SPEAKING
FREELY China's extra-special
zones By Irina Aervitz
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
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There is no doubt
that a conducive investment environment is crucial
for economic development. The government plays an
active role in creating this environment;
therefore, there is an incentive for any country
to emulate the best practices of the states that
have
successfully implemented governmental investment
policies.
One of these policies is the
institution of special economic zones. Chinese
SEZs are very successful. India, which tries to
follow the path of the "Great Dragon", has not
been quite as successful in its SEZs. Russia
genuinely attempts to mimic the Chinese model of
development as well. Russia is, however, failing
to attract investment, especially in the areas
beyond Moscow.
It is essential to
understand, therefore, what makes Chinese SEZs so
"special". Success can be attributed to the
coherence of central-government policies regarding
SEZs and their implementation at the local level,
namely, in the zones themselves. This is to state
the obvious, however. What lies beneath this
generalization is the key to puzzle.
It is
fair to argue that the key to the Chinese success
is the decentralized nature of the government
policies regarding SEZs. This allows the zones to
be fiscally independent and develop additional and
unique incentives for investors, within, of
course, the general central-government legal
guidelines. Finally, it creates an environment
where SEZs compete with one another for investors.
Competition is the essence of the market economy.
It is ironic that some people still think of China
as a command economy.
The SEZs in China
represent the so-called middle man between the
central government and investors. The SEZ is a
third party that has its own agenda and interests.
This does not constitute a problem, however; on
the contrary, it creates a more wholesome
environment for attracting investment.
In
December 1978, the Chinese Communist Party
embarked on the course of "four modernizations":
of agriculture, industry, defense, and science.
Overseas Chinese were the first to react to the
changes, then Western investors, who were
initially attracted by the huge Chinese market,
cheap labor, flexible environmental regulations,
closeness to raw materials and low construction
costs. That is how the model of "socialism with
the Chinese characteristics" was born. Economic
development became a priority for the Chinese
government.
To create a favorable
investment environment and to encourage overseas
firms to invest in China, the government since
1979 has gradually set up a relatively complete
legal system for investment. This system includes
industrial policies, regional policies and
financial policies. At the regional level, it is
the SEZs that possess the most successful
mechanisms to attract and retain investment.
Favorable tax policies Of the
incentives, perhaps the most important is
preferential tax treatment. The income-tax rate is
15% in economic zones, high-tech industrial zones,
and economic and technological development zones.
The enterprise income-tax rate is 24% in the
coastal areas and provincial capital cities.
Foreign enterprises can enjoy tax exemption in the
first two years after they begin making profits,
and income-tax reduction by half in the following
three years. Foreign high-tech enterprises enjoy
tax exemption in the first two years after making
profits and income-tax reduction by half in the
following six years.
In addition to these
policies, the export-oriented enterprises enjoy
having their income tax reduced by half as long as
the volume of their annual exports accounts for
more than 70% of the general sales. Enterprises
enjoy additional benefits if they purchase
domestically made equipment within the volume of
the total investment. Foreign enterprises are
exempt from business tax if they transfer
technology.
Since 1991, the Chinese
government has reduced its import tariff several
times. Furthermore, all equipment imported for
self-use is exempt from tariff and import-stage
value added tax. Since the middle of the 1990s,
China has significantly liberalized its credit and
foreign-exchange policy. Today China allows
foreign enterprises to get loans from financial
organizations inside and outside China. Also, at
present, foreign enterprises in China are allowed
to retain their foreign-exchange revenues.
All these policies provide a general
framework or a model of investment encouragement.
This model is implemented with a certain degree of
diversity at the local level. Even if the central
government makes a policy, it can be adjusted by
SEZ authorities. The central government seems to
understand that adjustments should be made. Each
economic zone offers a specific package of
benefits that includes tax incentives,
infrastructure, consulting services and special
treatment to particular industries. SEZs usually
have industrial specializations; however, they
still compete with one another.
Bureaucrats in SEZs in China are
efficient, are professional and, most important,
have room for initiative. SEZs have financial
freedom from the central government and,
therefore, an organizational interest in
attracting as much investment as possible. The
more investment an SEZ attracts, the better off it
is financially. SEZs resort to innovative methods
and techniques to attract investment ranging from
providing a coherent package of "babysitting"
services for investors to a list of additional
benefits and tax incentives that go somewhat
beyond the standard central-government investment
policies.
A look at
Suzhou Suzhou Industrial Park (SIP),
created in 1994, is one of the fastest-growing and
the most competitive industrial development zones
in the world. It is sometimes referred to as "one
of the nine new-tech cities in the world" and the
"New Silicon Valley".
SIP enjoys high
authority in project approvals. It takes three
working days to complete the incorporation
process. It can approve independently all foreign
investment projects as long as they are in line
with national policy. SIP possesses efficient and
flexible foreign-affairs administration power. It
can even assist foreign investors in obtaining
Chinese visas. The park has a sound
social-security system, having adopted Singapore's
Central Provident Fund (CPF) scheme, which is
quite unusual for China. The scheme is based on a
"personal account deposit", which provides
medical, retirement, social and housing coverage.
Suzhou is also equipped with a complete
and modern logistics system. The park hosts an
independent customs zone and a bonded logistics
center (type B). It was the first center of this
kind approved by the Chinese central authorities.
The park has been a trial area for modern
logistics programs and the pioneer in using the
EDI (electronic data interchange) system for
customs clearance in China.
SIP also has
one of the first 15 export processing zones (EPZs)
approved by the State Council, China's cabinet. In
addition, with the virtual-airport mode using the
air-land transshipment model, the customs
clearance and freight transportation time from
port to door can be significantly shorter than the
norm.
Located in the Yangtze River Delta,
the park enjoys an excellent transportation
network of highways, railways, waterways and
airports. Besides the advantage of an EPZ and
special treatment of exports, in general the park
encourages exports of locally manufactured
products and imports of high-tech products by
providing various tax incentives. Raw materials
and semi-finished products can be transferred or
traded freely within the EPZ. Tax is exempt for
products, machinery and equipment transferred
between it and other EPZs.
Suzhou strives
to attract high-tech industries, such as software,
biological technology, gene engineering and
various design and R&D (research and
development) institutes. The park also hosts a
number of auto-component manufacturers.
The zone has the following investment
structure: 42% Europe and America, 18% Singapore,
13% Japan and Korea, and 27% Hong Kong, Macau,
Taiwan, and other regions.
It is the only
place in China that provides tax rebates on
exports. Enterprises also don't pay duties on raw
components if they use them in the park to produce
exports.
The example of Honda To
illustrate how local bureaucrats can adjust the
central-government regulations to smooth
operations, the story of the Honda plant in the
Guangzhou Development District (GDD) is useful. Up
until 2004, the legislation regulating investment
in the auto industry permitted a foreign
manufacturer to have no more than 50% of ownership
in a joint venture with a Chinese partner. But
Honda, receiving special treatment in the zone,
was allowed to have 65% of ownership in a joint
venture with a Chinese partner. Honda received
special treatment because the local authorities of
GDD appealed on the auto maker's behalf with the
central government. The application approval took
six months. The reason the central authorities
made an exception was that the Honda production
facility in GDD was established to produce
exports, and the Chinese state has a general
policy of encouraging exports. In 2004, new
legislation came into force permitting foreign
companies in the auto industry to have up to 70%
of shares if they export.
The case of
Honda demonstrates that central government
directives are not perceived as direct orders at
the local level. The authorities in SEZs make
adjustments, negotiate with the central government
on behalf of their investors, and generally
approach the directives with pragmatic
flexibility.
In China, the central
government is involved less and less in the
operation of business. Previously companies
suffered from the state control, but now they are
enjoying an environment that is less managed. The
level of control depends, however, on the
industry. Strategic industries such as energy,
automobile manufacturing and defense are still
highly regulated. New industries such as
information technologies have fewer regulations.
Irina Aervitz, a PhD candidate
at the political science department at Miami
University in Oxford, Ohio, is writing a
dissertation on state policies in the automotive
sector in China and Russia.
(Copyright
2006 Irina Aervitz. Used by permission.)
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
contributing.
