Shanghai free trade zone presents opportunity for growth of outsourcing market, says expert

Late last month a new free-trade zone was launched in Shanghai in a pilot project that, if successful, could be rolled out more widely across China. Within the 11 square mile zone foreign businesses operating in a range of sectors, including financial services and technology, media and telecoms (TMT), face fewer regulatory restrictions than currently apply elsewhere in the country.

The Chinese Government has released a 'blacklist' of activities relating to TMT market that would be prohibited within the new free-trade zone. Activities that TMT businesses are banned from undertaking in the area include investment in stem cell technology development and application or genetic diagnosis and treatment technology and development. Investment in news agencies, books or newspapers and investment in audio visual products and electronic publications, production services is also barred.

In addition, further restrictions prevent companies investing in cinema infrastructure or operations without being a Chinese holding, or from in broadcasting or TV or movie production unless as part of a joint venture company with a local Chinese company.

However, Hong Kong-based technology law specialist Peter Bullock of Pinsent Masons, the law firm behind Out-Law.com, said that although details remain "sketchy" about what is permitted, there appears to be potential for foreign-based information service (IS) providers to engage in activities that they would otherwise face regulatory barriers to undertake elsewhere in the country.

"If this ‘black list’ is reliable, it could permit foreign companies securing a foothold in the zone to offer IS services which would otherwise require a Valued Added Telecoms Services (VATS) licence," Bullock said. "This could open up the outsourcing market, long since constrained to foreign companies."

"Of course, a further issue is as to whether there would be border control between the zone and the rest of China – if foreign companies were not able to sell internet enabled IS to customers outside the zone, the business would probably be still born – but further detail as to how the zone is to be developed are eagerly awaited," he added.

Bullock said that international IS providers have traditionally faced problems in building a presence within the Chinese consumer market due to "highly restrictive regulations".

"In general, foreign companies can only sell IS services in China to the extent allowed by the Foreign Investment Catalogue published by the Ministry of Commerce," he said. "Although there are aspects of IS services for which foreign participation is not prevented, a major area of concern is that services delivered over the internet are restricted to companies holding a VATS licence. Only domestic companies are eligible to apply for a VATS licence."

Another problem with the way the Catalogue system works is that it is often out of date, with it failing to "keep pace with the technical developments in the IT industry", Bullock said. "Impenetrable language" also makes it very difficult to interpret in a practical way, he said.

However, the expert said that the regulations in Shanghai’s free-trade zone appear to be "much more facilitative".

"It appears that business/investment activities will be allowed in the Zone, presumably so long as they comply with ground rules as to honesty and fair dealing, so long as they do not appear on the excluded list," Bullock said.

According to a report by the Wall Street Journal, foreign-owned banks would be able to set up within the new free-trade zone for the first time. Citigroup and the Development Bank of Singapore are among the financial institutions to have already opened branches in the area, the report said.

Banks in the zone will have greater ability to set interest rates, the BBC reported.

“Foreign banks are now allowed to set up branches in the free-trade zone and conduct renminbi (RMB)-based business for Chinese clients,” Shanghai-based technology and intellectual property law expert Kening Li of Pinsent Masons said. “Chinese state-owned banks are also allowed to do business in RMB ‘off shore"’, and privately-owned Chinese banks are can operate doing both in- and out-bound investment deals.” RMB is the official currency in China.

Interest rates are to be “market-set” rather than defined by the Central Bank in China, Li said, whilst the insurance market has also be opened up to both domestic and foreign insurance companies with more “innovative products” likely to be sold to the wider Chinese market as a result, he added.

Foreign companies are also able provide financing and leasing services in China, Li said. This will enable them to offer ships and airplanes to the shipping and airline companies, for example, he added.

The opportunity to gain access the healthcare, entertainment and legal services market in China has also been opened up to foreign businesses operating within the free-trade zone in Shanghai, Li said. However, he said foreign-based gambling operators will continue to face restrictions

Editor's note 09/10/13: Kenning Li's comments were added to this story.