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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 -
konstanz.de/bitstream/handle/urn:nbn:de:bsz:352-opus-5013/501_1.pdf. (accessed February 26, 2013)
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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-
konstanz.de/bitstream/handle/urn:nbn:de:bsz:352-opus-5013/501_1.pdf. (accessed February 26, 2013)
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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-
konstanz.de/bitstream/handle/urn:nbn:de:bsz:352-opus-5013/501_1.pdf. (accessed February 26, 2013)
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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-
konstanz.de/bitstream/handle/urn:nbn:de:bsz:352-opus-5013/501_1.pdf. (accessed February 26, 2013) 25 Ibid.
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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 -
konstanz.de/bitstream/handle/urn:nbn:de:bsz:352-opus-5013/501_1.pdf. (accessed February 26, 2013) 27 Ibid.
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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 -
konstanz.de/bitstream/handle/urn:nbn:de:bsz:352-opus-5013/501_1.pdf. (accessed February 26, 2013)
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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)