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Best Location For Startups in China - Shanghai FTZ

Shanghai Free Trade Pilot Free Trade Zone

There has been a lot of buzz and news on Shanghai Free Trade Zone (FTZ). But majority of the news is focused on Financial Reforms, Logistics and other large business connected to multi-nationals. But if you are living in China like me for a long time you would realize that if Shanghai Free Trade Zone offers the benefits as outlined in the first regulatory draft, it might pave the way for Shanghai to be a leading innovation center for doing Startups in China. It will enable young innovative brains to get away from regulatory and legal hoops and concentrate on building something great to help humanity. In this article I try to look at FTZ from startup perspective besides covering the overall regulatory draft.

Shanghai Free Trade Zone (FTZ) - First Regulatory Draft [1]

Shanghai Government with support from China Central Government unveiled the first draft of regulation governing the Free Trade Zone (hereafter called FTZ) on 27th September 2013. This FTZ is considered as second biggest change in China after the opening up of Chinese economy by Deng Xiao Ping in 1990’s by establishing Shenzhen Special Economic Zone. It marks the trasition of Chinese economy from world’s factory into a developed economy driven by consumptions and services with free market economy. This will serve as a blueprint for Chinese government for transition of China to free market economy. Only time will tell how its going to shape China and its development, but definitely by bypassing the local ministry and their entrenched interest the Central Government of China has indicated its willingness to reform and change the course of Chinese economy.

Personally I have been waiting for this reforms eagerly, since some of its regulations takes away the barriers in China for doing Startups especially in information technology and internet area. If Shanghai Government can target innovative startups to come and setup in FTZ, it might as well become similar to silicon valley in US, a Mecca of startups in China. This will obviously needs some minor reforms on the China immigration, but at least for local startups already in China, these changes might bring them closer to the environment offered in South Korea, Hong Kong, Singapore. This offers 2 main advantages to early startups:

  1. Instead of setting up shops in Hong Kong, Singapore for China, its better to come inside the second largest economy providing large user base.
  2. Significant cost advantages with more preferential policies they might get in Hong Kong or Singapore.

Following are some of the key areas which will help startups in FTZ:

  1. No approval required to start a business, just registration is enough. Takes away the burden of going through approval process. Its a key for young startups where founders are more interested in implementing innovative ideas instead of going through regulatory hoops.

    Starting from October 1, 2013, 11 administrative examination and approval items regulated under the following three laws will be suspended in the Shanghai FTZ on a three-year trial basis.

    • The Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises.
    • The Law of the People’s Republic of China on Sino-Foreign Equity Joint Ventures.
    • The Law of the People’s Republic of China on Sino-Foreign Cooperative Joint Ventures.

    In addition, in order to better promote investment into the Shanghai FTZ, the Plan also allows enterprises or individual shareholders registered in the Shanghai FTZ to pay income tax in installments within a five-year period for value-added assets arising from asset restructuring.

  2. Capital market reforms and free yuan conversion. This brings FTZ closer to developed economy like Hong Kong and Singapore where angel, private investors and venture capital firms can easily inject money in promising startups with legal protection. They do not need to adopt creative structures through contractual controls, like they did with alibaba and other local firms where they are not adequately protected and take significant risks.

  3. Innovative Information Technology and Internet services business can be started in the FTZ without lengthy approval processes. Obviously as most startups use information technology as their backbone for scalalble innovative services its key that this sector is free from redtap. This is exactly what FTZ offers.

  4. Negative list approach for foreign investment. This actually supports the angel, private and venture capital investment companies which will help spur the growth of promising startups.

Below is the translation of the first regulatory draft [1]:

General Guideline

In the first section besides discussing the General Requirement related to ideology, overall goal contains a scope which provides the geographical scope of the reforms:

Geographical Scope

Shanghai FTZ covers an area of 28.78 square kilometers, and consists of the four following existing bonded zones:

  • Waigaoqiao Free Trade Zone.
  • Waigaoqiao Free Trade Logistics Park.
  • Pudong Airport Comprehensive Free Trade Zone.
  • Yangshan Free Trade Port Area.

This area will be gradually extended to whole of Pudong which is approximately 1240 square kilometer area and later extended to the whole country based on the outcome. You can download the images of FTZ areas WaiGaoQiao and Pudong Airport and Yangshan Port.

Major Tasks and Measures

This sections defines the 18 services and sectors, the Shanghai FTZ will offer easier investment access to both foreign and domestic capital and further open up. Below are the details of the services and sectors covered in Shanghai FTZ:

Financial Services

1. Banking Services

  • Allowing qualified foreign finance organizations to set up foreign banks in the Shanghai FTZ and permitting qualified private capital and foreign finance institutions to set up joint venture banks.
  • Allowing qualified Chinese banks to conduct offshore business in the Shanghai FTZ.

2. Professional Healthcare and Medical Insurance

  • Allowing wholly foreign-owned professional healthcare medical insurance organizations to be established in the Shanghai FTZ.

3. Financial Leasing

  • Cancelling the minimum capital requirements for the establishment of single aircraft or single vessel company subsidiaries in the Shanghai FTZ by financial leasing companies
  • Allowing financial leasing companies to concurrently operate factoring businesses that are associated with their primary business

Shipping Services

4. Ocean Cargo Transportation

  • Relaxing the restriction over the proportion of foreign equities in joint venture international shipping enterprises

5. International ship management

  • Allowing wholly foreign-owned shipping management enterprises to be established in the Shanghai FTZ

Trade and Commerce Services

6. Value-added telecommunications

  • Allowing foreign enterprises to run certain designated telecommunication businesses in the Shanghai FTZ

7. Selling and servicing of gaming consoles

  • Allowing foreign enterprises to produce and sell gaming consoles in the Shanghai FTZ

Professional Services

8. Legal services

  • Exploring mechanisms to enhance cooperation between mainland Chinese law firms and foreign law firms

9. Credit investigation services

  • Allowing foreign investigation enterprises to be established in the Shanghai FTZ

10. Travel agency

  • Allowing Sino-foreign joint venture travel agencies registered in the Shanghai FTZ to provide overseas travel services (with the exception of Taiwan)

11. Human resource agencies

  • Allowing Sino-foreign joint venture human resource agencies to be established in the Shanghai FTZ (provided that the foreign shares thereof do not exceed 70 percent of the total shares)
  • Hong Kong and Macau service provides are allowed to establish wholly self-owned human resource agencies
  • Reducing the minimum registered capital for foreign human resource agencies from US$300,000 to US$125,000

12. Investment management

  • Allowing joint stock foreign investment companies to be established in the Shanghai FTZ

13. Engineering design

  • Cancelling the engineering design performance requirement for foreign engineering design enterprises (excluding engineering investigation enterprises) in the Shanghai FTZ when applying for the qualification to provide services in Shanghai for the first time

14. Construction services

  • Cancelling the equity caps for Sino-foreign construction projects in Shanghai taken over by wholly foreign-owned construction enterprises established in the Shanghai FTZ

Cultural Services

15. Performance brokerage

  • Cancelling the equity caps for foreign performance agencies and allowing wholly foreign-owned performance agencies to be established in the Shanghai FTZ

16. Entertainment venues

  • Allowing wholly foreign-owned entertainment venues to be established in the Shanghai FTZ

Social Services

17. Educational and vocational training

  • Allowing Sino-foreign education and vocational training organizations to be established in the Shanghai FTZ

18. Medical service

  • Allowing wholly foreign-owned healthcare organizations to be established in the Shanghai FTZ

Opening-up of the Financial Services Sector

Since Central Government wants Shanghai to be one of the leading financial center like New York, London and Hong Kong. According to the plan, Shanghai FTZ will implement the following measures for opening up of the financial services sectors:

  • Shanghai FTZ will start trial programs of RMB convertibility under the capital account, market-oriented interest rates, and cross-border RMB transactions.
  • Shanghai FTZ will facilitate market-oriented pricing of financial institution assets.
  • Shanghai FTZ will pilot a new mechanism for the management of foreign exchange to facilitate trade investment.
  • Shanghai FTZ will encourage enterprises to take advantage of both onshore and offshore markets.
  • Shanghai FTZ will deepen foreign debt management reform to facilitate cross-border financing.
  • Shanghai FTZ will encourage multinationals to establish regional or global capital management centers within the zone.

Gradually Shanghi FTZ will allow WOFE (Wholly Owned Foreign Enterprises) to do commodity futures trading and open up future delivery warehouse in FTZ.

Conclusion

Although the main purpose of Shanghai Free Trade Zone is to understand and create a blueprint for broader reforms in China’s financial and services sector and implementing free market economy. It also on the other side boost innovation by creating an environment for young enterpreneurs from China and around the world to do innovative startups in China. If Shanghai can play it cards carefully and remove the barriers as envisioned in the buzz around FTZ, it might as well become the Silicon Valley of Asia due to the size of Chinese economy.

Hopefully someone in Central or Shanghai government can take a notice and use this opportunity to build a sustainable ecosystems of angel, private investors and venture capital industry in China to boost the Startup eco-system. As proven by Silicon Valley by creating apple, google, hopefully Shanghai FTZ can create global success similar in scale to google.

The key here is to allow this Startup to get unfiltered access to information from around the world and support them with legal and financial policies to create next big thing.

Footnotes:

[1](1, 2) Shanghai Pilot Free Trade Zone Regulatory Draft