Marking the 40th anniversary of China’s Special Economic Zones (SEZ), further scrutinization can start regarding the influence of the Special Economic Zones. Opposing the frequent usage of “SEZ” as a buzzword, what does it precisely entail and more importantly what advantages have these zones. How do the rules and incentives set these economic zones apart from Mainland China, and are these capitalistic hotspots beneficial for your organisations?
What are Special Economic Zones?
Chinese Special Economic Zones are areas with different regulations and business policies than in Mainland China. These zones can vary in function and scope but all adhere to the principle of supporting (specific) economic functions in globalising aspect. SEZs have been implemented since the late 1970s as part of the Chinese market reform in the conquest of realising the entrance to the international market. Remarkable is the placement of these SEZs: manifested in areas with a potential for high import and export volumes, being in the vicinity of airport and harbours, and / or being nearby natural sources. Resulting in the coverage of the east coast of China in the early stages of the SEZs to the establishment of SEZs in rural Xinjiang, to trade free zones (Shanghai), and regional zones that stimulate technology as seen in Dalian. Thus, in these 40 years of development, China opened coastal cities and created national and local high-tech zones to further attract investments. Nowadays, the fruitfulness of these experimental zones can be analysed: SEZs contribute 22% of China’s GDP, 45% of total national foreign investment and 60% export, and created an estimate of 30 million jobs.
The purpose of the Special Economic Zones
The purpose of the Chinese Special Economic zones, including the open coastal cities and the regional zones, is to attract foreign investments, innovation, and knowledge. These opportunities for China, and the fact that it is a cheap labour country, stimulates the build and development of infrastructure. Shenzhen in the Guangdong province, as one of the initial four SEZs, is the beneficiary of this Special Economic Zone: transformed from a fishing village to a nationwide, even worldwide, centre of innovation and development. Housing tech giants, telecommunication companies and even claiming to be the first to achieve “full coverage” of 5g within the tech hub of China’s Silicon Valley. As a reaction, the initial four SEZs transformed into 19 local development zones, 7 large-scaled SEZs, local and national free trade areas, and high-tech zones. As the purpose to foster globalisation in China becomes evident. However, how are SEZs applicable to your business?
What are the benefits of China’s Special Economy Zones?
To ensure and stimulate foreign investors, the regulations in the SEZs (including open coastal and local zones) are made to attract. While exact policies or regulations can change over time (e.g. due to supply and demand of investors), the overarching advantages are as follows :
- Tax incentives:
- Reduced income tax: down to 15% (SEZ) versus 33% (Mainland)
- Elimination of corporate tax under losses;
- Being profitable after losses will result in reduced taxes for 5 years
- Exemption of local taxes in certain industries
- Special economic policies:
- Duty-free export
- Lowering import tariffs
- Foreign companies are allowed to set up joint ventures
- The local government has legislative authority
With all these benefits it is no wonder that SEZs attract a lot of foreign investments and thus benefit the flourishment of the Chinese economy. However, while SEZs are keeping the interests of investors high with the incentives, special economic policies and other benefits, China is slowly starting to applying these experimental policies as tested in the SEZs into the national policy. Furthermore, in line with the changes in Mainland China: the newest procedure is cutting the red tape to ameliorate the investment options in Mainland China.
Currently, the incentives of the SEZs do not need to be causally related to the success of the high-tech and developed metropolises (e.g. Shenzhen). While the economic liberation is surely impactful for the growth of certain districts and businesses, not all of the 54 “special” zones have been successful. With constant development, creating new SEZs, changing regulations, the business-friendliness and the special tax programs for new entrants, the Special Economic Zones are even more convenient for new investors that are aiming to advance to the Chinese market. Knowing this, will your company be the next booming business in one of the Chinese Special Economy Zones?
If interrested, we at Global Connect Admin provide administrative advice for European and cross-border businesses. Do you have any questions regarding the Special Economic Zones, or need other information to do business successfully? Feel free to send any questions our way: we would love to assist you.