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Ateneo de Manila University

Department of Chinese Studies

Xiamen SEZ:

A Case Study on the

Effects of Special Economic Zones

in the Economic Development of China

By

Francesca Gabrielle C. Garcia

CHN 20-A

Professor Benito Lim

March 1, 2013

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I. Introduction

In 1978, under the leadership of Deng Xiaoping, the Chinese government adopted the

Open Door Policy or the Open Policy . This refers to the set of policies adopted by the

reformist leadership since the Third Plenum of the Eleventh Central Committee in December

1978 to promote the expansion of economic relations with the capitalist world economy. 1 The

Open Policy marked the start of the 30 years of the first stage of Chinas reform towards a

market-oriented economy. This stage can be divided into four phases. The first phase operated on

a smaller scale with the Household Contract Responsibility System, wherein farmers took the

initiative in contracting agricultural production. The next stage was reform of State-Owned

Enterprises to the existence of private companies. The third stage involves the restoration of

urban and rural commodity markets, privately owned small enterprises and promotion of rural

bazaars. The final phase operated on a larger scale with the establishment of Special Economic

Zones between 1978 and 1983. 2

A Special Economic Zone (SEZ) is defined as a contained geographic region within a

country a demarcated area of land used to encourage industry, manufacturing, and services for

export, and are typically characterized by more liberal laws and economic policies than a

1 Howell, Jude. China Opens Its Doors: The Politics of Economic Transition. Colorado, USA: Lynne Rienner

Publishers Inc.2 Li, Xiaoxi. 30 Years of Reform Transforms China Beyond Recognition, In Road To Development: Journey of

the Chinese Economy

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countrys general economic laws. 3 Some of these laws include tax concessions, reductions in

land use fees and favorable labor policies.

This paper mainly looks into the role of SEZs in the economic growth and development

of China, as reflected in the Xiamen Special Economic Zone. It is evident that China

successfully demonstrated the usage of SEZs to its advantage. Beginning from the first stage of

reform, Chinas economy grew rapidly. From 1987 -2007, Gross Domestic Product grew by 9.7%

per annum, foreign trade by 17.4%, absorption of foreign capital by 17.1% and outbound

investment by 27.4%. 4 The table below shows Chinas GDP from 1980 -2008 and it is quite

evident that economic growth was really rapid and consistent.

3 Wang, Jin. The Economic Impact of Special Economic Zones: Evidence from Chinese Municipalities. Shanghai

University of Finance and Economics. http://se.shufe.edu.cn/upload/_info/42910_1001270253311.pdf. (Accessed

January 21, 2013.)4 Jiang, Xiaojuan. Chinas Long March Toward Greater Openness. In Road To Development: Journey of the

Chinese Economy

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It is important to study the role of Special Economic Zones on economic development in a

country where the demonstration of this was most successful. This can serve as a guide from

which other countries can draw insight.

II. Review of Related Literature

Jin Wangs F ramework on th e Role of Special Economic Zones

Jin Wang, a professor at the Hong Kong University of Science and Technology developed

some observations regarding SEZs in China: 5

1. Special Economic Zones, by combining private property rights protection, tax break and

preferential long-term land use fee, attract foreign direct investment

2. Special Economic Zones, in the absence of any significant crowding out effect, do not

reduce domestically owned capital formation;

3.

Special Economic Zones, if bringing more advanced FDI, will boost municipalitytechnology progress, i.e. total factor productivity growth

As evidenced by her research, the policy incentive package, which includes private

property rights protection, tax breaks and land use policy, increases per capita municipal foreign

direct investment by 58%. These foreign investments come in the form of foreign-invested and

export-oriented industrial enterprises. She also finds that SEZs increased municipal foreign

5 Wang, Jin. The Economic Impact of Special Economic Zones: Evidence from Chinese Municipalities. ShanghaiUniversity of Finance and Economics. http://se.shufe.edu.cn/upload/_info/42910_1001270253311.pdf. (Accessed

January 21, 2013.)

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owned capital stock and a crowding out effect did not occur on domestic capital and investment.

Lastly, SEZs increased municipality Total Factor Production growth by 0.6%.

III. Special Economic Zones in China

The main functions of SEZs were described by the Chinese in terms of a window and

a radiator. SEZs functioned as a window because you have China on the inside, peering out the

window so that they could learn about the potentials of the world markets and c ould transfer

technology into the country. 6 Also you had countries from the outside world, looking into the

window, taking the first step for foreign enterprises to enter the Chinese market while also

obtaining information. The radiator function describ es the relationships between the firms

within the SEZs and the firms throughout the rest of China. Other Chinese firms can learn and

get information from companies in SEZs. 7 Aside from these functions, SEZs also serve as a

bridge from which relations between Chinese and foreign partners emerge and inflow and

outflows of trade would be eased.

Development of Special Economic Zones

6 Knoth, Claus. Special Economic Zones and Economic Transformation: The Case of the Peoples Republic ofChina. KOPS: Das Institutional Repository Der Universitat Konstanz. ht tp://kops.ub.uni-

konstanz.de/bitstream/handle/urn:nbn:de:bsz:352-opus-5013/501_1.pdf. (accessed February 26, 2013) 7 Ibid.

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In 1980, the first four SEZs were established in the provinces of Guangdong and

Fujian. In Guangdong, these were Shenzhen, Shantou and Zhuhai. Xiamen was part of the Fujian

province.8 These were strategically located within the proximity of Hong Kong, Macau and

Taiwan, to be able to strengthen overseas trade relations with them and also to be able to

facilitate communications with overseas Chinese. The effects of opening up to foreign trade were

almost immediate. By 1981, the four SEZs accounted for 59.8 % of total Foreign Direct

Investment in China. By the end of 1985, total FDI totaled around US $1.17 Billion, about 20%

of the national total FDI. From 1980-1984, average national annual GDP growth was about 10%.

But GDP growth for the four SEZs were 58%, 32%, 13% and 9% annually for Shenzhen,

Zhuhai, Xiamen and Shantou respectively. 9

The SEZ model truly proved to be successful and thus could be expanded further. It

was in 1984 that China established 14 coastal port cities along the coastal line from North East

China in the Liaoning Province, closer to Korea and the Southern tip of China in the Guangxi

Province, which is closer to Vietnam. 10 During this time, more modern port infrastructures were

beginning to be developed. These were mostly container ports, which was essential in an export-

oriented strategy. 11

8 Rodrigue, Jean- Paul. Chinas Special Economic Zones. The Geography of Transport Systems.

http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/China_SEZ.html. (accessed February 26, 2013)9 Zeng, Douglas Zhihua. How Do Special Economic Zones and Industrial Clusters Drive Chinas RapidDevelopment? The World Bank Africa Region. http://www.chi nafile.com/how-do-special-economic-zones-and-

industrial-clusters-drive-chinas-rapid-development. (accessed February 28, 2013) 10 Ibid 11 Ibid

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In 1985, the Chinese government realized the importance of specific economic clusters,

which are market economy phenomen on, in which several firms locate themselves in some

certain geographical area for the purpose of reducing costs and raising profits on the basis of

external economies within the firms. 12 These clusters were established along the Yangtze River

Delta, Pearl River Delta and the Min River Delta. The next development was the declaration of

the whole province of Hainan as a SEZ in 1988. 13

With most of the SEZs set up along coastal areas, there was a migration of laborers

from the interior provinces to the coastal provinces. To counter this movement of labor, the

government established 6 Yangtze River ports and 11 border cities, which are more accessible to

the interior provinces. 14

Admini stration in Special Economic Zones

The following diagram shows the administrative structure of the initial four SEZs. 15

12 Lu, Ren. Chinese Special Economic Zones as Clusters http://brage.bibsys.no/hibo/bitstream/URN:NBN:no - bibsys_brage_6813/1/Lu_Ren.pdf. (accessed February 28, 2013)13 Rodrigue, Jean- Paul. Chinas Special Economic Zones. The Geography of Transport Systems.http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/China_SEZ.html. (accessed February 26, 2013) 14 Ibid. 15 Knoth, Claus. Special Economic Zones and Economic Transformation: The Case of the Peoples Republic ofChina. KOPS: Das Institutional Repository Der Universitat Konstanz. http://kops.ub.uni -

konstanz.de/bitstream/handle/urn:nbn:de:bsz:352-opus-5013/501_1.pdf. (accessed February 26, 2013)

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Contrary to being run by the central government, the SEZs have their own administrative body,

the SEZ Administrative Commission, which is under the City Government. However, Shenzhen

is the only SEZ where it is directly presided over by the city government. At the national level, it

is the Special Bureau at the Ministry of Foreign Trade and Economic Relations that facilitates

the development of SEZs. The Administrative Commission has the following functions: 16

1. drawing up development plans for the special zones and organizing their

implementations;

2. examining and approving investment projects in the special zones;

3. dealing with the registration of industrial and commercial enterprises in the special

zones and with land allotment;

16 Knoth, Claus. Special Economic Zones and Economic Transformation: The Case of the Peoples Republic ofChina. KOPS: Das Institutional Repository Der Universitat Konstanz. http://kops.ub.uni -


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4. coordinating working relations among the banking, insurance, taxation, customs,

frontier inspection, postal and telecommunications authorities and other

organizations;

5. administering labour matters;

6. being responsible for educational, cultural, health and other public welfare facilities

in the SEZs; and

7. supervising the implementation and enforcement of laws and orders in the SEZs."

I ncenti ves in Special Economic Zones

Special Economic Zones were designed mainly to attract foreign investors. Foreign

Direct Investment plays a big role in the economic development of the country. This is mainly

because foreign capital can solve the problems involved in the limited supply of domestic

capital. Some projects require huge amounts of capital, which may not be available within the

country and so the country needs to seek out foreign investment for help. These projects may

involve large infrastructures for the various industries in China, such as manufacturing

industries, which is significant to the export-oriented nature that China tries to achieve.

The following shows a brief list of the various incentives given to foreign investors. 17 A

more detailed list can be seen in the Appendix.

Reduced or no customs duties

No import quotas

Reduced or no foreign exchange controls

17 Knoth, Claus. Special Economic Zones and Economic Transformation: The Case of the Peoples Republic ofChina. KOPS: Das Institutional Repository Der Universitat Konstanz. http://kops.ub.uni-


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Unlimited profit repatriation

No or a minimum of taxes

Less restrictions on foreign ownership

Less bureaucracy (one chop policy)

Good infrastructure

Streamlined administrative regulations with relative independence for local planning authorities

Direct access to planning unites at provincial and central level

Tax holidays

Reduced tax on corporate profits (15%)

Duty-free allowances on production materials

Autonomy in hiring and firing workers

Generous depreciation allowances

Negotiated limited access to the domestic Chinese market for goods produced within the zone

Residence and work permits and income tax exemptions for foreigners working in the zone

Contr ibu tions of Special E conomic Zones

SEZs have various contributions to the development of China. The first of which is the

contribution to the countrys economy. The table below shows the significant contributions of Shenzhen,

Shantou, Zhuhai, Xiamen and Hainan SEZs to the Total Employment, GDP, FDI, Exports and Total

Population of China as of 2006. 18

18 Knoth, Claus. Special Economic Zones and Economic Transformation: The Case of the Peoples Republic ofChina. KOPS: Das Inst itutional Repository Der Universitat Konstanz. http://kops.ub.uni-


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National Indicator SEZs China

Total Employment 15 758 (millions)2 100 (as % of China total)

Real GDP 9,101 183,085 (RMB 100 millions)5 100 (as % of China total)

Utilized FDI 55 603 (US$ 100 millions)9.1 100 (as % of China total)

Merchandise Exports 1,686 7,620 (US$ 100 millions)22.1 100 (as % of China total)

Total Population 25 1,308 (millions)

1.9 100 (as % of China total)

SEZs were also utilized as a major avenue for attracting foreign investment. As

discussed, foreign investment is needed to fund various industrial projects that contribute greatly

to the Chinese economy.

Another contribution made is to employment. The establishment of various new firms

within the zones provided jobs for the Chinese people. Not only do they provide jobs, but also

provide human capital because of the high skills that are entailed from the employees. Higher

skills are obtained from training.

Aside from those already mentioned, SEZs contributed greatly to high technology and

infrastructure. This is known as the spillover effect, wherein there is a spillover of technology

and knowledge from the rest of the world. China truly used this technology and knowledge to

their advantage, which greatly contributed to their economy.

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IV. Xiamen Special Economic Zone

In analyzing the role of SEZs on Economic Development, we look at the case of the

Xiamen SEZ during the first 30 years of reform.

Xiamen is located in the Fujian province, west of the Taiwan Strait. It originally served

as a trading port before it was established as a SEZ in October 1980. It has a total area of 1,516

sq. km. The SEZ covers around 130 sq. km.

19

Population

The table below shows the increase of population and employment throughout the first

stage of reform.

19 Vacations To Go. http://www.vacationstogo.com/images/ports/maps/863_w.gif (accessed February 28, 2013)

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Exports & Imports Share in Chinas Total Foreign Trade 24

Foreign Direct Investments in Xiamen increased from $10 million in 1981 to $1.65

billion in 1997. This shows an annual increase of over 37%. As seen in the table below, it was

only after 1991 wherein FDIs grew almost tenfold.

Sectoral Distribution of Foreign Direct Investment (in billion US $) 25

By the end of 1997, there were 3,448 foreign-funded firms in Xiamen. They produced

about 79% of total industrial output in the area. All of these companies played important roles in

the export and import trading of the area.

24 Knoth, Claus. Special Economic Zones and Economic Transformation: The Case of the Peoples Republic ofChina. KOPS: Das Institutional Repository Der Un iversitat Konstanz. http://kops.ub.uni-


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Exports & Imports by Ownership (in billion US $) 26

Enterprises

As seen in the table below, Xiamen was mostly dominated by foreign-funded firms. Out

of all enterprises, 57% was funded with foreign capital. Investors who were in close proximity,

from Hong Kong, Macau and Taiwan, accounted for a share of 42% while other foreign

investors only had a 15% share. This shows how its location attracted more Asian investors

rather than Western investors. Foreign-funded enterprises employ 68% of the total labour force,

produce 81% of the output value, control 80% of the sales value, produce 79% of the value

added and have 71% of the total assets.

Economic Indicators of Different Legal Forms 1997 (in billion Yuan) 27

As seen in the following table, the electronic, and telecommunications equipment

dominates other sectors, providing 12% of employment and having a 17% output value.

26 Knoth , Claus. Special Economic Zones and Economic Transformation: The Case of the Peoples Republic ofChina. KOPS: Das Institutional Repository Der Universitat Konstanz. http://kops.ub.uni -


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Economic Indicators of All Enterprises in Different Sectors 1997 (in billion Yuan) 28

V. Conclusion

Since the opening up of China in 1978, the economy of the country unprecedentedly

grew like no other developing country did. The main avenue for this openness was the use of

Special Economic Zones and these have a variety of positive effects and contributions to the

economic development of China. By being able to attract Foreign Direct Investment, the firms

in the SEZ were able to capitalize on various infrastructure, machinery and other projects. The

case in Xiamen SEZ demonstrate the capacities of Special Economic Zones to facilitate this

development. With the consistent growth, improved economic conditions, higher employment

and higher output, it is evident how much these SEZs have impacted the growth of China as a

whole. However, proper policy implementation and supervision is still needed to fully maximize

the potential of these SEZs.

28 Knoth, Claus. Special Economic Zones and Economic Transformation: The Case of the Peoples Republic ofChina. KOPS: Das Institutional Repository Der Universitat Konstanz. http://kops.ub.uni -


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VI. Appendix

Incentives for Foreign Investment in SEZs and in the Rest of China 29

1. Taxes

30

29 Oborne, Michael. Chinas Special Economic Zones France: Development Centre of the Organisation for

Economic Co-operation and Development, 1996.30 G refers to the general regulations for the rest of China

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2. Costs

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3. Relation to Domestic Economy

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VII. References

Howell, Jude. China Opens Its Doors: The Politics of Economic Transition. Colorado, USA:Lynne Rienner Publishers Inc.

Jiang, Xiaojuan. Chinas Long March Toward Greater Openness. In Road To Development: Journey of the Chinese Economy

Knoth, Claus. Special Economic Zones and Economic Transformation: The Case of thePeoples Republic of China. KOPS: D as Institutional Repository Der UniversitatKonstanz. http://kops.ub.uni-konstanz.de/bitstream/handle/urn:nbn:de:bsz:352-opus-5013/501_1.pdf. (accessed February 26, 2013)

Li, Xiaoxi. 30 Years of Reform Transforms China Beyond Recognition, In Road To Development: Journey of the Chinese Economy

Lu, Ren. Chinese Special Economic Zones as Clustershttp://brage.bibsys.no/hibo/bitstream/URN:NBN:no-

bibsys_brage_6813/1/Lu_Ren.pdf. (accessed February 28, 2013)

Oborne , Michael. Chinas Special Economic Zones France: Development Centre of theOrganisation for Economic Co-operation and Development, 1996.

Rodrigue, Jean- Paul. Chinas Special Economic Zones. The Geography of TransportSystems. http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/China_SEZ.html.(accessed February 26, 2013)

Vacations To Go. http://www.vacationstogo.com/images/ports/maps/863_w.gif (accessedFebruary 28, 2013)

Wang, Jin. The Economic Impact of Special Economic Zones: Evidence from Chi neseMunicipalities. Shanghai University of Finance and Economics.

http://se.shufe.edu.cn/upload/_info/42910_1001270253311.pdf. (Accessed January21, 2013.)

Zeng, Douglas Zhihua. How Do Special Economic Zones and Industrial Clusters DriveChinas Rapid Development? The World Bank Africa Region.http://www.chinafile.com/how-do-special-economic-zones-and-industrial-clusters-drive-chinas-rapid-development. (accessed February 28, 2013)

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