Shanghai Free Trade Zone Further Relaxes Foreign Investment Control

January 9, 2014 Posted by China Briefing Reading Time: 5 minutes

Jan. 9 – On Monday, China’s State Council announced its decision to modify a series of measures on foreign investment approval and admission within the Shanghai Free Trade Zone (Shanghai FTZ). This move is part of a wider effort to reform China’s foreign investment management system and further open its service sector to foreign investors.

FIE Approval Procedures
The announcement has suspended approval procedures for the following 24 items in the Shanghai FTZ:

Foreign investment projects
Establishment of wholly foreign-owned enterprises (WFOEs)
Division and merger of WFOEs
Reduction, increase and transfer of registered capital by WFOEs
Mortgage and assignment of assets and interests by WFOEs
Capital contribution by foreign investors
Extension of capital contribution period by foreign investors
Operating period of WFOEs
Termination of WFOEs
Establishment of Sino-foreign equity joint ventures (EJV)
Equity transfer by EJVs
Reduction, increase and transfer of registered capital by EJVs
Capital contribution method of EJVs
Operating period of EJVs
Dissolution of EJVs
Establishment of Sino-foreign cooperative joint ventures (CJVs)
Major amendments to the agreements, contracts and articles of association of CJVs
Reduction of registered capital by CJVs
Assignment of rights under the cooperative contracts by CJVs
Entrusted operational agreements of CJVs
Early recovery of foreign investment
Extension of operating period by CJVs
Dissolution of CJVs
Capital contribution by WFOEs, EJVs and CJVs

The above-mentioned items now only need to go though record-filling procedures with relevant authorities provided they are not in contradiction with the Negative List, which covers areas that are off-limits to foreign investors.

DSA Comment: This announcement does not tell us anything we didn’t already know. It reaffirms that all of these procedures have been streamlined, and can now be done online in a matter of days as long as the project is not on the Negative List and has the requisite government operational and other licences.

Specific Industry Guidelines
Moreover, the announcement has put forward the following eight guidelines for the Shanghai FTZ:

Relaxing the restriction on the proportion of foreign equities permitted in joint venture international shipping enterprises;
Allowing wholly foreign-owned shipping management enterprises to be established in the Shanghai FTZ;
Allowing Foreign-invested credit investigation companies to be established in the Shanghai FTZ;
Cancelling equity caps for foreign performance agencies, and allowing wholly foreign-owned performance agencies to be established in the Shanghai FTZ;
Allowing wholly foreign-owned entertainment venues to be established in the Shanghai FTZ;
Allowing Sino-foreign education and vocational training organizations to be established in the Shanghai FTZ;
Allowing foreign enterprises to run certain designated value-added telecommunication businesses in the Shanghai FTZ; and
Allowing foreign enterprises to produce and sell gaming consoles in the Shanghai FTZ (Gaming consoles can be sold to domestic market upon approval from the competent culture department).

Detailed implementation plans for these eight guidelines will be rolled out by relevant government authorities on a later date.

DSA Comment: This announcement does not add much to that which has already been previously announced, although it reaffirms that there will be significant reform in a number of designated areas like shipping & transportation, gaming and entertainment, education, telecommunications and (possibly) HR. We are still waiting for detailed guidelines and definitions from the various Ministries, but note that the country’s Ministry of Industry and Information Technology (MIIT) has issued a statement on certain aspects of VATS businesses as noted below.

MIIT Statement on VATS Industry
Following the announcement, China’s MIIT released the “Opinions on Further Opening up Value-added Telecom Services in China (Shanghai) Free Trade Zone” (hereinafter referred to as ‘Opinions’) on its website, which allows overseas investors to own over 50 percent of some telecommunication businesses in the Shanghai FTZ.

According to the Opinions, foreign capital is now allowed to own more than 50 percent of online application stores and online storage business in the Shanghai FTZ. However, foreign ownership in online data and transaction processing businesses (e-commerce business) still cannot exceed 55 percent.

Moreover, the Shanghai FTZ will further open the following four new businesses to foreign capital:

Calling center services;
Internet access services;
Multi-side voice and video communication services; and
Domestic internet virtual private network businesses.

Overseas investors are able to increase their stake to over 50 percent in the first three services, while foreign ownership in domestic virtual private network businesse is capped at 50 percent.

Additionally, all telecom business enterprises that register and base their service facilities in the Shanghai FTZ will be allowed to offer their service (excluding internet access) nationwide.

DSA Comment: Although the full parameters and implications of this announcement are to be further considered, it would appear that the MIIT has decided to significantly open up parts of the VATS sector to foreign ownership. Whether this is followed up by the timely granting of licences for foreign-owned FTZ entities remains to be seen. The opening up of this sector (albeit in the FTZ) may spur the further development of BPO (Business Process Outsourcing) in the area and also see a re-examination of a number of VIE structures which are used by foreigners to participate in this sector.

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