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Numerous variables contribute to the success of Chinese economic zones, and in all cases situations and factors may change. However, their success is based on a number of important factors and common points for some common lessons:
1. Although the risk is very high at the beginning, the top leaders were decided to make changes, through a gradualist approach. Such a determination ensured a stable and supportive macro environment for reform and for the new Open Door policies to prevent political opposition and temporary setbacks from undermining the economic experiment with the special economic zones. Deng’s southern tour in 1992 clearly illustrated his assurance to reassert the government’s commitment to market-oriented changes.
2. Tax is probably one of the most important incentives. In special economic zones and high-tech zones, the corporate tax rate is 15%, while the figure is 24% in the coastal and provincial cities. Foreign companies can be tax-exempt for the first two years of profitability, and then it may reduce by half for the next three years. High-tech companies are tax-exempt for the first two years of earning profits and are reduced by half in the next six years.
3. At the same time that the SEZs were opening up in the 1980s, Macao, Hong Kong, Taiwan and China, were also starting to upgrade their industrial structure and exchange out their labor-intensive manufacturing segments. The cheap labor and good infrastructure in the SEZs, as well as the Open Door policies coupled with liberal motivation, given an awesome opportunity for FDI to flow into China from the diaspora. Given the language, culture, and location advantages, such investments were overwhelming in the beginning stage, especially for the early SEZs. (See table 1 for the FDI inflows to these SEZs.)The measures for attracting FDI included streamlined administrative control; concessionary tax rates, breaks, and exemptions; preferential fees for land or facility use; reduced duties on imports; free or low-rent business accommodation; flexibility in hiring and firing workers; depreciation allowances; and favorable arrangements pertaining to project duration, size, location and ownership (Ge 1999). For FDI, the corporate tax rate was especially generous—15 percent as restricted to 30 percent for domestic firms—plus exemption from local income tax.
Table1. FDI Inflows in Five Comprehensive Special Economic Zones, 1978-2008
4. Otherwise, one of the most successful of the SEZs is that they have a high concentration of very skilled people. As a result, they have ended up centers of information and innovation era, adjustment, dissemination, and development. The abundance of FDI gives a great opportunity for technology learning. Governments also put strong emphasis on technology learning and innovation, as well as on technology-intensive industries.
5. Last, most SEZs in China are located in the coastal areas or near major cities with a history or tradition of doing business or foreign trade. Thus, there are better linked to the international market. They also have good access to major infrastructure, such as airport, ports, and railways. The location advantage is especially obvious for the SEZs in the Pearl River Delta region (close to Hong Kong) and the Min Delta region (close to Taiwan).
Nevertheless, SEZ does not always have a positive impact. The incentive to attract investors also means the government must accept tax levies, at least in the short term. In the early stages, SEZs are facing many difficulties due to the overwhelming availability of long-term goods threatening the local industry, resulting in shortages, foreign exchange and the risk of inflation. After 1982, SEZs were seen as more active and widely propagated as models for the Chinese economy. However, as the rest of China began to liberalize, the attractiveness of SEZ fell. According to Business China, the investment model in the SEZ is different and only Shenzhen is truly successful. During the 1980s, Shantou hardly attracted investment. The problem of speculation and loss of land are the other side of the SEZ. As the Chinese government favors large enterprises, farmers are no longer guaranteed land-use rights, especially in urbanized areas and in SEZs.
Not only that, despite the regular adjustment of compensation standards, compensation for land acquisition generally lower than the “market” capital is also low. SEZ Hainan is a typical example. In 1992, the Economist said Hainan was “the largest speculative ball in the world.” In June 1998, Hainan Development Bank, the main bank for the provincial government, declared bankruptcy. Shortly thereafter, the Guangdong International Investment and Trust Group in Guangdong Province, which has SEZ Shenzhen, also fell into similar circumstances. This is the biggest bankruptcy since China reforms opened.
Besides, as technology is increasingly becoming the drivers for growth and competitiveness; because the cost of resources and labor is rising, along with trade protectionism, China cannot continue the old low-cost labor and factor-based growth model in the long run. To maintain their competitive edge, China’s special economic zones and industrial clusters need to be more innovative and technology intensive. Of course, given the vast pool of labor, such a shift will take time and cannot be completed hastily. While the export-led growth has been very successful for China, the economic crisis and increasing trade friction might make China consider whether it should continue to rely on exports as the main engine for growth. After decades of growth, the domestic market is becoming bigger and more sophisticated, with a middle class rapidly emerging. Under such circumstances, China might be able to gradually increase the share of domestic consumption as a source of growth. This strategy will need a comprehensive approach. Enterprises will need to make more products that cater to domestic consumers, for example, and the government will need to strengthen social security and the social safety net. Meanwhile, opening up and strengthening the service sectors—such as education, health, and rural services—will stimulate consumption significantly. This idea is consistent with China’s current balanced national development strategy and will also help move the country toward a more service-based economy.
China has enjoyed economic growth of nearly 10% a year over the past decade, but it is also one of the world’s largest carbon offsets. Air quality in many major cities of the country no longer meets world standards. The average life expectancy of people in the north of the Yellow River is 5.5 years lower than that in the south due to air pollution (the average life expectancy of Chinese people is 75.3 years). Pollution and water scarcity lead to soil erosion. Environmental degradation threatens economic growth, raising public concern. Since 2007, China has surpassed the United States and became the world’s largest greenhouse gas emitter. According to the Global Carbon Project, 27% of global emissions in 2014 are due to China. Along with industrial development, China’s demand for energy from coal and oil has also skyrocketed. In January 2013, the capital of Beijing experienced a long-lasting haze that prompted its people to call it “atmospheric apocalypse”. The density of dangerous substances in the air is 40 times higher than the safe level that the World Health Organization (WHO). On the other hand, in the context of economic development, the number of private cars is increasing; contributing to the generation of toxic pollutants. To control this serious problem, the Chinese government has introduced a number of temporary and urgent solutions, such as the suspension or reduction of some factories, limiting the number of cars on the road for a certain period of time. At the same time, strengthen the public transport system, including the metro system, public transport to meet the needs of people.
Briefly, over the past three decades, China has achieved great and significant achievements in economic development and modernization of the country. The lives of the Chinese people are constantly improving. Reform and opening up are core engines of the achievements and progress that China has made. China has insisted on continuing the right path of reform and opening up to building a more robust, effective and open system, and a favorable environment for scientific development. However, China faces many challenges, such as a growing gap between the rich and the poor, the rapid expansion of production and urbanization, and other environmental and social problems. A number of national and international factors create new challenges for the country’s development.
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