AN INVESTIGATION INTO THE IMPORTANCE  OF THE SPECIAL ECONOMIC ZONES  IN THE ECONOMY OF CHINA

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Over the past decade, there has been a sea change in China's economic policies. Like other developing countries which are attempting to become more export- orientated, China has started to set up free trade zones. These zones are called "Special Economic Zones"(SEZ's) and feature various incentives designed to encourage foreign investment. What is the significance of these zones? Have they really played an important role in the development of the economy of China? In this paper I first describe the background to the establishment of these zones, looking at China's economy before the 1970s. Then I describe some of the aims and characteristics of the SEZ's. Lastly, I attempt to assess the significance of the SEZ's in the development of the wider Chinese economy.

Historically, China has adopted an inward-looking strategy to its economic development. Successive Chinese governments thought that the economy could grow purely through self-reliance (Jao & Leung 1996). However, there are always limitations to what a country can do by itself, for example limitations in raw-materials, natural resources, technology, etc. These can hold back the growth of an economy and certainly China's economic growth lagged far behind much of the rest of the world up to the 1970's.

By contrast, countries like the USA were achieving significant economic growth in this period because they were practising foreign trade policies which facilitated free trade (Crane 1990). Any shortages in the domestic economy, for example oil in the USA or Japan, wheat in the Soviet Union or cars in India could be compensated for by imports. Foreign trade, then, could help to aid economic growth.

The export trade is also vital. Not only can exports be a means of paying for imports, but they also help to earn foreign exchange. Since 1979, the Chinese government has recognised the importance of exports as a means of fostering economic growth. Economic policies and special incentive programmes have been introduced to increase exports. One measure taken was the opening of the five special economic zones.

The aims of the establishment of the SEZ's were to earn foreign exchange, to enhance employment, to attract foreign investment and to accelerate the introduction of technology and management expertise (Crane op. cit.). The five SEZ's established were Shenzhen, Zhuhai, Shantou in Guangdong province, Xiamen in Fujian province and Hainan Island. In order to attract foreign investors and develop foreign trade, the five SEZ's offer similar packages of favourable incentives to foreign firms. One of the most attractive points of these packages is that income tax is fixed at the rate of 15 per cent, lower than that in other parts of China. Other advantages such as tax exemptions, land use rights, and banking and finance privileges are not available to firms operating outside the SEZ's.

Many other non-financial advantages are provided inside the SEZ's. Firms are provided relatively free-market environments with minimal government intervention. This means that private and joint-venture enterprises are free to hire their own workers. They are also free to set wages to reflect market conditions. Bonuses can be awarded to workers for outstanding performance (Crane op.cit.).

The favourable impact of the SEZ's on the economy of China is fivefold: They attract foreign investment, they help the growth of the export industry, they earn foreign exchange, they provide employment opportunities and lastly they help the indigenous economy improve its level of technology. I would now like to look at some of these points in more detail.

The preferential treaties of the SEZ's have attracted foreign investors to invest a huge amount of money in China. For instance, Hainan and Xiamen have attracted investments mostly from Taiwan (Hamrin 1990). By June 1987, a total foreign investment of $2.12 billion had been made in the five zones, amounting to one quarter of the total foreign investment in China during this period. The most marked success was registered in Shenzhen. By the end of 1986, it accounted for $1.4 billion through more than 4000 economic cooperation agreements (Vajpeyi 1994). One significant factor is that the investment has not been confined to the export industry, but has permeated other sectors such as infrastructure construction, commerce, tourism and real estate.

The establishment of the SEZ's has opened a way for China to increase its trade with foreign countries. They not only enhance trading activities such as foreign investment and tourism but also help China to earn foreign exchange through these activities. As all five SEZ's are coastal cities, they are convenient for ocean transport routes and help to promote the export industry. Preferential policies have encouraged foreigners to set up export- oriented factories in the territories. From 1985 to 1987, an annual average real growth rate of 83% was recorded for exports from the five zones. Shenzhen's exports, for example, grew at an average rate of 70% during this period. At the same time the proportion of the SEZ's' industrial products which went to export had risen to 53% by 1987 (Hamrin 1990).

Since the beginning of the open-door policy, small-scale private businesses have been allowed to coexist with state enterprises. This has increased employment opportunities for local people and raised the level of economic activity. Also, many state workers sense that going into business on their own may provide greater income potential. They generally adopt an attitude commonly known in China as " I Bu Zho Er Bu Shu ", which, loosely translated, means refusing to work and refusing to relax (Vajpeyi 1994). Many prefer to work for joint-venture firms for higher wages. So the average income in SEZ's now ranks as the highest in China.

In theory advanced technology and know-how will also flow into the country as a result of foreign investment. In turn, with increasing exports the force of international competition may bring greater pressure on Chinese firms to adopt more efficient work practices. It is perhaps questionable how much benefit the wider Chinese economy has reaped from these investments. The technology, patents and know-how remain firmly the property of, and are controlled by the parent companies. It may however be the case that in the long run the work culture and practices adopted by foreign companies could have some washback effect over wider economic practices in the country.

In conclusion, the establishment of the SEZ's has helped to increase the export trade which in turn has helped to improve the Chinese economy. Preferential treaties have been offered in the five SEZ's to attract foreign investment. A large amount of foreign investment has occurred not only in the export trade, but also in infrastructure construction, commerce and tourism. Foreign companies have been encouraged to set up factories in the territories and the export industry has grown. Jobs opportunities have been provided for locals as factories need labour and the average income of the people has increased. In addition, advanced foreign technology has been brought in with the inflow of foreign investment. All these factors have contributed to the growth of the Chinese economy. It remains to be seen if these quantitative advances, in which the SEZ's have played an important role, are matched by commensurate advances in the quality of life for the majority of Chinese people.

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