Development zones play key role in reform and opening-up#China Newsweek#-Sino-US


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Development zones play key role in reform and opening-up

Residents in most cities across the country know that there is a piece of land called “kaifaqu,” or development zone, where most companies in the city are based, especially high-tech companies.

Development zone, or economic and technological development zone, is an area a city designates to bring in foreign investment for economic development following the country’s reform and opening-up.

In the 38th issue of 2018, the China Newsweek magazine ran a cover story on the development of the development zones, elaborating the history and the trend of transformation.

Below is an excerpt of the article.

The State Council, or China’s cabinet, issued a document on June 15 focusing on actively and effectively utilizing foreign investment to promote the development of high-quality economy.

The document contains six sections, and one relates to pushing ahead innovation and upgrading national-level development zones.

As an important window for China to introduce foreign investment in the process of reform and opening up, the national-level development zones have passed 34 years.

By 2018, China had a total of 219 national-level economic and technological development zones, spread across coastal and inland cities in 31 provinces and regions across the country.

In 2015, national-level development zones created gross domestic product of 7.761 trillion yuan, accounting for 11.5 percent of the country’s total GDP. Industrial output and import and export indicators of development zones contributed 20 percent of the country’s total.

Shi Rongyao, chairman of the China Association of Development Zones, said that the national-level development zones are the “ballast stone” of securing stable economic growth in a region and the country.

Four years ago, during the celebrations of the 30th anniversary of establishing the development zones, Wang Yang, the then vice premier, said that the future direction of development zones is to accelerate transformation and upgrading and achieve innovative development.

He said at the 18th China International Fair for Investment & Trade that the development zones should be explorers in building a new open economy system and leaders in fostering new industrial advantages.

The country’s reform and opening-up has completed 40 years, and the first batch of 14 development zones have been established for over 30 years. They are in transformation and upgrading while facing the new economic situations.

Special zones outside of ‘special zones’

In February 1984, Deng Xiaoping returned to Beijing from Xiamen, East China’s Fujian province, and talked with some central government leaders on the country sticking to the opening-up policy.

He said that except for establishing the “special economic zones”, the country could also open some port cities. “These places are not special economic zones, but some policies in special economic zones could be adopted.”

Months later, central authorities decided to open Tianjin, Shanghai, Dalian, Qinhuangdao, Yantai, Qingdao, Lianyungang, Nantong, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai, allowing some cities to establish economic and technological development zones.

The development zones should bring in foreign advanced technologies, focusing on joint ventures, cooperative ventures, wholly foreign-owned enterprises and scientific research institutions, and making the zones as windows and bases for technological cooperation.

Preferential policies in the special economic zones will also be taken in the development zones for approving foreign investment projects.

In September 1984, Dalian economic and technological development zone was formally established. In October, Ningbo, Qinhuangdao, Qingdao and Yantai also established their development zones.

By 1988, 12 coastal open cities have established 14 development zones, the first batch of national-level zones.

These development zones were the breakthroughs in the country’s planned economic system. They were different from special economic zones like Shenzhen, but still they were established in an area out of old urban areas.

In the planned economic system, the application of foreign investment projects would go through different levels of approval, which is inefficient. Cities have granted the approval authority at city-level to development zones.

In the market system, the development zones are responsible for their own profit and loss, and the government only offers some loans for starting development zones.

Development zones enjoy preferential policies in tariff and tax. Companies in the zones would pay 15 percent less corporate tax, and when companies last for more than 10 years, they could not pay tax in the first two years, and pay half tax from the third to fifth year.

Chen Yao, a scholar from the Chinese Academy of Social Sciences, said that the preferential policies showed that the zones would focus on industrial development.

Sun Hongyu, an official from Tianjin economic and technological development zone (TEDA) management committee, said that the country had great expectations from the development zones, hoping they could help in the process of industrial modernization.

Trial and error

Zhao Yundong, former chairman of the China Association of Development Zones, said that in the first two years, the results of attracting foreign investment were not so good due to foreign investors’ concerns about the zones.

Other reasons also included weak infrastructure, shortage of capital and the national cycle of industrial transfer. Till 1987, things began to get better when the infrastructure construction was basically completed and some projects went into operation.

The development zones also did not meet the central authorities’ expectations at that time.

Zhang Ruihua, an official from the TEDA management committee, said that the central authorities expected the development zones would start at a higher level than the four special economic zones.

He said the development zones should bring in efficient ways for the technological transformation of state-owned enterprises, improving the quality and management of SOEs.

Zhang said that from the law of productivity gradient transfer, there is a process of bringing in foreign investment from small to big, from low level to high level, and it was hard to introduce advanced technologies in a short time.

Taking TEDA as an example, in 1985, the first joint venture, a bicycle factory of China and Denmark, was put into production. In 1986, there were more than 20 companies, but most were labor-intensive industries.

Sun Hongyu said that the development zones also competed fiercely. Sticking to high-quality development, the zone would not bring in projects at that time, and it has to change the mind to bring in projects at first.

Miu Enlu, a former official from Guangzhou development zone, said that at that time, because of lack of funds and talents, few new technologies entered the development zones.

Cities soon adjusted the expectations on the development zones, aiming to bring in technologies with comparative advantage and projects with good economic performance.

In 1991, development zones across the country attracted about $810 million, achieving cumulative utilization of foreign capital at $1.374 billion, the export of $1.13 billion and industrial output of 14.194 billion yuan.

Transition

In February 1992, Deng Xiaoping made his remarks on the reform and opening-up, and the central authorities decided to fully promote the opening-up across the country, from east to west, south to north.

In 1992, a new wave of development zones appeared. China approved the second batch of 18 national-level zones, including Changchun, Shenyang, Harbin, Hangzhou, Huizhou, Wuhan, Chongqing, Urumqi and Beijing.

Some places attracted an amount of foreign investment in 1992 that exceeded the total amount in the previous years. Multinationals entered the development zones, replacing small investors.

In 1992, Motorola Inc was incorporated in the TEDA with a total investment of $1.1 billion, followed by Toyota and Samsung with an investment of over $100 million.

Official data showed that compared with the investment in 1991, the development zones saw a 611 percent increase in foreign investment in 1996.

However, the financial crisis in Asia in 1997 impacted the development of these zones. For TEDA, the annual sales growth reached 100 percent from 1991 to 1995, but figures declined to 68 percent, 38 percent and 20 percent between 1996 and 1998.

In 1998, the preferential policies for the first batch of development zones terminated, and three years of preferential policies were left for the second batch.

When the preferential policies came to an end, some foreign investors withdrew, which has forced the development zones to reflect how to build a good environment to attract foreign investment.

Though the economic growth of the development zones slowed down, they still played an important role in a city’s economic development due to the past growth, such as for Tianjin, TEDA contributed 65 percent of the city's new industrial output.

In 2000, the State Council approved 11 national-level development zones in the central and western regions along with the country pushing ahead the western development strategy.

Wu Yi, then vice premier, said in 1999 that the development zones should achieve “second development,” from relying on policies to relying on further improved investment situations, such as the market mechanism, personnel training, service and efficiency.

In 2002, China joined the WTO, and the WTO principles of national treatment and fair competition have been applied to the socialist market economy system, and role of the development zones further weakened.

In 2004, Wen Jiabao, then premier, said that development zones should focus on developing modern manufacturing, optimizing export structure, developing high-tech industries and high value-added service industry, promoting the zones into multifunctional comprehensive industrial zones.

In 2014, at the 30th anniversary of the development zones, officials and experts reached the consensus that the zones should change from pursuing speed to quality, from government-oriented to market-oriented, from homogeneous competition to differentiated development and from taking advantage of hard environment to soft environment.

In October 2016, at the forum on development zones, officials said that after more than 30 years of development, development zones came to a critical period of transition.

Compared to the past, an obvious problem facing the development zones was that except for the abolition of former policies, the cost of the factors of production such as land and labor increased fast.

Some officials said that the development zones in recent years focused on opening up, but few focused on reform, especially the system reform that restricted the development zones.

Zheng Weiming, director of the TEDA management committee, said that the zone pushed ahead the reform in regional functions, organizations, personnel system and salary system.

He said that the TEDA will explore new development modes of the development zone plus free trade zone, and advanced industries plus core urban areas.

In February 2017, the State Council issued guidelines requiring the development zones to play a leading role in promoting growth, leading the adjustment of economic structure and transformation of the development mode.


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