Free Trade Zones in China

Free trade zones (FTZs) are types of special economic zones (SEZs) where goods may be imported, handled, manufactured and exported without direct intervention from customs.

Each FTZ in China has an industrial and economic focus, with different incentives to fulfil its objectives. Incentives and regulations in FTZs align with the Chinese government’s ongoing policy priorities. According to the Chinese Ministry of Commerce, in 2021, China's 21 FTZs contributed 17.3% of China’s total foreign trade (Rmb 6.8 tln) and 18.5% of China’s foreign investment inflows (Rmb 213 bln).

Benefits of China’s FTZs

Favorable administrative measures

• Reduced corporate income tax (CIT) (varies by FTZ)
• Duty-free imports and exports
• Bonded warehouse capacity
• Streamlined port and customs operations
• Simplified company registration
• Faster value added tax refund

Optimized business environment

• Targeted policy liberalisation in specific industries
• Purpose-built clustered industrial zones
• Reduced foreign exchange controls
• Additional liberalisations per Foreign Investment Law

Strong human capital

• Subsidies and tax benefits for recruitment of highly skilled workers
• Partnerships with universities to nurture young talents locally

Evolution of China’s FTZs and focused industries

China established its first free zone at Shanghai in 2013 as a testing ground for new regulations. In 2015, three costal provinces announced to strengthening regional economic integration. Two years later, the government set seven more FTZs to support western China and the Belt and Road Initiative (BRI).

In 2018, China put aside its 120 km2 limitation as for all other FTZs to make the entire Hainan province (35400 km2) a free trade port. Then, in 2019, six new zones were established with the focus on specific policy areas or to facilitate cooperation with certain countries or regions. In 2020, three more inland FTZs followed, in line with Beijing’s recent “strategic emerging industries” plan.

Opportunities

China uses FTZs to pilot new policies and regulations, thus permitting companies to experience more liberalised environment, with potentially lighter regulatory touch. Many international companies found FTZs an attractive option to set up China operations, depending on their industry. While FTZs in Shanghai and other prime Chinese cities have seen initial success, FTZ in Tier 2 and Tier 3 cities have distinct advantages with large pools of young skilled labour, lower costs and access to large regional markets beyond China’s coastal areas that are often overlooked. Many of the FTZs, such as Chongqing, Sichuan, Shaanxi and Henan focus on areas that are Canada’s strengths.

Considerations

Notwithstanding a potentially more liberal regulatory environment in the FTZs, all usual consideration with respect to market entry in China apply. To retain the established association between Canadian brands and qualities, exporters should ensure close attention to branding, customer service, quality control and Corporate Social Responsibility. 

Exporters and investors also need to consider that regulations and actual incentives differ by area, and each FTZ may have its own additional requirements. Most importantly, the implementation of national regulations in different parts of China may not be uniform. Therefore, companies need to understand thoroughly the requirements of local regulators. Companies should consult the latest FTZ foreign investment negative list and, if establishing business in China, ensure compliance with the latest Chinese cybersecurity, export controls and other regulations.

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Disclaimer:

The Canadian Trade Commissioner Service in China recommends that readers seek professional advice regarding their particular circumstances. This publication should not be relied on as a substitute for such professional advice. The Government of Canada does not guarantee the accuracy of any of the information contained on this page. Readers should independently verify the accuracy and reliability of the information. 

Content on this page is provided in part by Dezan Shira & Associates a pan-Asia, multi-disciplinary professional services firm, providing legal, tax, and operational advisory to international corporate investors.