The Development of China’s Special Economic Zones
China’s Special Economic Zones (SEZ) are areas in which foreign and domestic companies can trade and invest without the same control and regulations from Beijing as other parts of China (Britannica.com). These areas are designed to encourage overseas investment in China and boost the country’s economic growth.
SEZs were first developed in 1980 as part of Deng Xiaoping’s drive to open up China to the rest of the world and cement China’s place on the global stage as a major economic player.
Shenzhen, in Southern China near the border with Hong Kong, was among the first 4 locations in China to be given SEZ status. At the time Shenzhen was just a small town, now, 33 years on, it is a booming trade hub and one of China’s largest cities. The other 3 areas are also situated in the south of China in Guangdong and Fujian provinces.
The Chinese government aimed to encourage foreign investment in the SEZs by introducing more relaxed regulations in these areas but the scheme had a rocky beginning.
Shenzhen first became an SEZ in 1980 and was expected to attract investors from across the globe however, by the end of 1981, 91% of all foreign investment in the city came from Shenzhen’s neighbour, Hong Kong. This was due to a lack of proper regulations concerning wages, employment and the firing of employees. Foreign companies, unfamiliar with Chinese business culture were unwilling to take the risk and they felt there was still too much red tape to contend with. Hong Kong based companies were more inclined to take the risk of opening up offices in Shenzhen due to familial and cultural connections as well as having a better understanding of how business worked on the mainland.
Another problem Shenzhen faced was the lack of diversity of investment sectors. As most investment was coming from Hong Kong there was a severe bias towards the real estate sector with 71% of all investment concentrated in this one area. The bias was due, in large part, to exorbitant land prices in Hong Kong which was causing a population overflow into neighbouring Shenzhen.
The early setbacks that China’s SEZs were faced with caused many investors to withdraw their investment and close their offices in China. The withdrawal of investment caused the PRC to wake up to regulation problems and by January 1982, five new regulations had been approved which simplified red tape in SEZs, especially with regards to entry and exit procedures and wage guidelines. These improvements led to a sharp increase in overseas investment in SEZs and ultimately contributed towards the success of the zones in China.
Another factor that can be apportioned to the eventual success of SEZs in mainland China was the fixed 15% income tax applied to partly foreign owned enterprises as opposed to the 33% tax in the rest of China or 17% in Hong Kong. This was a huge incentive to overseas investors. Companies were also given exemptions from other local taxes and were allowed to export goods duty-free.
Since 1982 China’s SEZs have all been developing at an incredible speed. Shenzhen itself has been especially successful. In 1992 Shenzhen attracted 14% ($4.3billion) of China’s total foreign investment. The city is now one of China’s main import-export hubs as well as a leading manufacturing base. The initial success of the SEZs led the Chinese government to sanction more foreign trade areas in cities including Shanghai, Dalian, Ningbo and Tianjin.
These newer zones are known as Economic and Technological Development Zones (ETDZ). They are generally smaller than SEZs and place a larger emphasis on specific industries, particularly on developing high-tech research and development. They are split into several categories of development zones including High-Tech Development Zones, which have special incentives for innovation, and Bonded Logistics Zone which have special customs regulations. There are 54 ETDZs around China and they have, for the most part, carried on the success of the original SEZs.
However, SEZs haven’t proven to be a complete success story. A 2013 investigation presented to the Royal Economic Society into the viability and success of SEZs found that whilst it is undeniable that SEZs have helped to increase GDP in China by up to 10%, they have not led to increased productivity within the regions where they are located.
The next step in the development of SEZs will be the creation of Free Trade Zones (FTZ). In recent years cities across China, including Shenzhen and Shanghai have been vying for the opportunity to become FTZs. These new areas are expected to have more relaxed regulations on the exchanging of currencies as well as less stringent rules on the types of companies that can be set up. For example, foreign owned companies may no longer need a Chinese owned partner to help them develop their business on the mainland.
At the beginning of September 2013, Shanghai was named as the first city to be given the opportunity to trial a Free Trade Zone in the Pudong area of the city. The area will have fewer restrictions on currency converting and it is hoped that it will bring even more foreign investment into China and take the focus away from Hong Kong where the government has less control.
Beijing has also said it may lift the ban on websites like Twitter and Facebook in the FTZ to encourage foreign companies to come to China, as well as making it easier for Chinese companies to enter foreign markets and promote themselves abroad.
The Chinese government will be keeping a close eye on the FTZ trial in Shanghai with a view to developing more zones in other cities in the near future. If the Shanghai trail does prove to be successful then Shenzhen is likely to be the next city to create an FTZ given its success as an SEZ. The future of SEZs is uncertain but if Shanghai is successful in its latest venture, many of the current SEZs are likely to develop into FTZs in the future.
After the first FTZ was a complete success three more were established by the end of 2015, in Guandong, Fujian and Tianjin. Companies that registered in these FTZs will have fewer regulations and not as many harsh restrictions. Some of its benefits are less restrictions on customs and business registration, fastest foreign investments approvals, big discounts on import and export sales, and more lenient trade regulations. Each zone has its own industry and development focus, supported with corresponding policies. The FTZs have done a great job when it comes to attracting foreign investment, contributing significantly to China´s economic growth and development. Within only the first half of 2016, close to five thousand companies were established among the four FTZs, with investments adding up to 359 billionRMB. In 2016 the four FTZs attracted 81.3% more foreign investment compared to the previous year, an estimated figure of 87.96 billionRMB.
On the 31st of March 2017, the Chinese State Council announced the approval of sevennew FTZs. The new FTZs will start working on the 1st of April 2017, bringing the total number up to eleven. These new FTZs will not be like the previous ones, as they are not going to be located in the coastline, but instead in the inside of China located in underdeveloped areas.
These strategies movement has its behind reasons. First, the Chinese government uses these new FTZs to stimulate regional economic development and develop its interior. Secondly, the locations are chosen widely in order to fulfil one of their most important purpose One Belt, One Road (“OBOR”) boosting their interior economy to reach their final goal, which is to be G1 of the 21st Century.
Chongqing, Shaanxi and Sichuan, the most western FTZs have a main purpose, which is opening up western China to foreign investors, through an economic reform and its promotion. As well they will be developed as an OBOR transport, logistics and commerce centre. The government in Chongqing will approach high-end industries, creating a cluster of them, such as cloud computing and biological medicine.
FTZ in Hubei and Henan, will function as epicentres of logistics and transportation influenced by the OBOR strategy. Hubei will also intervene in the process of accommodation of industrial transfers from the coastline to central China, while in Henan they will serve as a hub for international cultural trade and medical tourism.
Liaoning FTZ, will promote and enhance productivity and competitiveness in the industrial base of the northeast of China, through economic reforms. To achieve this, Chinese government focus on developing a modern finance and IT services industry, while at the same time developing further advanced equipment manufacturing, such as automobile and aerospace.
The Zhejiang FTZ is rather peculiar and odd when compared to the six others, its located in an already economically well-developed area. This FTZ´s plans are to focus on further development of currently existing economic activity, which includes a new focus on the idea of exploring the liberalisation of international commodity trading, mainly focusing on oil and associated products. Other developments which are meant to be made are establishing an international maritime services centre and promote regional storage, transport, trading and supply industries.
The “negative list” is a key part of the FTZ framework. It is a list of sectors that foreign investments in FTZs are subject to specific restrictions, or completely banned. Foreign companies who want to invest for the industries that are not in the list, will receive the same treatment as domestic Chinese companies.
A new negative list was released on the 16th of June 2017, previously replacing the one back from 2015, and became effective on the 10th of July 2017. The new list is narrower than the previous one, 27 measures have been removed in 20 different industries, such as shipbuilding, aeronautical, automotive and many others.
With the new negative list and the corresponding removals might seem that they are opening towards economic liberalizations, it is still very carefully orchestrated. Many of the liberalized industries are mainly used by Chinese domestic companies. As well, depending on the industry, foreign investments are subject to a MOFCOM filing and national security review, giving Chinese authorities a powerful tool for controlling them.