ISE03/15-16

Subject: economic development, financial affairs, commerce and industry


Tag Cloud
  • The global economy grew rapidly after the Second World War and this fuelled the expansion of the international trade in the postwar period. A number of Asian countries had designated specific areas within their territories as free economic and trade zones ("FETZs") functioning as testing grounds for economic reforms. Within FETZs, more liberalized economic policies, tariff concessions and sound infrastructural facilities had been put in place to attract the inflow of foreign capital and advanced technologies for promoting economic activities such as import and export trade and processing industries. The successful reform measures implemented in FETZs were then replicated elsewhere in a move to benefit the country as a whole. In China, FETZs may comprise various types of economic zones including special economic zones, bonded zones, bonded logistics parks, export processing zones, new and high technology industries development zones, border economic co-operation zones and pilot free trade zones ("FTZs").
  • In general, the economic reform and opening-up of China can be broadly divided into five stages comprising: (a) the establishment of special economic zones in the 1970s; (b) the opening-up of coastal cities and the development of delta regions in the 1980s; (c) the creation of economic development zones in the 1990s; (d) the accession to the World Trade Organization ("WTO") in the 2000s; and (e) the launch of pilot FTZs in the 2010s.
  • This issue of Essentials traces the development of FETZs in the Mainland during the first three stages mentioned above, as well as China's accession to WTO in December 2001 and its importance to the country. In recent years, the Central Government has taken into account the domestic and international economic situations and decided to establish FTZs. The way forward of FTZs and their objectives, as well as the ensuing challenges and opportunities facing Hong Kong are discussed in another issue of Essentials entitled "Free economic and trade zones in the Mainland (Part 2)".

Establishment of special economic zones in the 1970s

Opening-up of coastal cities and development of delta regions in the 1980s

  • In May 1984, the Central Government further opened up Dalian, Qinghuangdao, Tianjin, Yantai, Qingdao, Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai, and granted increased economic autonomy to these 14 coastal cities. They were allowed to designate areas with clearly defined boundaries as economic development zones based on their own advantages and conditions. Within the economic development zones, foreign investors were encouraged to set up equity joint ventures, co-operative joint ventures, and wholly foreign-owned enterprises (collectively referred to as "the three types of foreign-invested enterprises"), as well as Sino-foreign co-operative research and development institutions.
  • The establishment of economic development zones primarily served as an avenue of facilitating the Mainland enterprises to absorb advanced technologies from their foreign partner enterprises. This, coupled with the Sino-foreign collaborative scientific programmes, has helped enhance the industry structure of economic development zones and their ensuing capacity to earn foreign exchange through exports. Preferential policies and measures implemented in the economic development zones could be broadly categorized into the following areas: (a) delegation to the respective coastal cities of the power to examine and approve foreign-invested projects which were self-financed and required the imports of equipment, regardless of the amount of investment; (b) lifting the foreign exchange use quota and foreign-currency loan ceiling for enterprises in opened coastal cities to facilitate their introduction of advanced technologies and import of the necessary equipment; and (c) according preferential treatment of foreign exchange settlement and tariffs/enterprise income tax to projects utilizing foreign capital and introducing advanced technologies for reforming domestic enterprises.
  • The Central Government continued its economic reform with the establishment of open economic zones in the Yangtze River Delta, Pearl River Delta, Minnan Triangle, Shandong Peninsula, Liaodong Peninsula and other coastal areas in February 1985, thereby forming an open coastal economic belt. A "trade-industry-agriculture" production structure gradually took shape in the respective open economic zones. Under this structure, the development of processing industry was to support the export market and the production of agricultural products, and raw materials was to support the processing industry. In March 1988, the State Council issued the Circular on Further Expansion of the Scope of Coastal Open Economic Zones (《關於進一步擴大沿海經濟開放區範圍的通知》) to designate 140 coastal cities (including the provincial capital cities Hangzhou, Nanjing and Shenyang) and counties as open economic zones.
  • Since the 1980s, more and more Hong Kong manufacturers have invested in setting up factories in the Mainland consequential to further reform and opening-up of China's economy. Nevertheless, many of them still maintained their base in Hong Kong. Meanwhile, Hong Kong focused on developing its service sector.

Creation of economic development zones in the 1990s

  • In the 1990s, the opening-up of market access amid the rapid globalization of enterprises gave rise to thriving international trading activities. This, coupled with the prevalence of cargo containerization, has changed the way and volume of commodities and raw materials shipped. The product market also became internationalized. Enterprises were keen to adopt the global logistics management model, which was an operating system closely linking up the activities of raw material supply, manufacturing and production, technology development, logistics and distribution between different countries and places. Such a trend enabled enterprises to apply the most effective operation model to achieve efficiency in overall operation and timely management.
  • In the Mainland, the Central Government set up different types of economic development zones, e.g. bonded zones, bonded logistics parks and export processing zones, in the early 1990s to align with the major global trend of transnational operation of enterprises. Economic development zones aimed to attract foreign-invested enterprises to engage in foreign trade, entrepot trade, export processing, warehouse storage and transportation, sorting and packaging, and a wide range of businesses. Foreign enterprises were also willing to invest, particularly in labour-intensive industries, due to the lower production costs as a result of abundant labour supply, low wages and preferential policies endowed to economic development zones.
  • In addition to the establishment of bonded zones, bonded logistics parks and export processing zones, the State Council issued in March 1991 the Circular of Concerning the Approval of the National Development Zones for New and High Technology Industries and the Relevant Policies and Provisions (《關於批准國家高新技術產業開發區和有關政策規定的通知》), announcing the establishment of 26 new and high technology industrial development zones to promote new and high technology modern industries. The Central Government also expanded the geographic scope of the open areas and set up economic co-operation zones in border cities. Moreover, the Pudong New Area of Shanghai and a number of coastal cities along the Yangtze River were developed while all the capitals of inland provinces and capital cities of autonomous regions were further opened up.

Bonded zones

  • Bonded zones, established upon the approval of the State Council, are economic areas subject to special customs supervision. Bonded zones serve to facilitate entrepot trade, as goods transported to the bonded zones can be stored, modified, categorized, mixed, exhibited, and undergo process manufacturing operations within the purview of customs supervision. Goods entering bonded zones from outside the Mainland are not regarded as imports and are not subject to import duty. They are only charged storage and administration fees when exported abroad. However, goods shipped out of bonded zones to enter the country again are regarded as imports and subject to tariffs. Since the granting of approval by the State Council for the establishment of the first bonded zone in May 1990, more than 60 bonded zones have been established throughout China, including those in Shanghai (Waigaoqiao), Tianjin Port, Shenzhen (Futian, Shatoujiao and Yantian Port), Dalian, Guangzhou, Zhangjiagang, Haikou, Xiamen (Xiangyu), Fuzhou, Ningbo, Qingdao, Shantou and Zhuhai.

Bonded logistics parks

  • Bonded logistics parks, established upon the approval of the State Council, are special customs supervision zones within the designated planning areas of a bonded zone or a special port section adjacent to the bonded zone. These bonded logistics parks are mainly for the development of storage and logistic industries with the objectives of attracting foreign investment, promoting regional economic growth, enhancing international competitiveness and expanding foreign trade. Notable examples include the bonded logistics park in Waigaoqiao of Shanghai to serve mainly the eastern China, and the one in Tianjin Port catering for promotion of regional trade in Northeast Asia.

Export processing zones

  • Export processing zones, established upon the approval of the State Council, are special industrial zones focused on the manufacturing, processing and assembly of goods for export. Export processing zones aim to capitalize on the capital and technologies of foreign-invested enterprises to support the development of export-oriented industries and expansion of foreign trade, with a view to realizing the goals of penetrating the international market and developing an externally-oriented economy. In order to attract foreign investment, incentives are provided to enterprises in the export processing zones. These include export tax refund, tariff exemption to foreign items entering the export processing zone, and provision of power and water supply and warehouses and other facilities at low costs. Most export processing zones are located at coastal ports, as the sites selected are usually characterized by more advanced economic development, easy access to transport and foreign trade, abundant labour supply and better developed urban cities. Among them are the Shanghai Jinqiao Export Processing Zone and the Suzhou Industrial Park in Jiangsu.

New and high technology industrial development zones

  • New and high technology industrial development zones are the industrialization hubs for advanced technologies in the Mainland, as well as the testing grounds for the diffusion of high and new technologies to traditional industries. New and high technology industrial development zones focus on supporting research and development projects in areas such as electronic information technology, aeronautic and astronautic engineering, new material and bio-engineering technology, and the scope of high and new technologies will be revised in the light of global development in advanced technologies. At present, there are more than 100 new and high technology industrial development zones in the Mainland, including the Zhongguancun Science and Technology Park in Beijing and the Guangzhou Hi-Tech Industrial Development Zone.

Border economic co-operation zones

  • Apart from developing coastal cities, the Central Government has also established border economic co-operation zones for the development of trade and export processing in border regions. Since 1992, a total of 16 border economic co-operation zones have been established upon the approval of the State Council. They have played an active role in the development of economic and trade relations between China and the neighbouring countries and regions. Most of these border economic co-operation zones are located in relatively remote areas such as Inner Mongolia, Guangxi, Yunnan, Xinjiang, Heilongjiang and Jilin. Among the better known are the Erenhot Border Economic Co-operation Zone in Inner Mongolia and the Ruili Border Economic Co-operation Zone in Yunnan.

China's accession to the World Trade Organization in the 2000s

  • China has made significant economic achievements after the implementation of more than two decades of economic reform and opening-up policy. In 2000, China's gross domestic product ("GDP") was about 6.3 times larger than that in 1980, while GDP per capita increased five folds over the same period.3Legend symbol denoting World Bank Group (2015). International trade also grew rapidly after the opening-up of the country. In 2000, China became one of the largest trading countries in the world with total trade value increasing by 69 times from that in 1980. Within the total, the value of exports and imports grew by 76 times and 62 times respectively.
  • The reform and opening-up of China has not been all smooth sailing. On foreign trade, China's Most Favoured Nation ("MFN") status was renewed annually by the President of the US (the largest export market of China) through the issue of executive orders. Yet the renewal was subject to China's performance in human right issues and protection of workers' rights. Although China managed to have its MFN status renewed and receive tariff concessions every year, there had been uncertainties during the process which overshadowed the confidence of foreign investors.
  • China became a WTO member in December 2001. Its accession to WTO marked a new step forward in its economic reform and liberalization, as the country would automatically enjoy the MFN status in international trade of goods and services. More importantly, under the framework of international trade law, China has embarked on an all-front opening-up to the outside world with the country fully engaged in international trade, integrating with the world economy, and playing by the rules that are governed by international consensus.
  • Upon its accession to WTO, China made four commitments of tariff reduction, elimination of non-tariff barriers and liberalization of agricultural and service trades. On tariff reduction, China has lowered the average tariff rate from 15% to 10%. To eliminate non-tariff barriers, China has lifted the import quotas on all 400 categories, including oil products, automobiles and auto parts. As to agricultural trade, China has opened its markets for wheat and meat processing. For the opening of service trade, China has promised to progressively open its markets for banking, insurance, tourism and telecommunication services. The Central Government is now actively pursuing reform of the service industry and the establishment of FTZs to (a) expedite the exploration of effective reform experience for nation-wide application; (b) foster structural innovation; (c) enhance resources allocation; and (d) diffuse the reform experience to other parts of the country.

Observations

  • During the initial stage of China's reform and liberalization, the Central Government established special economic zones and made use of tax concessions and preferential treatment to attract the inflow of foreign investment as the growth impetus. After accumulating certain experience through special economic zones, the Central Government further encouraged foreign economic co-operation and technological exchanges, and expanded the economic autonomy to local governments as appropriate. Following the opening up of some coastal port cities and cities along the Yangtze River, the Central Government went further ahead to open up border cities, all capitals of inland provinces and capital cities of autonomous regions. This results in an all-round opening-up structure featuring co-ordinated development along the sea shore, the Yangtze River and the land border, as well as the inland regions.
  • Transnational operation has become prevalent amid rapid globalization of enterprises in early 1990s and popularity of cargo containerization. In tandem with this prevailing trend, China has established various types of economic development zones, including bonded zones, bonded logistics parks, export processing zones, new and high technology industrial development zones and border economic co-operation zones. These economic development zones aim to attract foreign capital and technologies for developing different types of domestic industries (including modern industries with high technological content) to help upgrade their industry structure.
  • When becoming a WTO member in December 2001, China made commitments for tariff reduction, elimination of non-tariff barriers and liberalization of agricultural and service trades. Having fulfilled its commitments in the first three areas, the Central Government is now actively deepening the reform of the service industry and experimenting with the establishment of FTZs as a means to explore effective reform experience for nationwide application.
  • Looking back on China's path of reform and opening-up, FETZs established in early days were mainly export processing zones clustered with traditional labour-intensive industries. Nowadays China's economic reform has gradually changed its course to diversify into the service industries, such as the financial and professional sectors. The development of FTZs in recent years has marked China's third major adjustment in its open door policy, after the establishment of special economic zones in 1978 and the accession to WTO in 2001. As far as the degree of openness is concerned, it goes beyond the mere notion of "free trade" but covers various aspects related to governmental functions, legal system, investment and finance.
  • The economic and trade relations between Hong Kong and the Mainland have become closer since the implementation of the reform and opening-up policy in the Mainland. From the mid-1980s onwards, the Mainland has all along been Hong Kong's largest trading partner, while Hong Kong is one of the major sources of direct foreign investment in the Mainland. Meanwhile, Hong Kong has served as a port for entrepot port for the Mainland as a result of the latter's development of export-oriented manufacturing industry. This development has indirectly contributed to the robust development of Hong Kong's tertiary industry related to business and trade services. In addition, Hong Kong has served as a gateway for foreign investment in China, especially in the early stage of the reform and opening-up process when most of the foreign investment in China was originated from Hong Kong. Growth in foreign investment in China has, in turn, spurred the rapid development of the financial, trade, logistics, legal, accounting and other sectors in Hong Kong.4Legend symbol denoting See Central Policy Unit, the Government of the Hong Kong Special Administrative Region (2009).


Prepared by Jackie WU
Research Office
Information Services Division
Legislative Council Secretariat
19 November 2015


Endnotes:

1."Processing and compensation trade" is a collective term for processing with imported/supplied materials, processing with imported/supplied samples, assembling with imported/supplied parts and compensation trade. In operation, foreign enterprises usually enter into business contracts on processing and assembly with economic development companies or economic organizations qualified for processing operations from China, and proceed with the registration for the setting up of processing and assembly factories. Management and financial personnel are appointed by the Chinese side, while the foreign enterprises are responsible for providing capital, equipment, technologies, and making available the imported materials, samples and parts and organizing the production and processing work. Upon export, co-ordination charges and relevant management fees are payable monthly to parties on the Chinese side according to the size of the enterprises or at a fixed percentage of the processing fees in foreign currency.

2.See Central Policy Unit, the Government of the Hong Kong Special Administrative Region (2009).

3.World Bank Group (2015).

4.See Central Policy Unit, the Government of the Hong Kong Special Administrative Region (2009).


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