China Special Report

Industrial Park, China's Vehicles for Manufacturing

Economic and Technological Development Zones (ETDZs)	High-tech Industrial Development Zones (HIDZs)	Free Trade Zones
Export Processing Zones (EPZs)	Cooling Down Industrial Parks Mania

China’s rapid economic growth has attracted the attention of foreign investors all over the world and the flow of foreign investment into China has had much to do with the country’s establishment of development zones, also known as industrial parks. Developed to avoid land waste and create industry clustering, these industrial parks have become major vehicles for attracting foreign direct investment (FDI) in China’s manufacturing sector. These industrial parks promise a developed infrastructure, a relatively efficient administration and above all, attractive business terms.

However, given the sheer size of China and the wide developmental gaps between different regions, it is still a daunting task for prospective investors to decide where to go. Before commencing their initial research, many foreign investors are confused by the different types of industrial parks, such as SEZ, ETDZ, HIDZ, FTZ and EPZ.

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Economic and Technological Development Zones (ETDZs)

Generally speaking, ETDZs have the most general functions. The establishment of ETDZs was inspired by the success of the five Special Economic Zones (including Shenzhen and Zhuhai), which were the first areas opened to foreign investors. Currently, there are 54 state-level ETDZs - 29 in the Eastern Region and 25 in inland China under the supervision of the Ministry of Commerce (MOC).

The combined GDP of the top five ETDZs reached RMB 335.1 billion, accounting for a third of the 54 ETDZs’ total.

ETDZs are typically located in the suburban regions of a major city. Within the ETDZ, an administrative committee, commonly selected by the local government, oversees the economic and social management of the zone on behalf of the local administration.

Guangzhou Development District (GDD) ranked first among all the ETDZs in terms of GDP. In 2006, GDD’s GDP reached RMB 78.9 billion, 20.9% higher than 2005. Tianjin TEDA, Suzhou Industrial Park, Dalian Development Area and Kunshan ETDZ ranked second, third, fourth and fifth. The combined GDP of the top five ETDZs reached RMB 335.1 billion, accounting for a third of the 54 ETDZs’ total.

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High-tech Industrial Development Zones (HIDZs)

HIDZs are another major type of industrial park. In the late 1980s, the Ministry of Science and Technology (MOST) initiated the “Torch Program”. The main objective of the program was to utilize the technological capacity and resources of research institutes, universities, and large and medium-sized enterprises to develop new high-technology products, and expedite the commercialization of innovations.

Although the initial goal of these set-ups was to commercialize research and innovations, the result was not entirely achieved. Save for a few exceptions, many HIDZs function similarly to ETDZs and the line between these two types of development zones has blurred.

The program was manifested in the establishment of High-tech Industry Development Zones (HIDZs). These zones expedite technology diffusion and create synergy among the academic and financial institutions, and corporations within or near the park.

In 1988, the first HIDZ was established in Zhongguancun, a small area in northwest Beijing that has often been referred to as the Silicon Valley of China. As of today, there are 53 state-level HIDZs in China - 24 in the coastal regions and 29 in the hinterland.Although the initial goal of these set-ups was to commercialize research and innovations, the result was not entirely achieved. Save for a few exceptions, many HIDZs function similarly to ETDZs and the line between these two types of development zones has blurred.

Currently, the top five HIDZs in China (measured by value-added industrial output) are Beijing Zhongguancun Hi-tech Park, Shanghai Zhangjiang Hi-tech Park, Nanjing Hi-tech Industry Development Zone, Wuxi Hi-tech Industry Development Zone and Shenzhen Hi-tech Industry Development Zone. In 2006, the combined value-added industrial output of the five HIDZs reached RMB 208.6 billion, accounting for 24.5% of the 53 state-level HIDZs.

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Free Trade Zones

Before China’s access to the WTO, China set up free trade zones (FTZs) in an attempt to experiment with free trade. FTZs had three targeted functions - export processing, foreign trade, logistics & bonded warehousing. The first state-level FTZ, Shanghai Waigaoqiao FTZ, was set-up in 1990. These free trade zones may be viewed as enclaves within China. Though they are physically within China’s border, they can be treated as areas that function outside of China Customs regulations. Companies in FTZs are eligible for tax refunds on exports, import duty exemption and concessionary value added tax (VAT).

Currently, there are 13 FTZs in 12 coastal cities with a total planned area of 43 km2. Although they are small in size, China’s FTZs played an important role in experimenting with the concept of free trade prior to China’s entry into the WTO.

Nevertheless, upon China’s WTO entry, the original unique advantages of FTZs declined. To maintain their competitive edge, China has begun to integrate FTZs with nearby ports since 2004. This has virtually expanded the size of FTZs, and strengthened their logistics and warehousing functions in international trading. Among the 13 FTZs, Shanghai Waigaoqiao FTZ, Shenzhen FTZ and Tianjin FTZ are the three biggest FTZs in terms of foreign trade. In 2006, combined foreign trade of the top three FTZ reached US$ 93.2 billion, accounting for 85.5% of the total.

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Export Processing Zones (EPZs)

More recently, export processing zones (EPZs) have been created to develop export-oriented industries and enhance foreign exchange earnings. EPZs are similar to FTZs but are set up solely for the purpose of managing export processing. The first EPZ was inaugurated in Kunshan in April 2000. So far, 58 EPZs have been set up in China. 41 of them are located in the Eastern Region while the other 17 EPZs are located in inland China. Most of the EPZs are part of ETDZs or HIDZs, but remain separated from them by physical barriers that are monitored by customs officials. Not unlike FTZs, EPZs are generally small in size, with a planned area of around 1-3 km2. Also, all FTZs and EPZs are state-level zones.

EPZs are similar to FTZs but are set up solely for the purpose of managing export processing.

EPZs have been playing an increasingly important role in China’s exports sector. In 2006, the 58 EPZs’ exports reached US$ 54.3 billion, 54.7% higher than 2005. However, each EPZs’ rate of development varies dramatically from one to another. In 2006, the top five EPZs measured by exports reached a combined export of US$ 46.0 billion, accounting for 84.7% of total exports.

In 2006, the 58 EPZs’ exports reached US$ 54.3 billion, 54.7% higher than 2005.

Apart from these zones, there are border and economic co-operation zones, software development parks, university science parks, as well as tourist and holiday resort development zones.

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Cooling Down Industrial Parks Mania

Currently, various industrial parks are playing an important role in China’s economy. For example, in 2006, the 54 state-level ETDZs, 53 state-level HIDZs and the 13 FTZs accounted for a combined 11.1% of China’s GDP, and 29.8% of exports. They are also a major platform for attracting foreign investment. In 2006, the 54 state-level ETDZs alone attracted US$ 14.7 billion FDI, accounting for 23.3% of the national total.

The success of state-level industrial parks spurred the speedy development of new ones established by different levels of government - some provincial, others national. By early 2004, there were nearly 7000 industrial parks in China. During the process, many farmers lost their land due to the fact that many agricultural landscapes were occupied without proper permission. In addition, to compete for investments, the administrations of numerous industrial parks ignored rules for environmental protection and offered unsustainable preferential treatments.

To curb the blind expansion of industrial parks, China has stepped up its efforts to clean up unqualified industrial parks since July 2003. By the end of 2006, the number of industrial parks had been reduced from 6866 to 1568. Among them, 222 are state-level development zones. The total planned area has been reduced from 38.6 k km2 to 9.9 k km2 (70.4% less).

When prospective investors are in the process of selecting where to invest, they should ensure that the industrial park they are considering has been placed on the approved list jointly issued by the National Development and Reform Commission (NDRC), Ministry of Land of Resources (MLR) and Ministry of Construction (MOCON). The most recent list was released in April 2007.

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