A State Council plan to suspend some laws governing foreign investment in the Shanghai pilot free trade zone (FTZ) will break new ground in China's investment management mechanism and boost foreign capital inflow, said analysts.

The plan under discussion at the ongoing session of the Standing Committee of the National People's Congress (NPC), China's top legislative body, concerns laws on foreign capital enterprises; Chinese/foreign equity joint ventures; and Chinese/foreign contractual joint ventures.

The aim is to cancel superfluous administrative procedures and make it easier for foreign firms to set up in the FTZ. The plan conflicts with some existing laws so the idea was mooted to simply suspend the problematic regulations.

Pre-Establishment National Treatment (PENT)

According to the Ministry of Commerce, after these laws are suspended, foreign investors in the FTZ will be treated same as Chinese concerns in the pre-establishment phase of their business.

Zhao Jinping, of the State Council's Development and Research Center, said the new policy meant foreign investors in the zone should find it much easier to start doing business.

Foreign investors in the FTZ will have no need of government approval before setting up, so long as they formalize their arrangements after the fact, and do not operate in any sectors on a "negative list".

The negative list approach is another way of opening up the Chinese economy. It is a way of deciding what not to do, rather than what to do.

China has long categorized industries open to foreign capital as "encouraged", "restricted" and "prohibited". Zhao believes that in the Shanghai FTZ everything will be much simpler, with a few industries from the restricted and prohibited categories on the negative list and everything else eligible for PENT. This should appeal to foreign investors.

Zhu Jianfang, chief economist at Citic Securities, said sectors including innovative financing; business services; culture and entertainment; education; medicine and healthcare will all attract investment through the new regime.

Reform driven zone

Liu Yuanchun, assistant dean of the School of Economics at Renmin University of China, believes suspension of laws in the FTZ is completely in line with reform of power delegation and should enliven the market, improving efficiency and raising the status of Shanghai as a commercial center, focusing on reform rather than preferential policies like lower tariffs.

"Tariff policy will help, but that is not the main driver," said Zhang Youwen, an economic researcher at the Shanghai Academy of Social Sciences. "Only through reform can the experiences of the Shanghai FTZ be echoed in other parts of the country."