Want to know the basics of China's new Free Trade Zones? Here are some key pieces to get you up to date.
Free Trade Zones (FTZ) in China are a specific class of special economic zones; an area where goods may be landed, handled, manufactured and re-exported without intervention of the customs authority.
China’s first FTZ opened in Shanghai in 2013 and was seen as a milestone in doing business in China. It replaced the previous “low-cost land policy” of the more traditional industrial zones.
The FTZs should be seen as a blueprint of further reform throughout China. Unlike other types of special economic zones, FTZs can experiment with financial models and attract investment.
FTZs are organized in areas with many geographical advantages for trade e.g. major seaports and international airports.
After the opening in Shanghai, several other FTZ’s have been initiated in April 2015: Tianjin, Guangdong and Fujian. Each of the locations were not chosen randomly, but serve a specific purpose.
Why were FTZs created?
The fundamental reason for the setup of the FTZs is to try and explore policies for modernizing Chinese businesses.
These zones also help the Chinese government to reduce grey-import smuggling, protect product quality, and capture more tax (or more appropriately to 'lose less tax'). Additionally, the demand for foreign goods has skyrocketed, and the FTZs are a platform to help speed the classification of these new goods and streamline the process.
You can have a mainland China company
While many businesses operate either offshore to China, or more locally at locations such as Hong Kong, there are a lot of roadblocks to enter the Chinese market. By establishing a company in a China FTZ, you are a “genuine” mainland Chinese company that can; sell in China, hire in China, issue tax receipts in China, as well as all the other features and benefits of having a Chinese company.
Additional benefits are a lower company tax and other special support initiatives from the Chinese government.
You can open a real WeChat Business Account
WeChat is one of the best ways to market and sell to Chinese consumers today. Currently, offshore companies have been allowed to create WeChat business accounts... but... these overseas WeChat business accounts cannot reach Chinese residents. The Chinese government have put restrictions to WeChat on allowing foreign companies to influence Chinese people – and therefore these overseas WeChat business accounts can only reach users who are outside of China.
By opening a company in a FTZ, you are allowed (as a Chinese company) to open a true WeChat business account and reach Chinese customers directly.
Lower Tax Rate
Within the FTZs the corporate tax rate is 16.5% tax. This is an equal rate to that of Hong Kong, although you gain the benefits as described above. Additionally, this rate is about half of the average corporate tax within China.
Consequently, the FTZs are lowering the bar for international companies to open up a company directly inside China.
Duty Free Warehousing
The absolute major benefit to businesses operating within the FTZs is that they can import goods and materials into the FTZ warehouses, and combine/collate/construct/etc. before importing into mainland China.
As well as this, you can list these products for sale in China, and ship them B2C (business to consumer) direct from the warehouse. That means you can pass the import duties responsibility onto the individual consumer or let the China post office handle it for the person receiving the goods.
This has created a massive industry called “cross border e-commerce” that is growing fast and evolving quickly. The Chinese government has been watching it closely and adapting the rules and laws as they go.
While this hasn’t been implemented just yet – The Chinese government havge planned to use these FTZs as new testing grounds to give “open and unfiltered” internet, so that businesses there can freely surf on Western websites that are normally blocked. This will give businesses stationed in these zones an advantage over other Chinese based companies, and reduce the headaches and limitations that the Chinese internet filtering has caused for so many business owners and staff.
(As you may know, the Chinese government have strict policies on internet regulations and what the Chinese people can see, watch, and read online. This has caused huge sites such as Twitter and Facebook become blocked in mainland China.)
Government Incentives and Grants
The Chinese government has been working hard to attract more startups and innovations to the country. There are often competitions and application events where startups can woo Chinese officials for certain grants. It depends on city and local governments – but they all have a decent amount of cash on the books and budgeted for this. They want to attract top companies.
As these new FTZs are opened, and as a few years pass by under the new regulations, it will be very interesting to see how the FTZs change international business with China.