Considerations when Investing in China’s Free Trade Zones

April 19, 2016 Posted by China Briefing Reading Time: 4 minutes

By Kyle Freeman
Senior Associate, International Business Advisory
Dezan Shira & Associates, Tianjin Office

In addition to the benefits of starting a business in China’s Free Trade Zones (FTZs), there are a number of other considerations that prospective investors should take into account when choosing their investment locations. It should be noted that while the majority of the FTZs are well connected by transport, they are not close to any sort of prominent commercial or residential areas. For example, the Nansha area of the Guangdong FTZ is connected to a major port and railway, but it is around an hour away from any major shopping or living areas in Guangzhou.

In other words, investments that sell wholesale to other areas of China, or export goods abroad, will be well served in all of the FTZs. However, businesses that require interaction with the general public will have to choose their location carefully for an FTZ investment to be worthwhile.

Intellectual Property Protection

Free Trade Zones have their own separate “three in one” intellectual property offices, covering patents, trademarks and copyright, which can resolve and enforce copyright disputes. The extent to which this will strengthen IP protection over the long term remains to be seen, but in the short term, it will cut down on time dealing with IP related government bureaucracy.

Industrial Clusters

The economic efficiencies of being in a “cluster” are difficult to generalize, but potentially immense. Each area of the FTZs has its own stated aim for specific industries, and each sub-area of the FTZs has its own individual cluster of industries.

Cross Border Financing: HK and Taiwan

The Fujian and Guangdong FTZs have policies designed to increase economic integration with Hong Kong and Taiwan. One of the most promising areas involves cross border financing: parent companies based in Hong Kong with a subsidiary in these FTZs, for instance, can issue RMB denominated bonds in China, creating unique benefits for Hong Kong and Taiwan businesses.

Shanghai’s Visa Policies

Shanghai has sought to lessen restrictions for foreigners seeking visa or residence permits, particularly within its Free Trade Zone. Foreign qualified individuals can now 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.

Customs and Value Added Tax Cuts

VAT is only applied once a product leaves an FTZ, and not to transactions that occur between companies in the FTZ itself. Moreover, goods that are imported into the four FTZs are not subject to customs duties, though they are subject to duties once they leave the FTZs. This could bring immense value to companies that are linked to a wider, global supply chain.

This article is an excerpt from the January and February issue of China Briefing Magazine, titled “A Guide to China’s Free Trade Zones.” In this issue of China Briefing magazine, we examine China’s four Free Trade Zones and discuss the differences and strengths that exist in each of them. We begin by providing an introduction to the FTZs, and then take an in-depth look at the market access conditions, registration procedures and tax environments of each. Finally, we highlight some of the key considerations that foreign companies should be aware of when choosing an FTZ to invest in.

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