School of Economy

MID-TERM PRESENTATION

THE CHINA’S SPECIAL ECONOMIC ZONES

First semester of 2010/2011

Student: Loïc SEBASTIEN

Professor: 许文彬
 Structure

Introduction

I/ Brief presentation of the China’s Special Economic Zone.

1) The main objectives of the first Special Economic Zones

2) The ZES as pioneers for the China’s open policy

II/ The Shenzhen model

1) The beginning of the Shenzhen SEZ

2) The development of Shenzhen during the past 30 years

Conclusion
Introduction:

In the late 1970s, China is still a developing country, three decades after a
revolutionary regime change in 1949; it was in dire need of systemic change. The decade-long
debacle of the Cultural Revolution had just ended, leaving the economy dormant and the
people physically and emotionally drained. Moreover at that time, successful economic
development in other parts of Asia – including Taiwan, Hong Kong, Singapore, and South
Korea – demonstrated to Chinese government officials and the Chinese people that a market
economy works better than a planned one.

The new idea of opening the country to global seemed a no less drastic measure to
China’s leaders than the original policy of economic and social closure. Other new ideas were
emerging as well as this quotation of Deng Xiaoping:
― I am of the view that we should allow some regions, some enterprises, some workers and
farmers, who because of hard work and good results achieved, to be better rewarded and
improve on their livelihood . . . They will engender powerful demonstrative effects on their
neighbors and lead people in other regions, work units to follow their examples. In this way,
the national economy will, wave-like, surge forward, with all the people becoming relatively
well-off‖.

Policy and economic reforms were launched in 1978. In December 1978 the Third
Plenum of the 11th Congress of the Chinese Communist Party adopted the Open Door Policy,
and in July 1979, the Party Central Committee decided that Guangdong and Fujian provinces
should take the lead in conducting economic exchanges with other countries and
implementing ―special policies and flexible measures.‖
By August 1980, Shenzhen, Zhuhai, and Shantou within Guangdong Province were
designated as special economic zones (SEZs), followed by Xiamen in Fujian Province in
October 1980.

What are the objectives of the SEZs, how they had been set up, why such a success?
These are all the questions about which we are going to discuss in the following paper. In a
first part we will see an overview of these Special Economic Zones, what are the
government’s expectations by setting up these Zones, how it proceeded. Then in a second part
we will deeply develop what is often call ―the Shenzhen miracle‖ or how a small fishing
village of 30,000 people became a 9 million inhabitant city with a GDP worth of 120 billion
of dollars.

I/ Brief presentation of the China’s Special Economic Zones.

1) The setting up and the objectives of the Special Economic Zones

The old idea of attracting foreign manufacturers and traders by the establishment of
free zones has been developed in a variety of forms during the 60’s. These new forms had
called for more complex legislation and direct intervention by the State to provide
infrastructural and other facilities of a nature to encourage production activities within these
zones. Thus the public sector of the economy has been involved in their establishment. All the
countries in which experiments with policies of this type were being made were market
economy countries but in 1980 the People's Republic of China decided for the first time to
establish SEZ's in which mixed-economy enterprises (i.e. Chinese State-owned enterprises
operating alongside privately-owned foreign enterprises) using both Chinese and foreign
capital would predominate and in which workers educated according to the principles of
socialism and foreign managers and technicians imbued with the " bourgeois capitalist "
mentality would work side by side.

In doing so, China began the writing of a new chapter in the history of the economic
policies of the socialist countries. In the view of orthodox communists, such an association is
deemed to be unnatural; and it is possibly for that reason that at their beginning the SEZ's had
been established on an experimental basis with the declared objective of using foreign capital
and foreign organizing abilities for the benefit of the Chinese economy. In addition, the SEZ's
were pursuing a variety of economic objectives and reflect new orientations of economic
policy designed to improve productivity and to decentralize responsibility to the level of
management within individual public enterprises.

The four SEZ's were officially established by the 5th Session of the National People's
Assembly, which took the relevant decision in August 1980; but all the necessary studies and
preparatory measures had been taken before that. All of them border upon, or are close to
territories which the People's Republic considered as being occupied by other countries: the
Shenzhen SEZ is on the border of the New Territories of Hong Kong (Xianggang), which was
leased to Great Britain for 99 years in 1898; the Zhuhai SEZ shares a border with the
Portuguese colony of Macao (Aomen) and the Xiamen and Shantou SEZ's are not far from
Taiwan, which is the territory of the National Republic of China.

The objectives of the SEZ's imply restrictions or total waivers of the legal and
economic regulations applicable within the People’s Republic. However, their establishment
involves no loss of sovereignty, since they are not extraterritorial areas, but only special zones.
According to Chinese writings on the subject, in 1980 the SEZ's were pursuing five objectives.
They sought:
1) To attract foreign capital;
2) To attract advanced technologies;
3) To attract foreign currency.
4) To increase employment among Chinese workers
5) To permit first-hand study of the management of capitalist enterprises.

At a meeting held in Canton in June 1982, a number of differing views were expressed
on the degree of importance of each of these objectives. Those most highly praised were those
relating to the attraction of more advanced technologies and the earning of foreign currency,
which was necessary if imports were to be increased. There was also favorable comment on
the idea of being able to observe at firsthand how foreign companies were managed. However,
problems of a political nature were evoked with regard to the objective of making use of
foreign capital, since that implied that foreign private firms would be able to enrich
themselves from the surplus value created by Chinese workers and to make of the Chinese
economic system. Similarly, the objective of increasing employment among Chinese workers,
although intrinsically praiseworthy, gave rise to some doubts on the question of whether their
moral standards might not suffer as a result of employment in capitalistic enterprises. But
these distinctions, when looked at closely, are seen to be academic, since the five objectives
cannot be pursued in isolation from one another.

Each of these SEZs had more specific objectives based on their own geographical or
historical characteristics, but they were still quite similar in that they comprised large areas
within which the objective was to facilitate broadly based, comprehensive development.
Managed by their respective provincial governments, the SEZs were encouraged to pursue
pragmatic and open economic policies, serving as a testing ground for innovative policies that
if proven effective, would be implemented more widely across the country. The provincial
government had to draw up and implements zonal plans, examine and approve investment
projects submitted by firms, allocate land, co-ordinate public services, supply workers and
ensure that specific nights are safeguarded; provide schools, public health and welfare
facilities, enforce the law and keeps order.

Let’s see now how these Zones have been developed for the past thirty year and what
has been the central government reaction to the economic success of these zones?

2) The ZES as pioneers for the China’s open policy.

Early on, the SEZ experiment proved particularly successful in Shenzhen with an
extraordinary growth rate of around 30 percent for many years. Although the other SEZs
never realized Shenzhen's spectacular growth rates, the infrastructure in Zhuhai, Shantou, and
Xiamen was also rapidly modernized.

Spurred by the success of the SEZs, some members of the leadership coalition--
especially Hu Yaobang and Zhao Ziyang--argued that the international market should play a
greater role in determining China's economic policy. They gradually convinced Deng
Xiaoping to transform the import substitution development strategy from an insular policy of
discouraging imports to a more outward-oriented approach. Eventually designated the
"Coastal Development Strategy", the scheme called for the more prosperous coastal regions to
be transformed into major foreign economic trade centers, which would be partially integrated
with the international economy. The interior regions would remain protected from
international competition, in order to concentrate on production for the domestic market.

Under this framework, the central leadership expanded foreign trade and investment
privileges, access to foreign exchange, and taxation abatement schemes for the coastal areas.
In 1984, the Central Committee designated 14 cities as "Open Coastal Cities," entitling them
to approve foreign investment projects, offer various investment incentives to foreign
businesspeople, retain a larger percentage of earned foreign exchange, and import certain
equipment and technology duty-free. These municipalities, however, remained under Beijing's
control, and did not enjoy the same bureaucratic treatment granted to the SEZs

The Central Committee did allow certain "open cities," such as Dalian, Tianjin, and
Guangzhou, to establish Economic and Technical Development Zones (ETDZs), which were
essentially mini-SEZs. In 1985, "Large Open Coastal Economic Zones" were set up in the
Yangtze and Pearl river delta areas and in southern Fujian. The Shandong and Liaoning
peninsulas were later granted similar status, though none of these zones were able to exert the
same degree of autonomy as the SEZs. Like the SEZs, the new zones were set up to
encourage the transfer of technology, management reforms, and production inputs between
the coastal and interior regions, though their primary task was to break down barriers to
international economic exchange.

With the introduction of the coastal cities, the SEZs took on an additional role. Not
only were they supposed to attract foreign capital and technology, they were also to act as role
models for the open coastal areas and experimental hothouses for the coastal strategy reforms.
Theoretically, foreign technology, capital, and management techniques would first be
introduced in the SEZs, gradually utilized by the 14 Open Cities and their ETDZs, and then
disseminated to the interior regions. In practice, however, the SEZs were forced to compete
for domestic production inputs and foreign investment with the other coastal areas. This
competition ultimately strengthened the SEZs, forcing them to become more efficient.

Following the SEZ Work Conference of January 1986, drastic readjustments were
implemented to rein in the SEZs and turn them into foreign exchange generators, rather than
foreign exchange spenders that they became due to corruption and illegal trade. Stricter
foreign exchange and trade controls were adopted to prevent illegal trade. The State Council
also directed the SEZs to finance "outward-oriented" industrial and trading endeavors--i.e.,
those that would export at least 60 percent of production--to better fulfill their role under the
coastal development

In response to this directive, the SEZs increased investment capital to "productive

sectors" and made more credit available to local high-tech industries to develop competitive
export products. In Shenzhen, local markets were developed to facilitate the buying and
selling of such production inputs as materials, land, capital, and labor, in order to invigorate
the role of the market in the zone's economy. Shenzhen also granted foreign investors
preferential exchange rates, tax incentives, and bonuses to encourage investment in "outward-
oriented industries." Export industries were expanded in the other SEZs as well, but the
majority of projects in these zones were still concentrated in the production of labor-intensive
exports.
 The Beijing leadership, satisfied with the growth in SEZ exports, granted Hainan full
SEZ status in 1987. Although the national readjustment program introduced in 1988 reduced
overall funding for SEZ infrastructure projects, Beijing continued to grant preferential
treatment to export-oriented projects, especially those producing higher value-added products,
such as electronic goods.

After the mid-1989 leadership changes in Beijing and despite the SEZs' close
association with the reformist policies of the fallen Zhao Ziyang, the new leadership
announced during the February 1990 SEZ Work Conference that the SEZs would remain the
foundation of a modified coastal development strategy. The SEZs' mission as role models was
somewhat diminished, since the new leaders were no longer eager for the interior economy to
experiment with SEZ-type market reforms. They were, however, anxious to expand the SEZs'
role as foreign exchange generators, seeking to tap the foreign exchange earnings of
Guangdong, Fujian, and the SEZs to repay World Bank and other loans due in 1991 and 1992.
Although foreign exchange rules for foreign-invested enterprises did not change, the SEZs
reportedly were required to remit to Beijing up to 40 percent of earned foreign exchange in
1990 to help repay the national debt. Hainan, which encountered difficulties financing basic
infrastructure projects and attracting new foreign investment, was allowed to retain 100
percent of its foreign exchange earnings.

After the Tiananmen crackdown in 1989, Pudong New District in Shanghai was
established in 1990, further opening areas along the Yangtze River to trade and investment.
By 1992, the concept of openness was extended further, to a few cities in China’s border areas
and to all capitals of provinces and autonomous regions in the interior. Thus, by the latter year,
when Deng Xiaoping undertook his historic and crucial southern tour reaffirming China’s
open policy, the mission that had started with the creation of the SEZs had in many respects
been accomplished: the ―special‖ economic zones (and related areas)7 by that time were no
longer so special.

By 1994, after the special policies pioneered in the SEZs had been extended to many
parts of China, the country began to undertake nationwide reforms in tax remission, foreign
exchange control, and foreign trade regulation. In particular, one of the factors facilitating
rapid growth in China involved localizing the allocation of property rights, helping to
coordinate more closely the actions of local governments and local economic actors. The
process of innovation diffusion outward from the SEZs to China more broadly has been
generalized as a series of stages—experimentation, propagation, and harmonization—the
latter referring to the coalescence of national and SEZ growth rates over time, a narrowing
that has been empirically validated by a comparison of such rates over different time periods.
Three decades after launching of the reforms, China’s decision to focus on economic rather
than political development, and on a gradualist approach symbolized by the establishment of
the SEZs, can be judged a success. The country today is a world economic power house.

Shenzhen’s experience as an SEZ—both as a completely new city and an innovation center—

has been so successful that it merits special attention
II/ The Shenzhen model

1) The beginning of the Shenzhen SEZ

Shenzhen is by a considerable margin the most important of the SEZ's from the point
of view of area as well as that of economic activity. It derives specific benefits from the fact
of being adjacent to Hong Kong, the Canton-Hong Kong railway and a rapidly expanding port.
It has a total area of 327.5 sq. km. The social and economic development program provided
for the development of 98 sq. km. The utilization of the area has been rationally planned. It
has been divided up into 3 parts, 5 sections and 18 districts The principal activities it were
planned to develop are industry — preferably those based on advanced technology and giving
rise to little pollution (such as electronics, plastics, chemicals, furniture, textiles, food and
drink, machine-tools, products for use in agriculture, petrochemicals) — commerce and
general stores, a financial centre, tourism, fishing, an educational and cultural institute,
scientific research, a residential area and port activities.

The industrial district of Shekou already had numerous infrastructural facilities, which
were used by the first 32 enterprises. However this is a drop in the bucket compared with the
1,168 applications to establish enterprises already approved in 1982. Among these enterprise
we can distinguish four categories which are: wholly foreign enterprises; joint ventures in
which foreign capital and management resources are associated with Chinese investments,
technicians and workers enterprises processing raw materials and semi-finished goods (for re-
export) in which all the capital is foreign-owned and commercial enterprises based on foreign
capital and handling Chinese goods.

To understand the success of Shenzhen SEZ we may focus on the strategy used by the
local administration to attract the foreign investment. Foreign firms, when deciding on the
desirability of starting operations in an SEZ, take into account either cost savings or the
availability of infrastructural facilities and public utilities. First we’ll discuss the
infrastructural facilities and public utilities which constitute "external economies" for the
firms concerned. The main responsible authority in Guangdong and so in Shenzhen is the
"Guangdong Provincial Administration of Special Economic Zones" draws up and
implements zonal plans, examines and approves investment projects submitted by firms,
allocates land, co-ordinates public services, supplies workers and ensures that specific rights
are safeguarded; it also provides schools and public health and welfare facilities, enforces the
law and keeps order. Shenzhen also got private agency as the Development Corporation
which directly ensures co-operation with individual firms. It has discretionary powers and
guidance functions.

It is of interest to consider some of the infrastructural and service facilities supplied so

as to obtain a better understanding of their working and the system by which they were
financed. In view of the nature of the terrain, the first task of an infrastructural character was
to prepare it for use. This involves a great deal of earth-moving to flatten hills and to fill in
depressions and marshes. Once this has been done, the land has been divided into zones and
roads and electricity and the new city was able to rise. The total cost of these first investments,
amounting to 220 million Yuan, had been met from public funds and from loans granted by
the public authorities; the latter was planned to be reimbursed through the yearly rents paid by
the foreign companies and the fixed sums paid each year by the Chinese enterprises. Another
source of funds was the proceeds of the sale of dwellings which were being built by Hong
Kong firms; the latter must pay 80 % (in some cases 85 %) of the profits they earn to the
administrative authority of the SEZ. It can be seen that a substantial proportion of the cost of
infrastructural facilities came directly or indirectly from the economic agents directly
concerned.

As for the financing of installations for the supply of power and for refuse disposal,
the general rule was that "power supply, water supply, drainage, sewers, gas pipes and
telecommunications equipment within the area of land used by overseas investors must be
built on their own and the fees for linking these facilities with various trunk lines outside the
area of the land for their use should be paid by overseas investors'" (art. 21 of the
'"Provisional Provisions on Land Control in Shenzhen S.E.Z.). However, the actual terms, and
the amounts to be paid, vary according to the nature of the activity which forms the subject of
the individual contract. The housing facilities for foreigners were constructed and sold or
rented out by foreign firms. Where a dwelling was purchased, the purchase applies to the
actual dwelling but not to the land. Since all land belongs to the State, a rental must be paid
for the right to make use of it. As a general rule, a public authority or the employer was
responsible for the construction of housing and for maintenance and repairs. The dwellings
financed from commune funds were rented out and administered in accordance with
established practice in China as a whole; those financed by loans were sold. The money thus
received went towards the reimbursement of the loans. The infrastructural facilities of a social
character (schools, hospital and health services, parks and green belts, cultural activities and
entertainment, sports grounds) and for the establishment of a university were indirectly
financed by the foreign firms. We can now turn our attention to the problem of the benefits
for foreign firms to set up in the Shenzhen SEZ.

Before setting up their business, entrepreneur's calculation takes into account the cost
savings which can be achieved within the SEZ's. To determine the cost implications, we will
examine successively the following cases:
(1) The normal treatment for a firm establishing in a SEZ
(2) Preferential treatment, tax exemptions and concessions that a company which meet some
requirement can get

1）Normal treatment

a) Foreign firms have complete freedom of decision as regards the use of foreign personnel
for technical and administrative jobs. To obtain Chinese workers a firm may either make use
of the Special Zone Labor Service or make appointments directly, making use of selection
interviews and tests where desirable. They may also dismiss employees who are inefficient,
unsuitable or surplus to requirements.

b) A firm may choose the system of wage payment it desires, i.e. payment by the day, the
hour or the month or piece-work payment.

c) Enterprises and economic agents must carry out all their foreign currency transactions
through the intermediary of the Bank of China or that of some other bank with a branch in the
SEZ. Through these bodies they may transfer abroad part or all of the pay of all those of their
employees who are not Chinese nationals (foreigners, overseas Chinese and compatriots of
Hong Kong and Macao) after all income tax due has been paid.
d) All profits earned may be transferred out of the country through the same banks after
payment of profits tax. If a company ceases trading, its net assets may be transferred abroad
once it has been established that acceptable reasons exist for the cessation of trading and after
payment of all outstanding debts.

2) Preferential treatment

In view of the interest of the People's Republic of China in promoting certain particular types
of productive activity a preferential treatment was granted to enterprises established before
the end of August 1982 with total investments exceeding US$ 5 million and using advanced
technologies or technologies which require particularly long depreciation periods. The
Chinese authorities laid down the following rules:

a) Greater tax allowances than those normally allowed may be given to encourage additional
establishment and the reinvestment of profits. Firms which reinvest their profits in the SEZ
for at least five years "may apply for exemption of the income tax (amounting to 15%) on
profits from such reinvestment". This enables the People's Republic to avoid exports of
foreign currency and to increase investments.

b) With regard to the utilization of land, since "the land in the special zones remains the
property of the People's Republic of China", a firm got the usufruct of the land it needs by
paying rent running from the date of approval of its project. The amount of the rent payable,
and the maximum duration of leases, varied greatly according to the type of productive
activity envisaged, as can be seen from the following table:

After three years the rent may be increased by not more than 30 %. When the agreed period of
validity expires (which may be the maximum allowable period or less), the agreement may be
renegotiated.

c) Special preferential treatment on land use fees shall be granted to the educational, cultural,
scientific, technological, medical, health and public welfare undertakings run by overseas
investors in the special zone. Land use fees may be exempted for projects involving the most
advanced technology and non-profit-making projects.

d) Customs exemption is granted on all machinery, plant, accessories, raw materials, vehicles
and other instruments necessary for production. Consumer goods are liable to customs duty,
but the latter may be reduced or waived depending on the merits of each case.
 The first entrepreneurs also had some cost elements as two percentage fees which must
be paid in addition to actual wages. But in comparison of Hong Kong the labor cost was still
really cheap. This explains why Hong Kong firms were highly interested in expanding their
activities into Shenzhen, and were the first firms to invest in Shenzhen.

2) The development of Shenzhen during the past 30 years

In 1981 that is to say only three years after its nomination as a SEZ, the trading results
achieved by the Shenzhen SEZ were already considered as positive. In 1981, the value of
industrial and agricultural production in the zone was 340 million Yuan — twice as much as
in 1979. The standard of living of the inhabitants has improved. At this time average earnings
in China were of the order of 80 to 100 Yuan per month, whereas the monthly earnings of
workers in Shenzhen were from 150 to 200 Yuan. During 1982 the rate of construction in
Shenzhen raised by 3.10%, up to the end of April 1983 the total industrial output value of the
whole of Shenzhen city rose by 25 % compared with the corresponding period of one year
before.

With a progressively increasing level of freedom, Shenzhen achieved many successful

policy breakthroughs. One of the major challenges was to reconcile the goal of profit
maximization in a market economy with the basic tenets of a planned economy. Wage reform
was undertaken at a time when it was taboo elsewhere in China. The Shekou wage model,
adopted in 1983, restructured wages according to three elements: base pay, occupational pay,
and a variable allowance. The SEZ’s authorities also adopted an official minimum wage, and
all permanent and most contract workers received a social insurance package superior to
anything previously available in China. With improving terms of employment and social
protections, migrant workers soon began to gravitate to the city from many parts of China; by
1989 more than one million temporary workers already had converged on the Zone.
Improvements in labor productivity followed, and the beginnings of a ―free‖ labor market
emerged by the early 1990s.

To their credit, Shenzhen’s leaders recognized early on that the aforementioned tax
and policy measures applied to firms in the SEZ conferred only a temporary advantage, and
that over the long term, structural transformation and technological learning would be
necessary for development to become self-perpetuating. Consequently, a second principle
guiding Shenzhen’s development was ―learning by doing,‖ a striving for continued
improvement with a view toward the future. Shenzhen’s forward and backward linkages have
encompassed a large number of foreign and domestically funded enterprises capable of
synergistic learning. In 1985, 409 industrial projects operated in Shenzhen, more than 70
percent of which had domestic linkages.

One decade later, by late 1995, the number of domestic projects alone had increased to
1,400, and the number of joint ventures to nearly 9,000, manufacturing more than RMB 1
billion worth of products. The side-by-side operation of domestic and foreign enterprises
proved conducive to the diffusion of technologies. As a result, the Shenzhen SEZ developed a
certain competitive edge in manufacturing. As early as 1985, Shenzhen’s output of television
sets and radio-cassette recorders accounted for one-sixth and one-third, respectively, of the
national total. By the following decade, this competitive advantage had extended to the
international arena; by 1998, Shenzhen accounted for 14 percent of world output of floppy
disks, 6.2 percent of PC motherboards, almost 8 percent of hard disk drives, and 10 percent in
magnetic heads. Within the domestic market, Shenzhen by this time produced 70 percent of
liquid crystal displays (LCDs), 33 percent of digital wireless telephones, 30 percent of
personal computers, and 85 percent of the floppy disks. Such high market shares within China
and the world result both from the deliberate emphasis placed on Research and Development
in the leading domestic high-tech firms, such as Huawei Technology and Zhongxing
Telecommunication, as well as the increasing presence of Western companies utilizing firms
in the SEZ as subcontractors manufacturing their branded products to international
specifications. On the whole, the Zone has sought a balanced approach between global and
local in its development.

By 1998, high-tech industries accounted for almost 40 percent of the industrial output
within Shenzhen SEZ, reflecting the goal since the late 1980s of moving toward a more
technology intensive, higher-value-added stage of development. Many Chinese-patented
products have large international market shares, such as Huawei and ZTE Corporation
telecommunications equipment, as well as Great Wall computers. Although the role of foreign
firms and entrepreneurs in Shenzhen’s economy certainly points to the effects of globalization
in upgrading the technological content of the Zone’s output, the domestic forces at work
should not be overlooked. The number of patents registered in China as a whole has increased
rapidly; in 2007, China authorized 351,782 patents, up 31.3 percent from the previous year. In
2008, the number grew further to 411,982 a trajectory that puts it on a path to overtake Japan
(the current world leader in new patents) by 2012 .Within China, Shenzhen ranked first
among all Chinese cities in 2008, registering 2,480 new patents. Until late in 2008, at least,
Shenzhen’s high-tech industries appear to have held up well in the face of the strengthening
global financial crisis. Whether this trend is sustainable going forward will not be known until
the release of statistics for fourth-quarter 2008 and into early 2009.

The third factor underlying Shenzhen’s success has been its ability to attract FDI by
providing a favorable environment for foreign investment. The package of measures
described in the part 1) consistently attracted more FDI to Shenzhen than to the other SEZs,
and in most years Shenzhen’s FDI intake exceeded that of any other single province or
municipality in China, including Shanghai and Beijing. Shenzhen’s success in attracting FDI
also is reflected in its importance as a source of Chinese exports. In both 2006 and 2007,
Shenzhen accounted for about 14 percent of China’s total exports, the latter year representing
the fifteenth consecutive year in which it ranked as the leading exporting city in China.
Although during Shenzhen’s early years, Hong Kong and Macao were the dominant sources
of foreign investment; by 2008 FDI inflows came from as many as 82 countries, involving
148 Fortune 500 companies. In fact, more than 60 percent of the value of its industrial
production and exports originated from foreign investors, with FDI accounting for more than
half of total GDP.

The sustained rapid growth of FDI and foreign trade in Shenzhen has been
accompanied by a structural shift in its economy, manifest most prominently in the rapid
decline in the importance of agriculture. The share of the primary sector in Shenzhen’s total
GDP plummeted from 37.0 percent in 1978 to 4.1 percent (1990), and then to 0.1 percent in
2007. Agriculture’s decline was compensated by growth in the shares of the secondary sector
(from 20.5 percent in 1978 to 50.1 percent in 2007) and the tertiary sector (42.5 percent in
1978 to 49.8 percent in 2007). More specifically, by the start of the 11th Five-Year Plan
(2006–2010), Shenzhen’s economy could be described as supported by four economic
―pillars‖: high-technology industrialization, logistics, finance, and the culture industry
(tourism, entertainment, educational materials, and the mass media).
 In addition to the innovative policies described in part 1), Shenzhen introduced China
to several practices associated with economic liberalization in Western countries. For example,
Shenzhen was the first city in China to set up a center to monitor currency exchange rates, to
privatize a portion of its state-owned enterprises through stock-sharing plans, to permit the
entry of foreign banks, and to establish a stock exchange (1990).

One other factor of its success is its relation with Hong Kong. Shenzhen and Hong
Kong have for some time been exploring how the two special territories can better coordinate
their daily as well as longer-term interaction in areas of mutual interest. Prior to Hong Kong’s
reunification in 1997, there was a high level of expectation among Shenzhen’s political
leaders and academics of closer cooperation between the two cities. However, these
expectations did not elicit a favorable response from Hong Kong at the time. Post-1997, the
mood for closer cooperation has markedly improved, with governments on both sides now
taking proactive steps to realize economically sensible and mutually beneficial plans to work
more closely on a range of trans-boundary and other matters. And in fact considerable
tangible progress already has been made in the areas of cross-boundary transport and
environmental protection. Trans-boundary interaction has increased at a time when the gap in
levels of the development between the two regions has narrowed considerably.

Shenzhen’s GDP in 1981 was only 0.9 percent of Hong Kong’s, but by 2005 had
improved to 34 percent. Similarly, the per capita GDP of Shenzhen in relation to Hong Kong
is reported to have improved from 11.4 percent in 1987 to 28.5 percent in 2005. One of the
reasons has been the flow of FDI into Shenzhen from Hong Kong and Macao. Although this
flow as a percentage of total FDI in Shenzhen decreased from 78.9 percent in 1986 to 53.0
percent in 2005, this reflects an increase in the number of countries investing in Shenzhen
rather than an absolute decrease of investment coming from Hong Kong and Macao. More
important from a social perspective is the fact that an increasing number of Hong Kong
residents have opted to work and live in Shenzhen. This has raised questions about whether
the Hong Kong Special Administrative region government should be involved in supporting
its residents who work in Shenzhen, including day care, education for children, housing,
medical care, and old age support and assistance. Although issues of trans-boundary social
support are just now coming to the fore, joint plans to foster collaboration across a wide range
of economic activities have progressed considerably further.

As early as June 2004, with an eye toward establishing a world-class Hong Kong–
Shenzhen metropolis, the two governments signed a memorandum and eight cooperation (1+8)
agreements, followed in December 2007 by a major cooperation agreement and six additional
(1+6) agreements for the purpose of enhancing bilateral cooperation. In May 2007, the two
governments had also taken steps to facilitate sharing of technology and innovations,
concluding an umbrella agreement known as the Shenzhen–Hong Kong Innovation Circle,
under which they would pursue comprehensive technological collaboration across many fields.
This agreement committed the two parties to exchange talent, share resources and upgrade
technology. It has been argued that the Shenzhen SEZ, in many respects, has already been
integrated economically with Hong Kong, and has played an active role in shaping the Greater
Hong Kong Economy since the early 1990s. Hong Kong’s recent return to Chinese rule can
only hasten the process. In fact, in a recent visit the Chinese Premier, Wen Jiabao, strongly
advised Shenzhen to ―serve‖ Hong Kong, so that the two places would mutually benefit from
the move. Taking a cue from Hong Kong’s long-term plan to 2030, Shenzhen mounted a
parallel study—Shenzhen 2030—with the expressed intention of supporting and developing
in tandem with Hong Kong. The increasing cooperation between Hong Kong and Shenzhen
has been widely viewed as an effort to transform the two cities into a single, synergistic mega-
metropolitan area that will rank among the world’s largest in terms of population, logistics,
high-tech industrialization, and finance.

Conclusion
After a hesitant but historic start, the People’s Republic of China turned its back on its
first three decades of ―walking on two legs‖ and decided in 1978 to open to the world and
subsequently establish five special economic zones as windows and laboratories to test new
and innovative policies and measures.

Given its stellar economic growth over the past 30 years, China owes much to the
demonstration effect provided by its five SEZs, which as this paper has shown pioneered
many innovative policies and practices that had a truly revolutionary impact on the country’s
economic transformation. For example, most the "Twenty-Two Articles" issued in October
1986 to encourage greater foreign investment in China were first implemented in Shenzhen.
The most successful tests have been reductions in land usage fees, elimination of taxes on
remitted profits, and preferential tax treatment for foreign-invested enterprises.

But although the SEZs were ―special‖ by virtue of the exclusive policies and other
privileges extended them in the early years, the fact that by 1992 these favorable policies had
spread to many other parts of China and by 2001, the China’s admission to the WTO have
diluted the ―special‖ aura which was associated with SEZs.

Nonetheless, the contribution of the zones to accelerate economic growth within China
and in terms of their usefulness to foster better political and economic ties between overseas
Chinese and the mainland cannot be overlooked or underestimated. Political, economic, and
psychological barriers in China have been broken down due to the implementation of the SEZ.
 References

Xie Wei - Acquisition of technological capability through Special Economic Zones (SEZs):
The case of Shenzhen SEZ - Industry and innovation, volume 7, number 2 (december 2000)

Joanna Lee, and Gordon Kee - China’s special economic zones at 30

Chung-Tong Wu - China's Special Economic Zones: five years after an introduction -

Asian journal of public administration

Giorgio Stefani - Special Economic Zones and economic policy in china

Reardon, Lawrence C. - The SEZs come of age - China Business Review (nov/dec91)