PER­SPEC­TIVE: THE EVO­LU­TION OF CHINA’S SEZS

Special economic zones were key to the de­vel­op­ment of many emerg­ing mar­kets, but how rel­e­vant are they in to­day's China?

The Peak (Hong Kong) - - Contents - DOU­GLAS ZHI­HUA ZENG

Special economic zones are key to the de­vel­op­ment of many emerg­ing mar­kets, but how rel­e­vant are they in to­day’s China?

In re­cent years, SEZ (special economic zone) has be­come a buzz­word in many de­vel­op­ing coun­tries and even in in­ter­na­tional and re­gional de­vel­op­ment agen­cies. In China, it has al­ways been a fo­cal point given the im­por­tant role it has been play­ing in the coun­try’s pol­icy re­form and economic de­vel­op­ment. The an­nounce­ment of an­other mega- SEZ near Bei­jing ear­lier this year – the Xion­gan New Area again stirred fresh de­bates both in China and over­seas. Does the SEZ still have much rel­e­vance to China’s de­vel­op­ment? Haven’t they, to some ex­tent, com­pleted their task of in­tro­duc­ing re­form and boost­ing in­vest­ment and growth? Given China’s de­vel­op­ment level to­day, there is no sur­prise for peo­ple to won­der about it.

Look­ing back to China’s de­vel­op­ment his­tory, SEZS have played a very im­por­tant role in China’s in­dus­tri­al­iza­tion and struc­tural trans­for­ma­tion, and, to a large ex­tent, they are the key to in­ter­pret China’s economic mir­a­cle. Through­out the globe, so far China might be the most suc­cess­ful coun­try in terms of lev­er­ag­ing SEZS to achieve far-reach­ing economic trans­for­ma­tions. It started with four zones at the ini­tial stage to ex­per­i­ment with mar­ket-ori­ented economic re­forms that in­volves laws, reg­u­la­tions, tax­a­tion, land, la­bor, fi­nance, cus­toms, im­mi­gra­tion, etc. Af­ter the ini­tial suc­cesses, the zone pro­gram and rel­e­vant re­forms were grad­u­ally rolled out through­out the na­tion. To­gether with the nu­mer­ous in­dus­trial clus­ters, the SEZS have contributed sig­nif­i­cantly to na­tional GDP, em­ploy­ment, ex­ports, and at­trac­tion of for­eign in­vest­ment. The SEZS have also played im­por­tant roles in bring­ing new tech­nolo­gies to China and in adopt­ing mod­ern man­age­ment practices.

Af­ter decades of central plan­ning, China adopted the Open Door pol­icy in 1978, and in July 1979, it de­cided that Guang­dong and Fu­jian prov­inces should take the lead in opening up to the out­side world and im­ple­ment “special poli­cies and flex­i­ble measures”. In 1980, Shen­zhen, Zhuhai, and Shan­tou in Guang­dong Prov­ince, and Xi­a­men in Fu­jian Prov­ince were des­ig­nated as special economic zones. The four SEZS were quite sim­i­lar in that they com­prised large ar­eas within which the ob­jec­tive was to fa­cil­i­tate broadly based, com­pre­hen­sive economic de­vel­op­ment, and they all en­joyed special fi­nan­cial, in­vest­ment, and trade priv­i­leges. They were en­cour­aged to pur­sue prag­matic and open economic poli­cies that would serve as a test for in­no­va­tive poli­cies that, if proven suc­cess­ful, would be im­ple­mented more widely across the coun­try.

The com­bi­na­tion of favourable poli­cies and the right mix­ture of pro­duc­tion fac­tors in the SEZS re­sulted in un­prece­dented rates of growth in China. For ex­am­ple, against a na­tional av­er­age an­nual GDP growth of roughly 10 per cent from 1980 to 1984, Shen­zhen grew at a phe­nom­e­nal 58 per cent an­nual rate. The ini­tial opening to trade and in­vest­ment hav­ing proved suc­cess­ful, China re­solved to open its econ­omy fur­ther. From 1984 to 1988, 14 economic and tech­no­log­i­cal de­vel­op­ment zones (ETDZS, smaller SEZS or Chi­nese ver­sion of in­dus­trial parks) were es­tab­lished in ad­di­tional coastal cities and in the fol­low­ing years in cities in the Pearl River Delta, the Yangtze River Delta, and the Min Delta in Fu­jian. In 1988, the en­tire prov­ince of Hainan was des­ig­nated as the fifth com­pre­hen­sive SEZ, and in 1989 and 2006, Shang­hai Pudong New Area and Tian­jin Bin­hai New Area were granted such sta­tus as well.

In ad­di­tion to the SEZS men­tioned above, there are many other types of SEZS in China at var­i­ous lev­els, which in­clude high-tech in­dus­trial de­vel­op­ment zones (HIDZS), free trade zones (FTZS), ex­port-pro­cess­ing zones (EPZS), and oth­ers. Each has a dif­fer­ent fo­cus. By April 2017, China has seven mega-size com­pre­hen­sive SEZS, 219 na­tional-level ETDZS, 156 na­tional-level HIDZS, and many other zones. Eco­nom­i­cally, SEZS have contributed sig­nif­i­cantly to na­tional GDP, em­ploy­ment, ex­ports, and at­trac­tion of for­eign in­vest­ment and new tech­nolo­gies. The lat­est fig­ures are not avail­able, but based on my es­ti­ma­tion sev­eral years ago, SEZS (in­clud­ing all types of in­dus­trial parks and zones) at na­tional lev­els ac­counted for about 22 per cent of na­tional GDP, 46 per cent of FDIS, and 60 per cent of ex­ports and gen­er­ated in ex­cess of 30 mil­lion jobs.

Se­nior Econ­o­mist of the World Bank, Dou­glas Zhi­hua Zeng is a renowned global ex­pert on spa­tial econ­omy, tech­nol­ogy in­no­va­tion and com­pet­i­tive­ness.

Be­sides economic de­vel­op­ment goals, China’s SEZS have been tasked with the grand mis­sion of test­ing new re­forms in the dif­fer­ent stages of de­vel­op­ment. This may be the most im­por­tant fea­ture of Chi­nese SEZS, which dis­tin­guish them from those in many other coun­tries, and are of­ten called “re­form zones” ver­sus pre­dom­i­nant “con­ces­sion zones”. This helps ex­plain why China’s SEZS have been al­ways more or less rel­e­vant to the coun­try’s de­vel­op­ment agenda rather than be­ing com­pletely re­garded as “mis­sion ac­com­plished”. Glob­ally, if we re­gard the first gen­er­a­tion of zones as SEZ 1.0, which is mostly ex­port-pro­cess­ing type, the sec­ond gen­er­a­tion of zones (multi-func­tional but still mostly man­u­fac­tur­ing-ori­ented) as SEZ 2.0, then to­day China is aim­ing for SEZ 3.0, which is a more ser­vice-ori­ented and eco-friendly type of zone, and also well-in­te­grated with city de­vel­op­ment. This is rep­re­sented by the Qian­hai Shen­zhen-hong Kong Mod­ern Ser­vice In­dus­try Co­op­er­a­tion Zone (“Qian­hai SEZ”) and the Shang­hai Free Trade Zone launched in 2013, and other free trade zones sub­se­quently launched (now to­tally 11 FTZS) and ecoin­dus­trial parks, which are ori­ented to­wards fur­ther man­age­ment sys­tem re­forms (such as the “neg­a­tive list”), ser­vice sec­tor re­forms, high-tech ar­eas and green growth. The main ob­jec­tive is to help with China’s in­dus­trial up­grad­ing and trans­for­ma­tion of the growth model, and ul­ti­mately avoid the mid­dlein­come trap. To my knowl­edge, the Xion­gan New Area is also in line with this goal.

To­wards this end, China’s SEZS are now be­ing given new mis­sions in the new con­text. The dif­fer­ence is they are no longer de­signed for short-term growth but for longer-term re­forms and sus­tain­able growth, and the mar­ket is be­ing given a larger role, which is cru­cial for long-term sus­tain­abil­ity. In other words, the former is more out­ward-ori­ented, es­pe­cially tar­get­ing FDIS, and the lat­ter is more com­pre­hen­sive and long-term, fo­cus­ing on the wide needs of the na­tional econ­omy.

China's mega-sez Xion­gan New Area, near Bei­jing

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