Free trade zones in China

Free trade zones (FTZs) are a type of special economic zones (SEZs) where goods are imported, handled, manufactured, and exported without any intervention from customs. In August 2016, seven new FTZs were announced, bringing the total number of FTZs in China to 11. Each FTZ in China caters to a specific industry and benefits from several types of incentives such as:

• reduced tax rates
• expedited administrative procedures
• relaxed investment restrictions

In 2013, the pilot Shanghai FTZ was inaugurated. It was a testing ground for legal innovations and had fewer restrictions to attract foreign direct investment. Incentives offered included:

• relaxed incorporation requirements
• use of the negative lists for pre-approving procedures
• a one-stop application process

All these incentives were eventually adopted for all the FTZs in China.

In 2015, three more FTZs were announced in Fujian, Guangdong and Tianjin. Fujian FTZ supports trade with Taiwan, while the Guangdong FTZ focuses on economic integration with Hong Kong and Macau. Tianjin FTZ supports northeastern China and the development of offshore financial markets.

In 2016, seven new FTZs were announced to support the economic development of western China and the Belt and Road Initiative. The locations include:

• Chongqing
• Liaoning
• Henan
• Hubei
• Shaanxi
• Sichuan
• Zhejiang

A 12th FTZ will be established in Hainan by 2020. The government aims to develop a free trade port by 2025 in the province and ensure that the island province’s free trade system is completely developed by 2035.

Incentives

FTZs offer several types of incentives for foreign investors whose firms fulfil certain conditions such as:

• reduced corporate income tax (CIT) of 15%
• payment of CIT in installments
• individual income tax subsidies for qualified high-end talents
• duty-free import of machinery and equipment

In addition to customs duties and tax incentives, the customs clearance process is more streamlined with respect to declarations and payments. For example, companies can declare several batches of goods on a single form and issue a collective declaration for export and import of goods. This reduces clearance costs and increases flexibility. Firms with adequate guarantees can also pay their tax in a one-time lump sum payment within a specific period, for goods already imported.

The FTZs also have relaxed policies for foreign-invested enterprises in specific industries or capabilities, for example, for logistics and pharmaceuticals that are not widely available in China.

Map of China’s free trade zones, their focus industries and development progress

Negative lists

In June 2018, the National Development and Reform Commission and the Ministry of Commerce jointly released the new national and FTZ negative lists, which list prohibited and restricted industries for foreign investment. In addition to these lists, 22 special management measures were introduced to highlight the changes made within the revised lists.

National negative list

The 2018 national negative list also referred to as the Special administrative measures for the access of foreign investment, partially replaces the previous 2017 catalogue for the guidance of foreign investment industries. The new national list reduces the number of restrictive measures from 63 to 48.

The 2018 national negative list relaxes or removes restrictions on foreign investment in the agriculture, mining and infrastructure sectors. Restrictions in sectors such as finance, insurance and automobile will be gradually reduced.

Refer to the complete 2018 negative list (PDF: 418 KB; 5 pages in Chinese only).

Free trade zones negative list

The FTZ negative list is a list of industries in which foreign investments are either prohibited or restricted in China’s FTZs. Prohibited industries, such as ones related to national security, are prohibited, while restricted sectors need foreign investors to acquire special approvals or enter into a joint venture with an existing Chinese partner. For industries not included in the list, foreign investors will receive the same treatment as domestic firms.

The 2018 FTZ negative list, also referred to as the Special management measures for foreign investment access in the free trade zone (PDF: 471 KB, 6 pages in Chinese only), has reduced restrictions for foreign investments from 95 measures in 2017 to 45 in 2018. It applies to all the FTZs in China.

The majority of the changes for foreign investors in the 2018 list include the removal or easing of ownership caps and joint-venture requirements. Additional restrictions removed in the 2018 FTZ negative list include the following industries:

• prospecting and exploitation of petroleum and natural gas
• aviation manufacturing
• wholesale retail of tobacco and cigarettes
• legal services
• foreign education institutions
• smelting and processing of radioactive mineral resources as well as the production of nuclear fuel
• stage performance agencies