China’s Second Free Trade Zone will Open Next Week. Below is the text of an interview with Paul Kossof, an Associate at the Beijing office of TransAsia Lawyers, about this new development.
John Grimley: There has been substantial interest from foreign investors and companies in Shanghai’s free trade zone, which appears to not only offer procedural and economic incentives, but also allows foreign investors to participate in otherwise restricted industries. Do you expect that the Guangdong free trade zone will follow this trend?
Paul Kossof: The Guangdong FTZ is actually one of three FTZs approved by the State Council in December 2014 – the other two are in Tianjin and Fujian. The State Council explicitly provided that these three FTZs will be modeled on the SFTZ. Additionally, the Measures for the Administration of the China (Guangdong) Pilot Free Trade Zone, which are still under examination and not available in English, reflect the policy considerations I have seen in SFTZ regulations. As such, I believe that the Guangdong FTZ will offer similar economic and procedural benefits, as well as opportunities otherwise unavailable for foreign investors through a “negative list”.
John Grimley: What do you mean by negative list?
Paul Kossof: The Chinese free trade zone model incorporates the concept of a “negative list”, which lists industries that foreign entities cannot participate in. The loose presumption is that anything not on the list is otherwise allowed. In comparison, the rest of Mainland China uses a catalogue of industries that foreign investors are either allowed to, restricted from or banned from participating in. In fact, the new catalogue comes out next month, leading to substantial questions about how to navigate the relationship between the new catalogue and these negative lists.
John Grimley: I am also aware that China’s Foreign Investment Law is undergoing revisions. How will this affect Guangdong’s free trade zone and the others in China?
Paul Kossof: The current draft of the Foreign Investment Law would likely lead to the end of Variable Interest Entities in China. Currently, foreign investors can use contracts to exert control over companies wholly owned by PRC nationals, allowing these investors to participate in restricted or banned industries. Once the VIE model is no longer available, foreign investors will look for other avenues of participating in these industries, namely free trade zones. But at the same time, the new catalogue will open up some very important industries to foreign companies.
John Grimley: Is there anything else you would like to share about this new free trade zone?
Paul Kossof: I think that this new FTZ, along with the FTZs in Tianjin and Fujian, will show China’s investment in using FTZs as a method for promoting economic development. Not only is China establishing more FTZs, but they are larger (the Guangdong FTZ is almost four times as large as the original SFTZ) and will have their own unique characteristics. For example, the Guangdong FTZ will focus on Mainland China’s ties with Hong Kong and Macao. I’m looking forward to seeing whether the FTZ model takes hold in China.