Special Economic Zones (SEZs) in China: How can they benefit your company?

25 Oct 2021
China
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Benefits | China | Comparison | Development | Incentive | Industry | Investment | SEZ | ShenZhen | Special Economic Zone

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 :

  1. 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
  2. Special economic policies:
    • Duty-free export
    • Lowering import tariffs
  3. Foreign companies are allowed to set up joint ventures
  4. 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.

 

Conclusion

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 us any questions our way; we would love to assist you.

 

Sources

Experts hail pivotal role of special economic zones – Chinadaily.com.cn

经济特区：中国改革开放的伟大创举__凤凰网 (ifeng.com)

Special Economic Zones in China (SEZs): Characteristics & Benefits – Intrepid Sourcing

investing-in-africa-forum-chinas-special-economic-zone.pdf (worldbank.org)

From Beach Destination to Global Influential Trade Port: Hainan’s Masterplan

11 Oct 2021
China
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Hainan, the tropical destination on the south coast of China is more than a wedding island. Announced on June 1st this year, the Masterplan by the Chinese government is to transform the entire island province into China’s biggest special economic zone (SEZ). By 2025, this trade port is “basically” established and by 2035 this system will focus on the free and convenient flow of trade and investment. Whereas this results in global presence and influence, what does this Masterplan entail and what are the potentials for economic trade and welfare?

What is the Masterplan?

The Masterplan for the Hainan Free Trade Port (FTP) is aimed at the transformation of the southern island province into the flagship of trade ports. While already coined in 2017 as a concept, and approved by the province in 2018, the implementation of the FTP is currently ongoing. Moreover, one of the main aspects is that the FTP can easily cooperate and compete with the high-level ports of Hong Kong, Singapore and Dubai due to the international location. While the Hainan Free Trade Port is basically established in 2025, the maturing of the port will continue decades after the establishment. Here, the prospect is to establish a fully developed high-level free trade port including strong international influence around the year 2050. Bearing this in mind, there will be 4 major steps in the timeline for achieving different stages of development:

 

 

 

 

Hainan Free Trade Port policy highlights

For investors, the key policeis under the Masterplan yield the most importance weighting the opportunities that the Hainan FTP can provide. Therefore, a few policies will be highlighted to further explore the potentials Hainan can offer:

 

 

Taking the timeline and the benefits of the new Free Trade Port policies into account, the district of Hainan is an interesting development in the further globalisation of China. In the search for competitiveness among the high-level free trade ports such as Singapore and Hong Kong, the Masterplan for the Hainan Free Trade Port is aimed to be established in 2035 to fully realized these characteristics. The maturing of this FTP will continue until 2050, where Hainan should be established as a competing port with strong international influence. To optimize the potentials of the establishment of the Free Trade Zone (2025), and simultaneously the Free Trade Port (2035), we need to bear in mind that some industries have relatively more preferential support. According to RVO, the following industries will have these extra benefits in terms of taxation and restrictions within the Hainan Free Trade Port (see figure 2 points .2 & .3): Tourism – Modern service – New and High Tech – Retail (Duty-Free Consumer Goods) – Cruise and Yacht – Cultural and Sports – Education – Landscaping (Island loop Scenic Highway design) – Shipping – Air Transportation – Finance Lease – Offshore Trading – Modern Finance – ICT – Advanced Manufacturing – Medical Services and Pharmaceuticals – Oil, Gas and Chemicals – Deep Sea Technology – Modern Tropical Agriculture – Aerospace – Headquarter Economy.

 

Conclusion

Being aware of the potentials in the abovementioned sectors, the Hainan Free Trade Port can be seen as a good alternative to the Hong Kong, Singapore, and mainland China ports. With the international located position of the Hainan FTP, goods, people, and data can be easily transported to the mainland market due to the free flow in the first line and the efficient control at the second line. Whereas all the enterprises benefit from the full implementation of Zero-Tariffs on the entire island of Hainan and the increased duty-free shopping quota per person per year, the encouraged industries have competitive tax rates and exemption of duties when trading to mainland China in the case of Hainan processed goods having an added value of 30%. To conclude, the Hainan Free Trade Port is an interesting and encouraging development that should be followed closely to further evaluate the potential investing prospects.

Do you have any questions regarding the new Hainan Free Trade Port, or want other vital information to do business successfully? Feel free to send us any questions our way; we would love to assist you.

 

Sources

China-Briefing

RVO

 

 

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