Development zones are not a Chinese creation, but China has found tremendous success with this economic tool.
Historically, the liberal business environment in these areas have allowed foreign enterprises to operate more comfortably in the Chinese business environment, sheltered from the bureaucracy and red tape that often characterize the rest of the country. At the same time such businesses could benefit from preferential policies, greater resource availability, and prime locations.
The country’s first development zones came in the form of special economic zones (SEZs) located in the southern coastal cities of Shenzhen, Zhuhai, Shantou and Xiamen. They were meant as demonstration sites for the government to attract foreign direct investment and test whether the formerly centrally-planned economy could transition to a more liberal and capitalist model.
In particular, these zones focused on aiding export manufacturing to bolster the local economy without posing too significant a threat to state-owned enterprises.
Today, these original SEZs may be less relevant since a wide variety of alternative development zones have emerged. Also, China’s 2008 Corporate Income Tax (CIT) reforms reversed many of the key tax incentives that were previously offered. Finally, foreign companies are no longer solely focused on exporting, for which the SEZs were originally designed, and are increasingly interested in domestic sales.
Know Your Zones
The largest and most comprehensive types of development zones in China are SEZs and economic and technological development zones (ETDZs). However, while SEZs and ETDZs are technically development zones, large in scope and focus, some of the key tax incentives that made them terrific options in the 1980s and 1990s have all but dried up with recent tax reforms.
It is important to keep in mind that larger doesn’t always mean better when considering development zones in China. Foreign investors looking for specific services or tailored benefits to meet their business needs may find it more useful to look at the smaller, more focused types of development zones such as high-tech industrial development zones (HTDZs) or export processing zones (EPZs).
We go through the key characteristics, advantages and disadvantages of China’s primary development zones below.
Special Economic Zones. There are currently six SEZs in China. The first special economic zone was established in 1980 in Shenzhen, covering all four districts of the city and almost 400 square kilometers in total. A series of preferential policies to attract foreign investors, such as autonomous operating rights, tax incentives and other beneficial policies were introduced. Financing, commercial, and tourism facilities were also built to accommodate the coming foreign investors.
In the following years, China replicated this model in a number of other cities, among them Zhuhai and Shantou in Guangdong (the southern province bordering Hong Kong, where Shenzhen is also located), Xiamen in Fujian (the southeast province across from Taiwan), and Kashgar in the Xinjiang Uyghur Autonomous Region, China’s largest producer of natural gas that borders Russia. The entire island of Hainan, also in the south like Guangdong, has also been designated a special economic zone.
These SEZs enjoy a great deal of autonomy in formulating legislation friendly to the zone’s purpose. In this environment, the SEZs attained rapid growth and became magnets for foreign investment.
However, the 2008 CIT Reform ended most of the SEZ-specific tax incentives, including the 15% corporate income tax rate and other preferential tax policies. But smaller development zones such as economic and technological development zones, bonded zones and export processing zones have been built within SEZs to create new incentives. Furthermore, the flexible legislation, advanced infrastructure and great locations still make SEZs highly sought-after investment regions.
Economic and Technological Development Zones. ETDZs are designed to grow technology-intensive industries and hand out incentives like government funding or rewards to investments in the industrial sector as well as emerging industries. In 1984, China officially decided to open up 14 harbor cities along the coast, and 17 ETDZs were built in these cities. As China continued to grow and open its markets, more ETDZ were established in different regions.
Currently, there are more than 100 national ETDZs in China. The earliest ETDZs established in the 1980s include those in Dalian, Yantai, Qingdao, Ningbo and Guangzhou. The second wave was led by Pudong New District in Shanghai in 1990. Perhaps the best known ETDZ is the Suzhou Industrial Park, which was established by the governments of China and Singapore in 1994.
The latest wave of ETDZs was established in the 2000s, this time focusing on inland locations in central and western regions. They include ETDZs in Chongqing, Wuhu and Hefei in Anhui province, Hohhot in Inner Mongolia and Lhasa in Tibet.
The advantages of investing in ETDZs include great locations, access to local markets, advanced infrastructure and strong talent pools. Some ETDZs include high-tech industrial development zones, export processing zones or bonded zones. Today, they double as fully functional residential areas with schools, residence buildings, tourist sites and entertainment facilities.
High-Tech Industrial Development Zones. HTDZs are specific areas typically aimed at commercializing research and development and encouraging specific technology-heavy industries, including IT, electronics, pharmaceuticals and new materials. These zones are generally quite similar to ETDZs, but benefit from additional incentives for innovation.
Although many of the old SEZ-specific incentives are gone, qualified high-tech enterprises still enjoy the 15% corporate income tax rate regardless of location. Development zones generally provide a better-than-average environment in manufacturing, financing and residential development for investors, and so remain a highly preferred target for foreign investment.
HTDZs have been established in the coastal regions (Zhongguancun in Beijing, Zhangjian in Shanghai, Fuzhou in Fujian) and in the hinterland (Lanzhou in Gansu, Guilin in Guangxi, Taiyuan in Shanxi).
Free Trade Zones. FTZs are designated areas for export processing, international trade and bonded operations. They generally include industrial parks, bonded warehouses and export processing zones. They are usually established according to free trade agreements signed between China and other countries, which makes goods or services traded within the zone eligible for zero-rated or preferential rates on customs duties. Trade quotas are also removed within FTZs.
Enterprises in these zones can receive tax refunds on value-added tax for either exports or imports. They also make labor movement among related countries much easier with more convenient visa formality procedures. China currently participates in FTAs with 20 different countries, and Shanghai is planning to build the mainland’s first FTZ in Pudong.
Export Processing Zones. EPZs are essentially smaller-scale and simplified FTZs, generally located within an existing development zone for the purpose of export processing. EPZs are subject to restrictive terms regarding the manufacturing of goods for sale in local markets.
Key advantages of EPZs include exemptions from import and export duties and VAT refunds, easier foreign exchange and customs declaration procedures, and no quota limits. State-level EPZs can be found in Beijing, Fujian, Guangdong, Hebei and Jiangsu (14 in this province alone), among the coastal provinces, and also in 13 hinterland areas including Anhui, Chingqing, Guangxi, Henan, Hubei, Hunan and Inner Mongolia.
Bonded Logistic Zones. Traditionally located near ports or airports to facilitate aggregation of shipments or assembly, BLZs are areas where specific logistic activities subject to unique customs taxes can be executed. Rent is generally higher, and these areas are not intended for setting up factories or manufacturing bases.
Because BLZs are used for storage, certain processing, import and export customs duties are exempted, and trade quotas will not apply if imported goods are later exported. However, imported goods intended for domestic markets will still be subject to import duties and other relevant taxes.
There is no limit on how long the goods can be stored, making BLZs prime locations for trading companies and purchasing centers for foreign enterprises. BLZs also provide platforms for foreign enterprises to display their products without being subject to Chinese taxes. More efficient customs processes are also applied to goods exported from BLZs. Enterprises that use this type of zone need to go through customs only once when entering the zone.
Cross-Border Economic Zones. CBEZs are designed to develop trade and export processing industries at China’s border areas, usually building cooperation zones and encouraging joint-projects with neighboring countries. Preferential tax and tariff policies, such as special VAT refunds for reinvesting in the enterprise and other government rewards, are generally offered to attract investment.
In the flowchart below, we outline the typical application process for foreign-invested enterprises looking to operate within a development zone in China. However, it is important to note that there are no unified rules regulating the application process, and some steps may vary depending on the individual zone’s type, level, designation and focus.
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Application Procedures: Investing in China’s Development Zones
About the Author
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. This article was first published in Asia Briefing and was reedited for clarity and conciseness. For further details or to contact the firm, please visit www.dezshira.com.
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