Shanghai FDI – New Measures to Attract Foreign Businesses

Shanghai is seeking to bolster its position as a global magnet for foreign direct investment (FDI) with new measures to attract foreign investors and improve the city’s business environment. The measures call for more supportive policies for foreign businesses in key industries and improve legal frameworks for litigation and dispute resolution for foreign and domestic businesses alike. We look at how the measures seek to increase Shanghai FDI and how they may help foreign businesses in the city.

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Chinese officials have been on a charm offensive to regain the confidence of foreign businesses and investors in the months since China emerged from the COVID-19 pandemic. 

As one of the main hubs for foreign businesses and investment, Shanghai is at the forefront of this effort. Since the start of the year, the city has released several documents aimed at bolstering the economy by providing support to the private sector. In late April, it released the  Several Measures to Enhance the Attraction and Utilization of Foreign Investment in Shanghai (the “foreign investment measures”). This document proposes various measures for attracting foreign direct investment (FDI), from expanding market access to increasing policy support for foreign companies in key industries. 

Then in May 2023, the city’s high court released a new action plan to improve the overall business environment, a plan that is modeled partly on the Work Bank’s new Business Ready (B-READY) model for assessing the business environment of cities and countries around the world. 

The release of these documents points to a broader effort of Shanghai to present itself as the top destination for foreign businesses in the Chinese mainland and to transform itself into one of the most business-friendly cities in the world.  

Measures for attracting foreign investment 

The foreign investment measures do not introduce any new specific policies for attracting FDI or supporting foreign businesses, but they do propose several courses of action to guide local authorities toward policy implementation. 

The measures are split into four main categories, which can be broadly characterized as measures to improve market access, channel FDI into key industries, expand support and resources for foreign-invested projects, and improve services geared toward foreign businesses. 

The proposed strategies are summarized in the table below. 

Measures to Attract and Utilize Foreign Investment in Shanghai
No.	Target	Summary of proposed strategies
1	Promoting high-level opening up	Improving market access.  Supporting financial companies to establish and expand in Shanghai.  Implementing pilot programs to expand access to industries, such as telecommunications, internet, education, culture, and healthcare.  Promoting opening up in key areas, such as the Shanghai Pilot FTZ and the Hongqiao International Central Business District.  Promoting international trade by enabling pilot relay programs for international container shipping companies and expanding bonded fuel oil and LNG refueling services.
2	Elevating the level of foreign investment	Channel FDI into industries such as advanced manufacturing, modern services, high-tech, energy conservation, and environmental protection.  Encouraging foreign companies to increase investment in integrated circuits, biomedicine, artificial intelligence, electronic information, healthcare, automobiles, high-end equipment, advanced materials, and fashion.  Supporting foreign companies to enjoy the same preferential policies as domestic companies.  Implementing policies to encourage the establishment of headquarters in Shanghai  Encouraging development of foreign-invested R&D centers through implementation of relevant support policies.  Encourage FDI in green and low-carbon technologies and industries.
3	Expanding resource support for foreign investment development	Consolidating service guarantees for the establishment of for foreign-funded projects, such as creating favorable policies for planning, land use, energy use, and construction, and facilitating project approval, environmental impact assessment, logistics, cross-border payments, and so on.  Increasing financial and tax support for foreign-funded projects.  Strengthening financial support services; encouraging FIEs to issue stocks on Chinese exchanges, expanding financing support and financing channels for FIEs.  Facilitating cross-border investment and financing, e.g. by simplifying foreign exchange registration procedures.  Facilitating foreign personnel exchange, e.g. by implementing favorable policies for the employment of foreigners.  Promoting trade of FIEs through measures such as implementing the RCEP, offering services and guidance to FIEs to optimize supply chains, etc.
4	Optimizing services for foreign investment	Organizing promotional activities and events aimed at attracting FDI.  Enhancing government-business communication and services, e.g., providing interpretation and guidance on policies relating to foreign investment and FIEs.  Improving foreign-related services platforms, e.g., by providing multilingual services and ensuring online services and information is available in both English and Chinese.  Safeguarding the rights and interests of foreign investors and businesses, e.g., by ensuring smooth operation of complaints channels, supporting the relocation of FIEs, and ensuring equal participation of foreign businesses in government purchasing.  Enhancing intellectual property protection.  Encouraging FIEs to participate in the setting of local standards.
Note: The above list is not exhaustive.

Potential expansion of market access 

The foreign investment measures suggest that Shanghai is considering loosening access to certain industries that have been off-limits to foreign investors. China manages the market access for foreign companies through the Negative List for Foreign Investment Access, which industries foreign companies are prohibited or limited from investing in. 

Among the industries that are included in the negative list are telecommunications and internet services. On a national level, foreign investors were limited to 50 percent ownership of value-added telecom services and 49 percent for basic telecom services until recently. In April 2022, the Chinese government relaxed rules over foreign ownership in the telecom industry, allowing a majority foreign stake or even 100 percent ownership for certain telecom sectors. Several regions in China had already experimented with lifting the limitations on foreign ownership of certain types of telecom businesses prior to this date, including the Shanghai FTZ. 

However, foreign investors are still prohibited from investing in online news, publishing, audio-visual programs, culture (except for music), and information dissemination services, (except for those that are required to be open under China’s WTO commitments). 

The foreign investment measures call to “implement pilot programs to expand access to industries such as telecommunications, internet, education, culture, and healthcare” therefore could mean further market access expansion for foreign investors, at least on a limited pilot basis. 

Aligning FDI with China’s long-term goals 

One of the strategies of the foreign investment measures is to align the policies for promoting foreign investment with Shanghai’s overall industry development goals. One of these goals is to develop key high-tech industries, such as integrated circuits (IC), artificial intelligence (AI), biomedicine, and clean energy.

Shanghai has already developed support policies for the development of some of these industries, such as the reduced 15 percent corporate income tax (CIT) rate available to businesses engaged in IC, AI, and biomedicine in the Lingang New Area in Pudong. 

Several of the strategies to “elevate the level of foreign investment” seek to channel FDI into these key industries. This includes the development of foreign-invested R&D centers and encouraging FDI in green and low-carbon technologies and industries. In addition, the measures mention creating policies to incentivize the establishment of headquarters in Shanghai. 

The foreign investment measures do not offer any new policies or further details for attracting FDI to these industries. It is therefore unclear what kind of companies will be targeted, and which kinds of projects will be eligible.  

However, the measures do signal that the central and municipal governments have the desire to attract more FDI in these sectors and are actively encouraging the responsible departments to formulate potential policies that can benefit foreign companies. 

Expanding financial opening 

Recent years have seen a series of concerted efforts to increase access to China’s capital markets for foreign investors. This opening is hoped to help facilitate both cross-border businesses and promote the internationalization of the RMB. As the mainland’s financial center, Shanghai has been at the forefront of this movement. 

Since March 2021, the central government has been rolling out a cash pooling program that enables eligible MNCs to open multi-currency accounts to carry out cross-border transactions in certain cities, including Shanghai. 

Shanghai’s Free Trade Zone (FTZ) has already allowed some foreign businesses located within the zone to transfer funds between their China domestic and overseas entities via two-way cash pooling for some time, and the new pilot program suggests this may be expanded to other parts of the city in the future. 

Meanwhile, Northbound Trading of the China-Hong Kong Swap Connect launched on May 15, 2023, enabling overseas investors to access the mainland Chinese interest rate swap market, including Shanghai’s, thereby providing foreign investors with a tool to hedge against interest rate risks. 

Although the foreign investment measures do not outline specific policies for improving access to resources and capital for foreign investors, we anticipate that these are the types of policies that may be used to achieve this in the future. 

Action plan to improve Shanghai’s business environment 

In addition to the efforts specifically targeted at attracting FDI, Shanghai has introduced new measures to improve the city’s business environment more broadly. At the end of May 2022, the Shanghai High Court released the Special Action Plan for Promoting the Construction of a Legalized Business Environment (Version 6) (the “action plan”), which seeks to improve certain legal procedures to facilitate business, such as optimizing the foreign-related legal system, improving mechanisms for corporate legal disputes, and strengthening intellectual property rights (IPR) protection.

The action plan integrates the principles and requirements of the World Bank’s B-READY model that has replaced the World Bank’s Doing Business report, and is therefore the foremost international benchmark for the business environment. 

It is also based on the Shanghai Municipal Action Plan for Strengthening Integrated Innovation and Continuously Optimizing the Business Environment (also known as Plan 6.0 as such a plan has been released for six concurrent years since 2018), which was released in January 2023. 

To improve benchmarking reform for key industries, the action plan calls for implementing measures, including enhancing the environmental resource trial mechanism, improving the coordination of domestic and foreign-related rule of law, and effectively resolving administrative disputes involving businesses. Additionally, there are efforts to strengthen the protection of property rights, improve the quality and efficiency of civil and commercial trials, and accelerate the development of the system for handling bankruptcy cases. 

In terms of dispute resolution and case arbitration procedures, the action plan calls for improving diversified dispute resolution systems, optimizing filing and litigation services, and promoting the integration of document delivery systems. These efforts are intended to streamline and expedite the resolution of disputes, making the business environment more efficient and reliable. 

The action plan also outlines measures to improve the business environment for foreign investment. Measures in this regard include building an upgraded version of the one-stop dispute resolution platform for foreign-related commercial affairs and promoting the use of general entrustment, authorization, and accreditation mechanisms for overseas entities in foreign-related commercial and maritime cases. 

What do the policies mean for foreign businesses and investors in Shanghai? 

Shanghai’s prospects as a destination for FDI have improved significantly since the lifting of COVID-19 restrictions at the end of 2022. This is reflected in the sentiments of foreign companies business in China, which have become more optimistic about the prospects of China’s economy.

However, the city, and China more broadly, face challenges when it comes to bringing in FDI in the longer term, as issues such as tense US-China relations, a recession in key overseas markets, and uneven post-COVID economic recovery impact business confidence. 

The proposed measures to improve its business environment can help the city overcome obstacles and attract FDI in the longer term. The alignment with the World Bank’s B-READY model demonstrates Shanghai’s commitment to international standards and best practices, which enhances its credibility and attractiveness to foreign businesses. 

Finally, if enacted with concrete policies to support businesses and further opening, the foreign investment measures may help Shanghai to overcome challenges and become even more attractive to foreign investors. Given the city’s reputation as an economic powerhouse, strategic location, and robust infrastructure, it is likely to remain an attractive destination for foreign businesses and investors looking to establish a presence in China’s dynamic market.