Investing in China’s Economic Development Zones
China’s economic development zones (EDZs) are areas with preferential business policies that differ from those governing the country as a whole. First experimented with in the 1970s, China has created a range of EDZs to attract foreign direct investment (FDI) and boost domestic growth.
EDZs provide a broad range of FDI incentives, which vary depending on the specific EDZ. Businesses operating in EDZs can expect, among other incentives, a higher level of autonomy over their operations, a variety of tax exemptions, land and building subsidies, and preferential employment policies.
In this article, we look at the different types of EDZs in China and the benefits they offer to foreign investors.
Types of EDZs in China
There are at least 14 types of national-level EDZs. When considering investment into an EDZ it is important to be aware of the subtle differences in the incentives that distinctive zone types provide.
According to a report by Xiao Wang published by the Pardee RAND Graduate School, the 14 EDZ types can be split into six classes, with zones falling in the first three being the most popular locations for FDI:
- Zones for Specific Economic Activity;
- Zones for Commercializing High-Tech Research;
- Zones for Trade and Exports;
- Zones to Attract Investment for Specific Purposes;
- Zones for Cooperation with Specific Countries; and
- New Areas.
I. Zones for Specific Economic Activity
Special Economic Zones (SEZ) and Economic and Technological Development Zones (ETDZ) fall into the first category. They are both heavily focused on attracting FDI and tend to provide incentives for manufacturing.
There is some policy overlap between SEZs and ETDZs. ETDZs tend to focus on providing incentives for specific kinds of activities, such as international trade, utilizing local resources, or developing technological innovation. There are almost 200 national-level ETDZs, each of which covers a much smaller area than an SEZ.
By contrast, SEZs are only seven in number, cover much larger areas, and tend to have more generalized policies rather than incentives for specific sectors. For example, China’s first SEZ was set up in Shenzhen, which now covers the whole city and primarily provides a preferential tax environment for manufacturers oriented towards export markets across a wide range of industries.
II. Zones for Commercializing High-Tech Research Findings
High-Tech Industrial Development Zones (HIDZ) aim to use the technological resources of research institutions, universities, and private companies to develop innovative high-tech products. Many HIDZs provide incentives for foreign tech firms with the aim of building collaboration between institutions to expedite the commercialization of research and development.
Innovation-focused ETDZs and HIDZs have similarities as they both focus on promoting innovation.
However, ETDZs often have a specific industry focus, are located further away from city centers, and are more heavily linked to manufacturing. HIDZs are instead located inside city centers and tend to create clusters of high-tech research institutions to foster research collaboration rather than manufacturing capabilities.
III. Zones for Trade and Export Purposes
There are four zones in this category, namely Free Trade Zones (FTZs), Export Processing Zones (EPZs), Bonded Logistic Parks, and Bonded Ports. Among other purposes, they collectively focus on attracting FDI to increase imports and exports through cost reductions.
FTZs focus on developing trade and the internationalization of the renminbi (RMB), while also acting as a testing ground for new policies before nationwide implementation. FTZs provide favorable environments for FDI primarily through less restrictive investment policies and administrative systems, as well as tax incentives for import and export.
The purpose of EPZs is similar, but they are primarily set up to develop export-orientated industries through export processing management. Bonded Ports, meanwhile, provide highly competitive trade-focused tax and subsidy policies, and Bonded Logistics Parks have a clear focus on the movement and storage of goods within the zones.
IV. Other zones
The other seven zones types fall into the last three categories, Zones to Attract Investment for Specific Purposes, Zones for Cooperation with Specific Countries, and New Areas. These zones collectively make up only a small proportion of all national-level EDZs.
Zones to Attract Investment for Specific Purposes have preferential tax and subsidy policies that focus specifically on either tourism or finance. They are worth investigating for businesses thinking of entering these sectors in China, as they are generally heavily restricted from FDI.
Zones for Cooperation with Certain Countries or Regions provide tax incentives for conducting trade and business with neighboring regions, focusing mainly on Taiwan, Macau, and Russia.
New Area Zones, such as the Shanghai Pudong New Area and Tianjin Binhai New Area, encompass some of the zones mentioned in other categories. They have been established to grant autonomous regulatory power to the local governments that manage specific EDZs.
Choosing where to invest in China
There are over 2,000 EDZs, each with unique investment incentives and accreditation at different levels of government. Even within zones of the same type, the level of infrastructure, amount of autonomy, and breadth of incentives vary widely, creating an extremely diverse investment environment.
Further complicating the business landscape, EDZs can have accreditation at the national, provincial, municipal, and district levels. Accreditation at a higher level generally means larger tax exemptions and better infrastructure. However, smaller companies are often better off locating in zones with a lower level of accreditation because they may not be eligible for incentives in zones with higher-level accreditation.
The right EDZ for investment depends heavily on a company’s specific business needs. Among many other factors, businesses need to take into account the location of suppliers and resources, the quality of the surrounding transport network, the cost of land, and which tax exemptions they are eligible for.
The complicated and diverse nature of China’s EDZs mean merely investing in any EDZ does not guarantee success. To ensure their investment pays off, businesses should consult experienced experts who understand the regulatory and business environment, and work with them throughout the investment process.
China Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Dalian, Beijing, Shanghai, Guangzhou, Shenzhen, and Hong Kong. Readers may write email@example.com for more support on doing business in China.