Beijing loosens grip on economic zones

PUBLISHED : Wednesday, 05 April, 2006, 12:00am
UPDATED : Wednesday, 05 April, 2006, 12:00am

Beijing's campaign to control the growth of special economic development zones will end this year despite there still being too many concessions across the country, according to a senior planning official.

'There are well over 1,000 economic zones, which is still a huge figure,' said Liu Peiqiang, chairman of the China Association of Development Zones under the National Development and Reform Commission. 'I don't think we need so many.'

The special economic zones are a legacy of the country's gradual opening to capitalism and international investment, but they face an uncertain future as continued economic liberalisation reduces their competitive advantage and the government begins eliminating preferential policies designed to attract foreign direct investment.

From the first tentative flirtation with market forces in a few select cities in the early 1980s, there are now 54 central government-level zones, such as Shenzhen and Shanghai's Pudong, about 230 national-level zones that enjoy regulations and incentives granted by the central government and between 1,300 and 1,400 provincial economic zones that offer a variety of local-level incentives to foreign investors.

The government kicked off a campaign in late 2003, similar to an initiative launched in the mid- 1990s, aimed at curbing the 'irrational' creation and expansion of special economic zones at all levels of government.

Beijing was especially concerned about the widespread social unrest spurred by official seizures of rural land for use in economic development zones.

Local governments often requisition land and subsequently sell it at prices many regard as very cheap in order to attract foreign investors to their areas.

Firms buying land in development zones often pay as little as 25 per cent of the amount banks subsequently value it at, according to industry sources.

Because of this and the tax breaks, preferential policies and clustering of supply chains they provide, special economic development zones remained the first choice for foreign direct investment last year.

'Most clients investing in China end up in one zone or another,' said Roy Zou, an executive director of law firm Hogan & Hartson.

Last year, the 54 central-level economic zones accounted for 4.5 per cent of the mainland's GDP and almost 15 per cent of its imports and exports.

The zones absorbed 21 per cent of the country's US$60 billion of foreign direct investment, according to Mr Liu.

The economic zones have rtained their prominent position as regional development and high-technology hubs in this year's five-year plan, but their relevance to China's future growth remains questionable, particularly in view of the government's clearly stated intention to abolish preferential tax rates for foreign investors, who usually pay corporate tax at rates of about 15 per cent, compared with the 33 per cent paid by their domestic counterparts.