTZ specialises in a particular industry (e.g. financial services in Qianhai, Guangdong)

Why should you set up?

  • You are seeking a virtual office solution for your WFOE in China (although virtual office solutions are also available outside FTZs in China).
  • You are selling via cross-border e-commerce through a large global platform. If you are a foreign brand seeking to sell your products via cross-border e-commerce, the FTZs have made this possible. You are able to sell directly to your end customer, and fulfill per order from a bonded warehouse in the FTZ, with customs, warehousing and logistics taken care of by agents serving global cross-border e-commerce sites.
  • You have a clear long-term policy playwith the local government and FTZ administration regarding opening up of regulation in your sector (e.g. license to operate in a restricted industry).

Why shouldn’t you set up?

  • You have a service or goods company with high domestic transaction volumes.
  • If you set up your China subsidiary in a FTZ, you will need to register with the tax office of the relevant FTZ in China. This means that all administrative tasks, such as collecting new VAT invoices and filing China VAT need to be done at the local FTZ offices. As many of the FTZ administrative bureaus are located far from the city centre, this will be inconvenient, adding cost and time to routine accounting tasks for most companies.
  • Seeking stability. Polices within the FTZs are notoriously vague, and implementation inconsistent as a result of local officials being unsure of where FTZ policy stops and national policy begins.

Remember that these zones are not only designed to attract foreign investment, and as the most recent FTZ announcements show, they often mainly seek to boost local industry and current policy initiatives (RMB internationalization, One Belt One Road). So if you are looking to set up a business in China, don’t get distracted by these zones and start by thinking where it would make commercial sense to be (e.g. close to your clients in China) first and foremost.

 

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