China's FTZs: Recent developments

China recently announced the establishment of seven new free trade zones. We explore this and other key free trade zone developments.
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Recent policy developments have generated renewed interest in China’s free trade zones (FTZs). Most notably, in August 2016, the CPC Central Committee and State Council announced that they would authorize the establishment of seven new FTZs. This will add to the four existing FTZs, bringing the total to eleven.

More recently, on 05 January 2017, Ministry of Commerce (MOFCOM) spokesman, Sun Jiwen, underscored the importance of FTZs to China’s continuing reform and development, stating that MOFCOM will cooperate closely with the relevant departments of the provincial and municipal governments of each FTZ. Specifically, its goals are to strengthen the four existing FTZs, while rapidly establishing the seven new ones, which together will serve as engines of China’s future economic growth.  

Below we take stock of these recent developments and explore the continuing evolution of the FTZs from a testing ground for economic reforms to key drivers of regional development and integration and pillars of national development strategies.

China's FTZs

China’s FTZs are meant to help open up key markets and industries to foreign investment through relaxed customs procedures, foreign investment rules, and trade and finance regulations. They also serve as key platforms for facilitating outbound investment. Each of the four existing FTZs employs similar means to achieve these goals, albeit with a slightly different approach and focus.

The key FTZ innovation that was first piloted in the China (Shanghai) Pilot Free-Trade Zone (Shanghai FTZ) and has been introduced nation-wide is the negative list filing system for foreign investment. Other notable FTZ policies include: accelerated approval of outbound investments; easier RMB conversion; bonded warehouses; reduced or eliminated import/export taxes; and allowing domestic companies with FTZ bank accounts to borrow funds offshore. New measures are continually being rolled out. For instance, in January 2017, the Ministry of Transportation issued the "People's Republic of China Shipping Registration Regulation," which exempts international vessels registered in a FTZ from the 50% minimum Chinese equity investment quota that would otherwise apply. Similarly, on 06 January 2017, Vice Minister of Commerce, Wang Shouwen, indicated that the FTZs will be used to open to investment areas that are currently closely protected, including mining and telecommunications.

Four existing FTZs

The four FTZs currently in operation are in Shanghai, Guangdong, Fujian and Tianjin, which as depicted in Figure 1 below, are all affluent coastal areas. 

Figure 1 - FTZs depicted here are: (1) Shanghai; (2) Guangdong; (3) Fujian; and (4) Tianjin.

China’s first FTZ, the Shanghai FTZ, was inaugurated in September 2013 as a means to test economic liberalization policies which, if successful, could later be implemented nationwide.  Its focus is on international trade, financial services, and building Shanghai into a global financial centre. Plans are currently being formulated to transform the Shanghai FTZ into a world class free port over the next three to four years by further relaxing cargo controls and streamlining customs clearance.

In 2015, China established three additional FTZs in Guangdong, Fujian, and Tianjin. These FTZs differ from the Shanghai FTZ in that they have specific regional development and integration focuses and are meant to support certain national development strategies, most notably One-Belt, One-Road. 

The China (Guangdong) Pilot Free-Trade Zone is meant to further the integration of the Pearl River Delta cities with the Hong Kong and Macau Special Administrative Regions. It focuses on finance, customs clearance and assisting Guangdong fulfill its key role as a manufacturing and export centre in the Maritime Silk Road.

The China (Fujian) Pilot Free-Trade Zone is meant to strengthen and expand on Fujian province's already close economic links with Taiwan through streamlined visa and construction processes and providing foreign bookkeeping services. It focuses on high tech industries and high end services. 

The China (Tianjin) Pilot Free-Trade Zone is meant to foster regional development in Tianjin and the less affluent areas of Hebei province and help integrate both areas with Beijing’s economy so that they will eventually coalesce to form “Jingjinji,” the future mega-city of North China. It focuses on shipping, financial leasing and high-end manufacturing. As a shipping centre with a particular focus on financial leasing, this FTZ has a special role to play in the Maritime Silk Road and in financing One-Belt, One-Road infrastructure projects. 

Seven new FTZs

The creation of seven new FTZs represents the next stage of the expansion and evolution of China’s FTZs. 

As shown in Figure 2 below, unlike China’s existing FTZs, the new FTZ’s will be located mainly in less developed jurisdictions in Central and Western China. The significance of this is twofold. First, the main purpose of China’s FTZs has shifted away from testing economic reforms that can be implemented nationwide. Though the FTZs will still perform this function, their main purpose is now fostering regional economic development and integration. Second, considered alongside recent investment incentives and the development targets of the 13th Five Year Plan, the new FTZs are a clear signal of China’s determination to develop its interior and to energetically implement the One-Belt, One Road development strategy. Given that the new FTZs are mainly in China’s interior, they will have a special road to play in the land-based Silk Road Economic Belt, unlike the existing FTZs, which play a greater role in the New Maritime Silk Road.

Figure 2 - FTZs depicted here are: (1) Chongqing; (2)Sichuan; (3) Shaanxi; (4) Hubei; (5) Henan; (6) Zhejiang; and (7) Liaoning.

To better understand the rationale behind the location of the seven new FTZs, it is helpful to categorize them geographically as follows: (1) the three western FTZs; (2) the two central FTZs; (3) the two new coastal FTZs. 

i. Western FTZs

The three western FTZs are Chongqing, Sichuan, and Shaanxi, which corresponds with China’s West Triangle Economic Zone (Chongqing, Chengdu, and Xi'an),1 a tri-city economic zone which has been singled out by the Chinese government as forming the focal point of its Western Development Strategy. Essentially, the government has decided to give priority to the three cities in Western China that are already the most developed2 and to invest heavily in their infrastructure, industry and education and otherwise encourage foreign investment in these cities, which will serve as growth poles for the rest of Western China. Though currently a less developed region, Western China is now growing faster than other regions of China, in part due to the westward migration of China’s manufacturing capacity from the developed Eastern provinces. 

Chongqing is the centerpiece of the West Triangle Economic Zone, as it is one of the largest cities in China and one of only four direct-controlled municipalities.3 In 2015 Chongqing had the highest economic growth rate, 11%, of any province-level jurisdiction in China. It will likely be the major growth pole for Western China. Its FTZ will encompass Liang Jiang New Area, West Logistics Park, and a micro-electronics park. Much like Chongqing, Sichuan province will also serve as a gateway to opening up Western China. As well, these two cities are both major centres along the Yangtze River Economic belt, which, as discussed below, is a massive economic development region.

The purpose of Shaanxi’s FTZ differs from that of Chongqing and Sichuan in so far as, in addition to developing Western China, it is also meant to aid in the construction of the One Belt, One Road network. Shaanxi’s capital, Xi’an, will serve as a key juncture at the eastern end of the New Silk Road Economic Belt and will also serve as one of its largest and most important logistics centres. 

ii. Central FTZs

The FTZs in Hubei and Henan will both capitalize on the fact that these provinces are highly populated (total population of over 150,000,000) and centrally located transportation hubs. 

The Hubei FTZ will have locations in the provincial capital of Wuhan and further west in Xiangyang and Yichang. The Hubei FTZ will seek to develop several strategic sectors, including high-tech industries. Along with the Chongqing and Sichuan FTZs, it is meant to serve as a key hub in the Yangtze River Economic Belt, which is a massive 2.05 million square kilometer area that includes nine provinces and two direct-controlled municipalities situated along the Yangtze. This economic belt follows the course of the Yangtze river, which begins in the mountains of Yunnan, flows through some of China’s most highly populated provinces and connects China’s less developed Western provinces with prosperous Shanghai, where the Yangtze empties into the sea. The Chinese government is investing large sums to build railways, roads and airports in this area to further integration between East and West and developed and undeveloped provinces. 

Henan’s FTZ will be located in its provincial capital, Zhengzhou and in the Yellow River cities of Luoyang and Kaifeng. Henan, in particular Zhengzhou, is currently the logistics and transportation epicenter of Northern China. Henan has excellent rail and road links, both within and beyond, China. It is now the default choice for shipping goods by rail to and from Europe. As well, in recent years, Henan has made major investments in cargo handling at the Zhengzhou airport. Its status as a key import/export and transport hub has also allowed it to expand its warehousing and manufacturing industries. Henan’s FTZ is meant to help the province further capitalize on this role, in particular by serving as an integrated transport hub for One Belt, One Road.

iii. New Coastal FTZs

Of the seven new FTZs, only those in Zhejiang and Liaoning are located in coastal provinces. However, of the three groups of new FTZs, this group is the least coherent, as these two provinces are ultimately quite different from eachother. 

The Zhejiang FTZ stands out from the other new FTZs as it is located in a coastal province that is already very well developed. Zhejiang has the fifth highest GDP per capita in China, and has a very robust and innovative private economy. In particular, Zhejiang’s capital, Hangzhou, is highly developed and hosts the headquarters of several large e-commerce companies, including Alibaba and Net Ease. 

Zhejiang is already an export powerhouse and its FTZ will attempt to capitalize on this by locating in Zhoushan, the site of the Zhoushan-Ningbo Container Port, which is often ranked as the world’s busiest container port. A free trade port already exists in Zhoushan and it is a major hub for various industries including maritime equipment, life sciences, electronics and logistics. Further development of the Zhoushan-Ningbo Container power has been cited as a key component of the Maritime Silk Road.  

The Liaoning FTZ has a clear regional development role to play in revitalizing Northeast China, which by Chinese standards is a stagnant region with low economic growth and a declining population. In 2016 Liaoning itself grew at the slowest rate, 2.7%, of any province in China. It was likely chosen because it is the only province in the Northeast with a sea port. The Northeast was the earliest region to industrialize in China, but its economy is now dominated by inefficient state-owned enterprises operating in heavy industry. China has initiated the Revitalize the Northeast campaign to counter this problem. The primary purpose of the Liaoning FTZ will thus be to help improve the competitiveness of the Northeast's traditional industries and help open up the region to increased foreign investment.


2017 promises to be an exciting year for China’s FTZs. New economic reforms should reinvigorate China’s existing FTZs, while the inauguration of the new FTZs should do much to help advance One-Belt, One-Road and other development strategies. 

1Chengdu and Xi’an are the capitals of Sichuan and Shaanxi, respectively.
2Collectively, Chongqing, Chengdu and Xi’an account for 40% of the GDP of Western China.
3Essentially, this means it is a province-level city like Beijing, Shanghai and Tianjin.

This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document. Simmons & Simmons is registered in China as a foreign law firm. We are permitted by Chinese regulations to provide information on the impact of the Chinese legal environment and also to provide a range of other services. We are not admitted to practise in China and cannot, and do not purport to, provide Chinese legal services. We are, however, able to co-ordinate with local counsel to issue a formal legal opinion should this be required.