Special economic zones in China
Export processing zones in China are very different from those in other countries. The special economic zones, as they are known, are not only designed to promote investment but to experiment with market economics on a controlled basis, with a view to extending it to other parts of the country in due course if it is deemed desirable. They have some of the same features of zones in other countries in that they are designated areas with specific incentives to promote investment, but the zones are not only industrial parks. Rather they are entire cities or areas containing all the usual community features such as residential areas, commercial and recreational facilities, transport infrastructure, education, health and other social services. This helps to avoid many of the social problems experienced by less organic zones in other countries. City-scale zones have the advantage of promoting a more comprehensive and integrated investment profile and facilitating backward and forward linkages between zone locators and local enterprises.
There are at present seven different types of zones or areas in China in which investment incentives are available to investors, namely:
Foreign involvement can take a variety of forms, with each one enjoying specific taxation and investment incentives and operating under different conditions, in particular with regard to the industrial sector and access to the domestic market. The forms are:
-- representative offices -- only for preparatory or auxiliary activities, including market research and consultancy services; cannot recruit local staff directly without going through government authorized agents; may not earn income from local clients;
-- wholly foreign-owned enterprises -- must be approved by the Ministry of Foreign Trade and Economic Cooperation; may not be permitted in certain industries; have a limited lifespan (generally less than 50 years); may not reduce their registered capital during their term of operation;
-- equity joint ventures -- must be approved by the Ministry of Foreign Trade and Economic Cooperation; the foreign contribution must be at least 25 per cent (and usually less than 50 per cent); capital contribution cannot be repaid in the lifetime of the joint venture and may be in cash or capital goods, etc.; profit-sharing is proportionate to investment; specified lifetime; taxable entity on worldwide income;
-- cooperative joint ventures -- must be approved by the relevant authority; based on specific contract and duration; foreign partner contributes equipment, cash, materials; Chinese partner contributes land and buildings; partners are separate taxpayers; foreign partners' contribution is repayable during joint venture period if assets are transferred to the Chinese partner at end of contract period with no consideration;
-- management/operation contracts -- used in industries such as tourism (e.g. hotel management); relatively short-term; unfavourable tax regime.
More and more enterprises are establishing themselves as wholly foreign-owned rather than as joint ventures, and the former exceeded the latter for the first time in 1997. This is partly due to the progressive opening up of the Chinese economy, and partly a reflection of the greater confidence of investors to "go it alone" without a Chinese partner.
Table 1.3 details the flow of foreign investment into China from 1987 to 1997. It is interesting to note that the number of projects has continued to decline (from a high of 83,437 in 1993 to 21,001 in 1997) while the amount of investment capital actually used has continued to rise (from US$27.5 billion in 1993 to US$45.25 billion in 1997), indicating that the capital-intensity of the projects has increased. The total amount of foreign capital contracted or pledged has continued to fall (from a high of US$91 billion in 1995 to US$51 billion in 1997), but the actual amount of foreign capital used has continued to rise (from US$37.5 billion in 1995 to US$45.2 billion in 1997).
Table 1.4 indicates that the vast bulk of the investment has come from Hong Kong (US$119 billion, or 54 per cent), although a lot of that capital may have originated elsewhere and simply been routed through Hong Kong. This is followed by the roughly equal contributions of Japan (US$18.5 billion, or 8.3 per cent), Taiwan, China (US$18.3 billion, or 8.2 per cent) and the United States (US$17.5 billion, or 7.9 per cent).
Table 1.3. China: Utilization
of foreign capital
Source: Ministry of Foreign Trade and Economic Cooperation.
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The Chinese Government continues to increase the number of open areas and zones, which now number around 1,500. These are gradually extending inland from the coastal areas which were originally opened to market economics. There are 48 established economic and technical development zones for example, with infrastructure worth US$6 billion and about 10 per cent of all foreign investment. Productive foreign investments are entitled to a reduced rate of corporate income tax of 15 per cent. If the enterprise is scheduled to operate for more than ten years it is 100 per cent exempt from corporate income tax for the first two years after the first profitable year, and 50 per cent exempt for a further three years. If it exports more than 70 per cent of the value of its output it is then taxed at a rate of 10 per cent after the five-year period.
The Government continues to enhance the investment environment. A Guide directive on industries open to foreign investment was published at the beginning of 1998 and provides exemption from tariffs and import-related value added taxes for government-supported projects. Areas covered by this incentive include: