When China opened up its market to foreign investment in 1979, one of the main means of attracting investment and foreign currency was to establish investment zones (IZs). These IZs were areas within China that offered foreign investors incentives in return for their investment in China. Incentives included tax holidays, better infrastructure (power, water and telecommunications) and discounts on the rent of business premises.

Much of China’s recent success in attracting FDI has been attributed to its IZ policy and the incentives.

However, all this will change now that China is a member of the World Trade Organisation. It is a requirement of membership that China should not discriminate between Chinese businesses and foreign enterprises – to create a ‘level playing field’, as the expression has it.

China is currently drafting the ‘Unified Tax Laws’. A draft of these laws indicates that a flat tax rate between 25% to 28% will be applied throughout China, making no distinction between foreign enterprises and domestic firms.

Note, however, there are certain areas and industries that will probably be exempt from the unified tax policy. Under WTO rules, for instance, tax breaks are allowed if they are for industrial research and development activities which promote competition. The information technology industry is one area which is likely to receive continued incentives.

It is also likely that China’s central and western regions will continue to offer tax incentives in order to attract much needed foreign currency into these underdeveloped areas.

China’s accession to the WTO will also reduce the significance of the IZs by the reduction of tariffs and other non-tariff barriers in the rest of China. This will not spell the end of IZs. IZs are well situated geographically to carry out international trade and will continue to offer superior infrastructure and facilities.

Many IZ authorities are already preparing for the effects of the WTO accession by specialising in specific industrial areas. Tianjin FTZ and Waigaoqiao for example have developed niche markets in the automobile sector and the IT sector respectively.

All that said, what is the situation now?

What foreign enterprises can get from IZs
1. Tax Breaks
The main incentive of an IZ is the tax breaks that it has to offer to foreign enterprises. These tax breaks vary according to the industrial sector of the foreign enterprise and the zone that it has decided to invest in. Examples of tax breaks:

• The most common tax break that a FE investing in an IZ may receive is a 50% discount on the corporation income tax (CIT). This means a reduction from 30% to 15% on the CIT.

• In many cases a complete exemption of the tax can be received for a two-year period with a further reduction by half for the next three years (i.e. two years at 0% and then a further three years at 7.5%)

• If the FE is bringing in technology that is regarded as ‘advanced technology’ by the authorities then a further three years’ reduction by half (i.e. three years at 7.5%) can be negotiated

• If a FE has an export value of more than 70% for a certain year, then the FE may receive a preferential CIT rate of 10% for that year

2. Tax Refunds
Another benefit that a FE investing in an IZ may receive is a tax refund. There are two types of tax refund that can be negotiated:

• If the FE reinvests the profits that it has made in China back into its own enterprise or other enterprises in the IZ, and, these enterprises are due to operate for a further five years then such enterprises will receive a 40% refund of the CIT on the investment amount

• If the reinvestment of profits is made into an export-orientated or high-technology enterprise, then the FE shall receive a refund for the entire amount of CIT paid on the amount of the reinvestment

Different types of IZ
There are many different types of IZ which were set up at different times after the opening up of China. These different types of IZ include:

• Special Economic Zones (SEZs)
• Open Cities (OCs)
• Economic and Technological Development Zones (ETDZs)
• Hi-tech Development Zones (HTDZs)
• Free-Trade Zones (FTZs)
• Export Processing Zones (EPZs)

Each of these zones has different requirements for establishment and also offers varying benefits. A Foreign Enterprise (FE) looking to invest in one of these zones should therefore check the local regulations and policies for each zone in order to establish which area suits them the best.

Special Economic Zones
Shenzhen, Xiamen, Zhuhai, Shantou and Hainan were established in the 1980s and were China’s first attempts at developing IZs. The Zone authorities in each area were given more autonomy to plan and develop their respective areas and as a result they were able to transform these poor, low-density populated areas into modern container terminals with facilities that enabled them to deal with trading and investment opportunities from Hong Kong, Taiwan and other Asian trading nations.

The benefits offered in the SEZs have been greatly reduced since China’s accession to the WTO and their subsequent requirement to level the playing field for FE and domestic enterprises. Thus it is said that Shenzhen is the only SEZ that remains nationally important because of its proximity to Hong Kong. However, the other SEZs may still attract FEs through the superior infrastructure that exists in their zones.

Open Cities
In 1984, 14 cities in southern and eastern China were designated as ‘open cities’. These were:
• Beihai
• Dalian
• Fuzhou
• Guangzhou
• Lianyungang
• Nantong
• Ningbo
• Qingdao
• Qinhuangdao
• Shanghai
• Tianjin
• Wenzhou
• Yantai
• Zhanjiang

From 1992 onwards, this list was extended by the inclusion of all provincial capitals and a number of border cities. The main aim of these cities was to attract foreign capital, technology and expertise. To do this the authorities within these cities, like those of the SEZs, were given more autonomy to develop their own economic strategies regarding foreign investment.

Economic and Technological Development Zones
The ETDZs were first established as part of the 14 open city projects from 1984. The ETDZs for the most part were areas located just outside of their related OC. Their objective is to attract as much technology-intensive industry as possible and in this way it is more focused than the SEZs which are designed to attract a wide spectrum of industry.

Local Authorities within ETDZs can approve foreign investment with a value of up to US$30m and can guide local investment via locally made regulations. Manufacturing firms with who intend to invest long-term (more than 10 years) in the ETDZ will also receive additional tax benefits in that they will only have to pay 15% corporate tax. Ventures which are non-productive or have a shorter term will be taxed at 24%.

High-tech Development Zones
The 53 HTDZs were also established as part of the OC project. They were established with the intention of attracting hi-tech industry into China. However, HTDZ projects have not lived up to expectations. One of the main reasons is that most of them were ‘superimposed’ on the university areas, restricting their space to grow and develop. This has greatly restricted the attractiveness of HTDZs and has meant that even lo-tech FEs have been able to negotiate to be located within the HTDZs.

A list of the HTDZs in China can be found at the following weblink:
http://www.cadz.org.cn/en/about/aboutus.asp

Free-Trade Zones
There are 15 FTZs established in China and these areas are also known as ; 'bonded' zones. The main activities of these FTZ’s are warehousing and export processing:
• Dalian
• Fuzhou
• Guangzhou
• Hainan Haikou
• Ningbo
• Qingdao
• Shanghai Waigaoqiao
• Shantou
• Shenzhen
• Tianjin Port
• Xiamen Xiangyu
• Zhangjiagang
• Zhuhai

FTZs offer tax breaks similar to that of the SEZs. Additionally, enterprises establishing themselves within these areas may enjoy ‘duty-free’ status on imports and exports which enables them to import materials and equipment and export finished products. The condition to this duty-free status is, however, that the materials must stay within the zone.

Export Processing Zones
The first two EPZs were established in Dalian (in 2000) and in Beijing (in 2003). Since then however the number of EPZs has since grown to 38. These types of zone are small areas occupying an area of two to three square kilometres and are sometimes connected to ETDZs. They are supervised by customs and provide a less bureaucratic method of carrying out export processing activities. This is because goods may be brought into these zones without formal declarations having to be made or the need for payments of duties on goods that are being re-exported after processing.