China’s Special Economic Zones

Chinas Special Economic Zones

Source: adapted from World Bank (2009) World Development Report 2009: Reshaping Economic Geography.

China’s remarkable process of economic growth through globalization began in 1978 with the implementation of the “Open Door Policy”. It enabled a partial liberalization of the factors of production and permitted private and corporate capital accumulation, which was mostly forbidden beforehand. This was followed by a massive wave of investments and rapid expansion of China’s infrastructure base (e.g. real estate, utilities, transport, and communication).

From the 1980s, special economic zones (SEZ) played an instrumental role in integrating China into the global economy and in its economic development. Their setting aimed at attracting foreign investments and technology (many through the setting of joint ventures), providing employment, utilizing Chinese and imported resources, and supporting capital formation. The bulk of the output was to be exported to foreign markets, underlining that SEZs were part of an export-oriented strategy that characterized many Asian economies since World War II (Japan was the first to develop such a strategy in the region). The following incentives were offered to foreign investors:

  • Labor. The ability to use the vast Chinese pool of low-cost labor was a powerful incentive to locate in SEZs. Foreign firms also have the right to hire and fire labor, which was different from the then-prevailing Chinese lifetime system of public or collective firms.
  • Land use. SEZs were physically developed as planned entities with infrastructures and access to a container port complex (airports played a more significant role later) so that parts and raw materials could easily be brought in for processing and the output shipped to foreign markets. A degree of protection of private property was also significant since, until 2004, there was no constitutional protection of private property in China outside SEZs.
  • Tax incentives. SEZs offered a reduced corporate income tax rate, including income tax exemptions for foreign nationals working in SEZs. No custom duties were levied on imported materials and parts as long as they were for re-exports.

The development of SEZ went through several stages, which were linked with the setting and expansion of major container port infrastructure:

  • In 1980, the first four SEZs were established in proximity to Hong Kong (Shenzhen), Macau (Zhuhai), and Taiwan (Shantou and Xiamen). Their location was aimed at attracting “overseas” Chinese capital and as a showcase for the potential impacts of such a reform. This was dramatically different from the centrally planned policies that have taken place since the setting of the People’s Republic of China in 1949. These SEZs were also close to Hong Kong, the only modern port facility of the time, which had effective access to the global shipping network.
  • By 1984, the SEZ model was judged to be successful and could be expanded. The initial setting of the four SEZs was solely concerning southern China, so 14 coastal port cities, from the Dalian to Beihai, were selected to become SEZs. This triggered the development of modern port infrastructures, particularly container ports, which were essential to support an export-oriented strategy.
  • The importance of specific economic clusters was acknowledged in 1985 when the status of SEZ was expanded to the Yangtze River Delta, the Pearl River Delta, and the Xiamen-Zhangzhou-Quanzhou Triangle (Min River delta). This also provided additional space for the setting of industrial districts. In time, the Pearl River Delta would become the world’s most important manufacturing cluster. The development of manufacturing clusters was also accompanied by the development of port terminal clusters in these deltas, particularly for the Yangtze River Delta and the Pearl River Delta.
  • In 1988, the status of SEZ was expanded to Hainan Province, which mostly developed the touristic and agribusiness sectors, which became the fifth SEZ. By the late 1990s, the province would become an important destination for domestic tourism.
  • Since their inception, SEZs and their positive economic impacts were solely a coastal endeavor, with interior provinces lagging. By the late 1980s, a substantial migration of labor from the interior to coastal provinces was observed. In an attempt to counterbalance this trend, six Yangtze River ports and 11 border cities were granted SEZ status, in addition to all the capital cities of interior provinces and autonomous regions. Yet, accessibility to port infrastructures and foreign markets remained the dominant factor in the dynamism of SEZs, and comparatively, limited development took place in interior provinces until the 2000s.

By 1992, 60 SEZs have been set up in China, including 5 initial SEZs, 15 coastal port cities, 8 river port cities, 19 inland cities, and 13 border cities. Then, the process received wide adoption, particularly through the coastal provinces of China, as many jurisdictions (provincial governments, municipalities, counties) started to develop and promote their own development zones. Ten years later, by 2005, there were 210 national development zones and 1,346 provincial development zones. Therefore, China’s geography of production is strongly coordinated by its proximity to coastal areas and its capabilities to access global markets through port and airport terminals.

To counterbalance the development of this coastal orientation, from 2013, the Chinese government began an inland infrastructure investment strategy across Eurasia. The development of road, rail, and pipeline corridors across Eurasia was initially articulated as OBOR (One Road One Belt), which in 2017 became the BRI (Belt and Road Initiative) to better reflect the geographical context of the project.