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China (Shanghai) Free Trade Pilot Zone Enhancing Market Access for New Zealand Companies

Strategy

By Damon Paling

After months of mounting anticipation the China (Shanghai) Free Trade Pilot Zone (FTPZ) was officially opened on 29 September 2013. Rather than being a “big bang” event a series of reform measures are to be released over the coming months and years. These changes may enhance China market access opportunities for certain New Zealand companies. This article summarises some of the salient aspects that have been established to date.

Objectives

The medium term objectives of the FTPZ are to expand the services sector and promote reform of the foreign investment management system. Development of regional headquarters activities and new trade reforms will be rolled out. Capital account convertibility and the full opening up of the financial services sector should also take place. An innovative international business environment that is governed by the rule of law is planned.

The government will control risks by adopting a step-by-step principle for rolling out these measures. The majority of the new rules and regulations to support business in the FTPZ are to be issued by the Shanghai municipal government.

The Zone

The FTPZ comprises of four existing zones, namely Shanghai Waigaoqiao Bonded Zone, Shanghai Waigaoqiao Bonded Logistics Park, Yangshan Bonded Port, and Shanghai Pudong Airport Comprehensive Bonded Zone. These four areas cover about 28 square kilometres and are located adjacent to major international air and sea ports in Shanghai.

One open question is whether the FTPZ will be expanded physically so as to ensure that the supply of land and buildings for commercial offices and warehousing can keep up with increased demand. This move is anticipated so that Shanghai can remain cost-competitive against other regional hubs such as Hong Kong and Singapore.

Trade in Goods

Reduced ‘red tape’ at the border

Most New Zealand companies exporting goods to China today enjoy a 0% customs duty rate under the FTA, which has aided in opening up the market since 2008. However, several other hidden costs at the border remain which still restrict access to the China market. This can come in the form of inconsistencies and a lack of transparency around documentation requirements, Customs clearance times, Customs/CIQ inspections and testing, working hours of officials, and the like. This is particularly so for companies in the agricultural and food and beverage sectors.

Examples of where ‘red tape’ and hidden costs may be removed are as follows:

  • The Consignee with an import Manifest can receive cargo into the FTPZ before proceeding with Customs Registration. This will reduce the discrepancy rate between what is received a bonded warehouse and what is declared to Customs and therefore additional customs duty assessments.
  • The Consignee can enjoy simplified entry/exit record lists, as well as the entry/exit procedures for international transfer, containerization and distribution. This will reduce effort required in preparing and exchanging commercial and shipping documentation and the data entry and declaration work that is currently performed by Customs Brokers.
  • New Zealand exporters entering or launching new product in the market may be able to display these goods in bond without customs duties being paid. Potential distributors will be able to visit and sample/test product and the product may be re-exported thereafter or sold into the domestic China market.
Shanghai Gateway

New Zealand exporters using multiple gateway Ports to enter China experience inconsistency in Customs and Commodity Inspection and Quarantine (CIQ) rule enforcement across different Ports. This results in additional costs and time being lost in delivering merchandise to Distributors. A streamlined Customs checkpoint that is integrated with CIQ in the form of a single electronic window will make Shanghai more attractive as a preferred gateway Port. Use of a new single “streamlined entry and exit channel that assures quality safety” may be a preferred strategy. For example, once cleared through Shanghai FTPZ goods could then be delivered to Distributors in various Tier 1 and 2 cities. In this scenario a comparison should be made between the total door-to-door freight costs and lead times of using Shanghai as a single hub gateway versus using multiple ports of entry.

Pudong airport is being expanded to support increase international transit flights, which may also help New Zealand exporters that are supplying not just the China market but also other North East Asia markets, such as Japan and South Korea.

Retaining FTA Cost Savings

The General Administration of Customs (GAC) issued Notice 36 in July 2013, which can be used by New Zealand exporters to temporarily store goods in a bonded zone, such as the new FTPZ, but still retain the FTA benefits of a 0% customs duty rate when product enters domestic China. For example, a New Zealand exporter could ship a full container load (FCL) to the FTPZ, store temporarily in bond, and then deliver less-than-container-load (LCL) on an as need basis to various Distributors in domestic China.

Existing versus new investment

New Zealand exporters need not have to deploy additional capital to create a new Wholly Foreign Owned Enterprise (WFOE) or Representative Office (RO) registered in the FTPZ. A Third Party Logistics Provider (3PL) and Customs Broker that is already registered and operating within the FTPZ should be able deliver the benefits of enhanced trade facilitation measures to their clients. Distributors registered in other Provinces may still be able to use the FTPZ as a gateway hub by using their existing Customs Registration Number (CRN) or working with an Import/Export Agent that is registered in the FTPZ.

However, if a new investment is planned then New Zealand exporters can benefit form a transformation in governance, standards, approval processes and service levels. For example, this may come in the form of one-off acceptance and integrated examination and approval. The usual 4 – 6 month period to have a WFOE operationally ready should be shortened and the conversion of foreign currency into functional RMB currency should be simplified.

Trade in Services

Acceleration of trade in services is in many respects the primary focus of the new FTPZ with opening up scheduled in the following areas:

  1. Finance Services: Banking, healthcare and medical care insurance, financing leasing
  2. Shipping: Ocean cargo transportation and international shipping management
  3. Commerce and Trade Service: Value-added tele-communication, sales and services of games consoles and amusement machines
  4. Professional Services: Legal services, credit status investigations, travel agents, human resources intermediary services, investment management, engineering design, and construction services
  5. Cultural Services: Performance agents, entertainment venues
  6. Social Services: Educational and vocational training and healthcare services

Related market access restrictions should be suspended or cancelled, such as requirements on investor qualifications, equity ratio limits and business scope limits, with some exceptions in the areas of banking and communications services still remaining. The opening up will only be applied to enterprises registered in the FTPZ.

Summary

Presence of a physical office versus simple registration in the FTPZ remains as an open consideration depending on the nature of the operation. Relaxed debt/equity ratio is also still on the table for discussion. The headline corporate income tax rate of 25% is likely to remain but it is yet to be announced what, if any, financial subsidy would be available.

For New Zealand exports in the agricultural and food and beverage sectors one of the better outcomes would be relaxed rules in Customs and CIQ procedures as well as foreign exchange remittance from Chinese Distributors. This reform coupled with a bonded warehousing and Vendor Managed Inventory (VMI) approach may further open up sales channels into the domestic China market.

The various reforms, according to the plan, should be carried out on a trial basis within 2-3 years with no indication of a specific timeline as of now.