The original article has been prepared by our partners from 1421 Consulting Group. MS Advisory has updated this article following recent developments in China.
A frequently asked question is where to register your entity in China. A lot of organizations are interested in the Free Trade Zones (FTZs) and Special Economic Zones (SEZs). They want to know the differences between these areas and the 'normal' Mainland China ground in general.
This article focuses on Free Trade Zones in China. In the second article, 1421 will elaborate on the Special Economic Zones in China.
What are Free Trade Zones?
The first modern free-trade zone was established at Shannon airport in Ireland. Founded in 1959, the FTZ attracted little attention from the outside world. Nowadays, due to a combination of tax-and-tariff incentives, streamlined customs and less regulation, everyone seems an admirer of the 'special economic zones' (SEZ).
Free Trade Zones in China are a specific class of special economic zones; an area where goods may be landed, handled, manufactured and re-exported without intervention of the customs authority. China's first Free Trade Zone opened in Shanghai in 2013 and perceived as a milestone in doing business in China. It replaced the previous "low-cost land policy" of the more traditional industrial zones and is used to try and explore policies for modernizing the Chinese business environemnt. The FTZ should be seen as a blueprint for further reform in China. Unlike other types of SEZs, free-trade zones can experiment with financial models and attract investment. Free-trade zones are organized in areas with many geographical advantages for trade e.g. major seaports and international airports.
After the opening of the Shanghai FTZ, several other FTZs have been initiated. Currently there are 11 approved pilot free trade zones, which are: Shanghai, Fujian, Guangdon, Tianjin, Chongqing, Liaoning, Henan, Hubei, Shaanxi, Sichuan and Zhejiang. China is planning to make the entire island of Hainan in the south of China into a Free Trade Zone by 2020. Each of the locations was chosen to serve a specific purpose, upon which we will elaborate below.
Even though every FTZ has subsections, this article will only focus on the overarching areas. Specifically, this section will elaborate on each Free Trade Zone and will summarize the benefits. Please note that the indicated focus areas are merely indications; any investments are welcome in the FTZ's.
Benefits of a Free Trade Zone
This section will provide a shortlist of concrete benefits why foreign entities would register in an FTZ. Even though not all benefits have proven to be significant, they are still listed:
Choosing a virtual office instead of a real one;
Procedure of registering in an FTZ are quicker and easier;
Less - or no - (import/export) taxes;
Easier conversion from RMB to foreign currencies;
Special customs monitoring system: 1) detailed customs clearance is only needed in a later stage, and 2) faster customs clearance of goods.
No import tax when imported into the FTZ;
Broadening of investment horizons
Shanghai, in August 2013, was the first city to be given the opportunity to trial a Free Trade Zone. With fewer restrictions it was the testing ground of the FTZs and it was hoped it would bring more foreign investment into China and take the focus away from Hong Kong.
Focus: financial services, international shipping and pharmaceuticals.
Tianjin is a major city only located 30 minutes south of Beijing. It has a harbor and a well-developed industrial sector. However, the major reason that the Central Government chose Tianjin is for a future purpose: Jingjinji, also known as Beijing-Tianjin-Hebei. This region is emerging as the major northern metropolitan area, rivaling the Pearl River Delta and the Yangtze River Delta. It is the wish of the Government to combine these cities in terms of infrastructure, manufacturing/industry and R&D resources. For that reason, a huge airport in the center of Jingjinji has been planned: Beijing Daxing International Airport. Also, it was the only FTZ zone in Northern China. This boosted Tianjin's economy in the China-Mongolia-Russia economic corridor.
Focus: Shipping, financial leasing and high-end manufacturing
Guangdong has a distinct advantage: the geographic location. It has several major ports and is the Chinese gateway to both Hong Kong and Macau. China is pushing for the 21th century (maritime) silk road, and both Shanghai and Guangdong fit the start of this route perfectly. Guangdong is a leading industrial province, with a huge electronic R&D sector in Shenzhen.
Consequently, Guangdong has been on top of GDP rankings of Chinese provinces for two decades. Moreover, this FTZ works on further integration of Mainland China with Hong Kong and Macau and exporting the huge number of products produced in Southern China. Also, its purpose is to build a new financial cooperation system in the region.
Focus: Finance industry, customs clearance and maritime routes to Africa and Europe.
The Fujian FTZ is located next to Xiamen and will yield a lot of benefits linking to Taiwan. Nowadays, Fujian and Taiwan's economies are very linked, resulting in a lot of economic interaction. It will promote free-flow of goods between Taiwan and Mainland China. Consequently, many benefits are for Taiwan entities. Examples are easier visa's, encouraged construction projects and providing foreign bookkeeping services.
Furthermore, Fujian's rich land and labor resources have a great advantage to labor intensive industries. Fujian's specification is to create easy entry barriers to attract more Taiwanese companies. Its dual channel of loan business for both sides is also a special advantage for Xiamen.
Focus: Trade with Taiwan, production services and high-end service sector.
New Free Trade Zones introduced in 2016
During 2016, the Chinese government introduced 7 new Free Trade Zones to support the country's long-term plans to further develop inland China and the "One Belt, One Road" initiative.
The focus areas of these FTZs are as follows:
Chongqing: inland hub for the "One Belt, One Road", high-end manufacturing, tariff-free services and pharmaceuticals.
Liaoning: increasing the North East's economic development by attracting talent and serving as a logistics hub.
Henan: develop a traffic and logistics system for the "One Belt, One Road", and support of the cross-border eCommerce, automobile and biomedical industries.
Hubei: act as a transport link for the Yangtze River Delta and develop new energy vehicle manufacturing.
Shaanxi: serve as logistics and commerce hub for the "One Belt, One Road" and development of agricultural technology.
Sichuan: function as logistics hub for South West inland development, advanced manufacturing and medical services.
Zhejiang: develop foreign trade in bulk commodities, maritime related advanced services and develop the oil and petrochemicals industry.
Hainan FTZ to be established in 2020
The Chinese government aims to make the island province of Hainan as their largest Free Trade Zone by 2020 and a Free Port by 2025.
Hainan: key advantages of this FTZ would be the relaxed rules on setting up hospital facilities, foreign doctors are allowed to operate in this province, relaxed import procedures for pharmaceutical and medical equipment imports and other favorable policies for international trade. Due to Hainan's strategic location close to South East Asia, this FTZ would serve the purpose to become an important trading partner with the ASEAN economic region.
Even though these free trade zones in China have the support of the Central Government, clear and long-term results will have to be seen. Many (foreign) entities are already registered in the zones, but are not always experiencing clear effects and/or benefits. New regulations are under strict control of the government. A government steering a huge economy. The government is looking carefully at the results of the FTZs and is slowly implementing new procedures and rules, both in the FTZs as well as in Mainland China.
We will see the real impact o f the FTZs in the decades to come.
The original article has been prepared by 1421 Consulting Group, a management consultancy firm active in Beijing and Shenzhen, who have supported many foreign SMEs with doing business in China. To visit the original article and get in contact with 1421 Consulting Group, please visit the article at https://www.1421.consulting/2016/08/free-trade-zones-china/