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 .

The decade-long debacle of the Cultural Revolution had just ended. 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. to be better rewarded and improve on their livelihood . 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. 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. Singapore. three decades after a revolutionary regime change in 1949. what are the government’s expectations by setting up these Zones. with all the people becoming relatively well-off‖. the national economy will. China is still a developing country. Hong Kong. surge forward. Then in a second part we will deeply develop what is often call ―the Shenzhen miracle‖ or how a small fishing village of 30. successful economic development in other parts of Asia – including Taiwan.000 people became a 9 million inhabitant city with a GDP worth of 120 billion of dollars. it was in dire need of systemic change. wave-like. why such a success? These are all the questions about which we are going to discuss in the following paper. followed by Xiamen in Fujian Province in October 1980. and Shantou within Guangdong Province were designated as special economic zones (SEZs). In December 1978 the Third Plenum of the 11th Congress of the Chinese Communist Party adopted the Open Door Policy. Policy and economic reforms were launched in 1978. some workers and farmers. some enterprises. work units to follow their examples.‖ By August 1980. and South Korea – demonstrated to Chinese government officials and the Chinese people that a market economy works better than a planned one. In this way. how it proceeded. They will engender powerful demonstrative effects on their neighbors and lead people in other regions. Moreover at that time. In a first part we will see an overview of these Special Economic Zones. Other new ideas were emerging as well as this quotation of Deng Xiaoping: ― I am of the view that we should allow some regions. What are the objectives of the SEZs. how they had been set up. 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. leaving the economy dormant and the people physically and emotionally drained. Zhuhai. who because of hard work and good results achieved. All the . . Thus the public sector of the economy has been involved in their establishment.Introduction: In the late 1970s. . Shenzhen. I/ Brief presentation of the China’s Special Economic Zones.

such an association is deemed to be unnatural. since they are not extraterritorial areas. 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. China began the writing of a new chapter in the history of the economic policies of the socialist countries. 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. their establishment involves no loss of sovereignty. which took the relevant decision in August 1980. 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. but all the necessary studies and preparatory measures had been taken before that. which is the territory of the National Republic of China. which was leased to Great Britain for 99 years in 1898. All of them border upon. . but only special zones. 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.e. In the view of orthodox communists. 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). In addition. The four SEZ's were officially established by the 5th Session of the National People's Assembly. However.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. The objectives of the SEZ's imply restrictions or total waivers of the legal and economic regulations applicable within the People’s Republic.

But these distinctions. They sought: 1) To attract foreign capital. provide schools. supply workers and ensure that specific nights are safeguarded. Early on. Eventually designated the . allocate land. co-ordinate public services. would be implemented more widely across the country. which was necessary if imports were to be increased.According to Chinese writings on the subject. a number of differing views were expressed on the degree of importance of each of these objectives. comprehensive development. 2) To attract advanced technologies. although intrinsically praiseworthy. enforce the law and keeps order. 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. when looked at closely. are seen to be academic. public health and welfare facilities. examine and approve investment projects submitted by firms. the SEZs were encouraged to pursue pragmatic and open economic policies. The provincial government had to draw up and implements zonal plans. 4) To increase employment among Chinese workers 5) To permit first-hand study of the management of capitalist enterprises. Each of these SEZs had more specific objectives based on their own geographical or historical characteristics. Managed by their respective provincial governments. the SEZ experiment proved particularly successful in Shenzhen with an extraordinary growth rate of around 30 percent for many years. 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. gave rise to some doubts on the question of whether their moral standards might not suffer as a result of employment in capitalistic enterprises. in 1980 the SEZ's were pursuing five objectives. 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. problems of a political nature were evoked with regard to the objective of making use of foreign capital. since the five objectives cannot be pursued in isolation from one another. Those most highly praised were those relating to the attraction of more advanced technologies and the earning of foreign currency. Although the other SEZs never realized Shenzhen's spectacular growth rates. Shantou. the infrastructure in Zhuhai. and Xiamen was also rapidly modernized. At a meeting held in Canton in June 1982. serving as a testing ground for innovative policies that if proven effective. 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. 3) To attract foreign currency. Spurred by the success of the SEZs. the objective of increasing employment among Chinese workers. but they were still quite similar in that they comprised large areas within which the objective was to facilitate broadly based. There was also favorable comment on the idea of being able to observe at firsthand how foreign companies were managed. However. Similarly.

In 1984. which would be partially integrated with the international economy. the Central Committee designated 14 cities as "Open Coastal Cities. the new zones were set up to encourage the transfer of technology. the scheme called for the more prosperous coastal regions to be transformed into major foreign economic trade centers. land. Theoretically. "Large Open Coastal Economic Zones" were set up in the Yangtze and Pearl river delta areas and in southern Fujian. . and taxation abatement schemes for the coastal areas. the central leadership expanded foreign trade and investment privileges. capital. retain a larger percentage of earned foreign exchange. to establish Economic and Technical Development Zones (ETDZs). and bonuses to encourage investment in "outwardoriented industries. local markets were developed to facilitate the buying and selling of such production inputs as materials. The Shandong and Liaoning peninsulas were later granted similar status. but the majority of projects in these zones were still concentrated in the production of labor-intensive exports. though their primary task was to break down barriers to international economic exchange." such as Dalian. management reforms. Like the SEZs. The interior regions would remain protected from international competition. however. in order to concentrate on production for the domestic market. Tianjin. and Guangzhou. This competition ultimately strengthened the SEZs.. offer various investment incentives to foreign businesspeople. which were essentially mini-SEZs. The State Council also directed the SEZs to finance "outward-oriented" industrial and trading endeavors--i.e. and production inputs between the coastal and interior regions. in order to invigorate the role of the market in the zone's economy. access to foreign exchange. forcing them to become more efficient. gradually utilized by the 14 Open Cities and their ETDZs. In Shenzhen. the SEZs were forced to compete for domestic production inputs and foreign investment with the other coastal areas. they were also to act as role models for the open coastal areas and experimental hothouses for the coastal strategy reforms. In 1985. rather than foreign exchange spenders that they became due to corruption and illegal trade. In practice. the SEZs took on an additional role. and management techniques would first be introduced in the SEZs. With the introduction of the coastal cities." entitling them to approve foreign investment projects. capital. tax incentives. Following the SEZ Work Conference of January 1986." Export industries were expanded in the other SEZs as well. however. Shenzhen also granted foreign investors preferential exchange rates. drastic readjustments were implemented to rein in the SEZs and turn them into foreign exchange generators. foreign technology. and did not enjoy the same bureaucratic treatment granted to the SEZs The Central Committee did allow certain "open cities. Stricter foreign exchange and trade controls were adopted to prevent illegal trade. These municipalities. remained under Beijing's control. the SEZs increased investment capital to "productive sectors" and made more credit available to local high-tech industries to develop competitive export products. and labor. Under this framework."Coastal Development Strategy". those that would export at least 60 percent of production--to better fulfill their role under the coastal development In response to this directive. and import certain equipment and technology duty-free. Not only were they supposed to attract foreign capital and technology. though none of these zones were able to exert the same degree of autonomy as the SEZs. and then disseminated to the interior regions.

the new leadership announced during the February 1990 SEZ Work Conference that the SEZs would remain the foundation of a modified coastal development strategy. further opening areas along the Yangtze River to trade and investment. The process of innovation diffusion outward from the SEZs to China more broadly has been generalized as a series of stages—experimentation. Hainan. since the new leaders were no longer eager for the interior economy to experiment with SEZ-type market reforms. helping to coordinate more closely the actions of local governments and local economic actors. and on a gradualist approach symbolized by the establishment of the SEZs. granted Hainan full SEZ status in 1987. a narrowing that has been empirically validated by a comparison of such rates over different time periods. the concept of openness was extended further. seeking to tap the foreign exchange earnings of Guangdong. to a few cities in China’s border areas and to all capitals of provinces and autonomous regions in the interior. Pudong New District in Shanghai was established in 1990.The Beijing leadership. after the special policies pioneered in the SEZs had been extended to many parts of China. Although the national readjustment program introduced in 1988 reduced overall funding for SEZ infrastructure projects. Three decades after launching of the reforms. China’s decision to focus on economic rather than political development. They were. can be judged a success. The SEZs' mission as role models was somewhat diminished. Beijing continued to grant preferential treatment to export-oriented projects. satisfied with the growth in SEZ exports. By 1992. the country began to undertake nationwide reforms in tax remission. anxious to expand the SEZs' role as foreign exchange generators. After the mid-1989 leadership changes in Beijing and despite the SEZs' close association with the reformist policies of the fallen Zhao Ziyang. was allowed to retain 100 percent of its foreign exchange earnings. By 1994. one of the factors facilitating rapid growth in China involved localizing the allocation of property rights. and foreign trade regulation. such as electronic goods. by the latter year. 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 . foreign exchange control. which encountered difficulties financing basic infrastructure projects and attracting new foreign investment. 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. and harmonization—the latter referring to the coalescence of national and SEZ growth rates over time. Fujian. Although foreign exchange rules for foreign-invested enterprises did not change. The country today is a world economic power house. especially those producing higher value-added products. After the Tiananmen crackdown in 1989. Thus. 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. however. propagation. when Deng Xiaoping undertook his historic and crucial southern tour reaffirming China’s open policy. and the SEZs to repay World Bank and other loans due in 1991 and 1992. In particular.

examines and approves investment projects submitted by firms. Shenzhen also got private agency as the Development Corporation which directly ensures co-operation with individual firms. The industrial district of Shekou already had numerous infrastructural facilities. This involves a great deal of earth-moving to flatten hills and to fill in depressions and marshes. To understand the success of Shenzhen SEZ we may focus on the strategy used by the local administration to attract the foreign investment. In view of the nature of the terrain. fishing. had been met from public funds and from loans granted by the public authorities. Once this has been done. tourism. co-ordinates public services. Foreign firms. a residential area and port activities.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. the Canton-Hong Kong railway and a rapidly expanding port. enforces the law and keeps order. scientific research. It has been divided up into 3 parts. It derives specific benefits from the fact of being adjacent to Hong Kong. 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. furniture. Among these enterprise we can distinguish four categories which are: wholly foreign enterprises. the first task of an infrastructural character was to prepare it for use. textiles. However this is a drop in the bucket compared with the 1. It has discretionary powers and guidance functions. First we’ll discuss the infrastructural facilities and public utilities which constitute "external economies" for the firms concerned. which were used by the first 32 enterprises.5 sq. 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. km. it also provides schools and public health and welfare facilities. km. Another source of funds was the proceeds of the sale of dwellings which were being built by Hong . chemicals. It has a total area of 327. a financial centre. technicians and workers enterprises processing raw materials and semi-finished goods (for reexport) in which all the capital is foreign-owned and commercial enterprises based on foreign capital and handling Chinese goods. amounting to 220 million Yuan.168 applications to establish enterprises already approved in 1982. supplies workers and ensures that specific rights are safeguarded. machine-tools. an educational and cultural institute. 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. when deciding on the desirability of starting operations in an SEZ. food and drink. allocates land. 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. joint ventures in which foreign capital and management resources are associated with Chinese investments. petrochemicals) — commerce and general stores. The social and economic development program provided for the development of 98 sq. The total cost of these first investments. The utilization of the area has been rationally planned. products for use in agriculture. the land has been divided into zones and roads and electricity and the new city was able to rise. take into account either cost savings or the availability of infrastructural facilities and public utilities.

To obtain Chinese workers a firm may either make use of the Special Zone Labor Service or make appointments directly. entrepreneur's calculation takes into account the cost savings which can be achieved within the SEZ's.Kong firms. payment by the day. 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. the general rule was that "power supply. As for the financing of installations for the supply of power and for refuse disposal. parks and green belts. and the amounts to be paid. 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. sewers. the actual terms. However. The dwellings financed from commune funds were rented out and administered in accordance with established practice in China as a whole.E. We can now turn our attention to the problem of the benefits for foreign firms to set up in the Shenzhen SEZ. drainage. cultural activities and entertainment. vary according to the nature of the activity which forms the subject of the individual contract. hospital and health services. 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.).Z. It can be seen that a substantial proportion of the cost of infrastructural facilities came directly or indirectly from the economic agents directly concerned. a public authority or the employer was responsible for the construction of housing and for maintenance and repairs. Before setting up their business. Where a dwelling was purchased. 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. The money thus received went towards the reimbursement of the loans. As a general rule. a rental must be paid for the right to make use of it. the hour or the month or piece-work payment. . making use of selection interviews and tests where desirable. the latter must pay 80 % (in some cases 85 %) of the profits they earn to the administrative authority of the SEZ. sports grounds) and for the establishment of a university were indirectly financed by the foreign firms. we will examine successively the following cases: (1) The normal treatment for a firm establishing in a SEZ (2) Preferential treatment. unsuitable or surplus to requirements. b) A firm may choose the system of wage payment it desires. those financed by loans were sold. The infrastructural facilities of a social character (schools. To determine the cost implications. 21 of the '"Provisional Provisions on Land Control in Shenzhen S. i. They may also dismiss employees who are inefficient.e. overseas Chinese and compatriots of Hong Kong and Macao) after all income tax due has been paid. Since all land belongs to the State. water supply. The housing facilities for foreigners were constructed and sold or rented out by foreign firms. the purchase applies to the actual dwelling but not to the land.

a firm got the usufruct of the land it needs by paying rent running from the date of approval of its project. but the latter may be reduced or waived depending on the merits of each case. b) With regard to the utilization of land. c) Special preferential treatment on land use fees shall be granted to the educational.d) All profits earned may be transferred out of the country through the same banks after payment of profits tax. Land use fees may be exempted for projects involving the most advanced technology and non-profit-making projects. Consumer goods are liable to customs duty. cultural. scientific. accessories. 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. 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. and the maximum duration of leases. as can be seen from the following table: After three years the rent may be increased by not more than 30 %. technological. This enables the People's Republic to avoid exports of foreign currency and to increase investments. medical. health and public welfare undertakings run by overseas investors in the special zone. varied greatly according to the type of productive activity envisaged. vehicles and other instruments necessary for production. d) Customs exemption is granted on all machinery. raw materials. the agreement may be renegotiated. 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. 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". The amount of the rent payable. since "the land in the special zones remains the property of the People's Republic of China". If a company ceases trading. When the agreed period of validity expires (which may be the maximum allowable period or less). . plant.

The SEZ’s authorities also adopted an official minimum wage. One decade later. The standard of living of the inhabitants has improved. migrant workers soon began to gravitate to the city from many parts of China. Consequently. But in comparison of Hong Kong the labor cost was still really cheap. almost 8 percent of hard disk drives. Shenzhen achieved many successful policy breakthroughs. The Shekou wage model. restructured wages according to three elements: base pay. occupational pay. of the national total. Shenzhen’s forward and backward linkages have encompassed a large number of foreign and domestically funded enterprises capable of synergistic learning. more than 70 percent of which had domestic linkages. respectively. As early as 1985. and that over the long term. by 1998. and were the first firms to invest in Shenzhen. 6. by 1989 more than one million temporary workers already had converged on the Zone. By the following decade.The first entrepreneurs also had some cost elements as two percentage fees which must be paid in addition to actual wages. 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. As a result. by late 1995. To their credit. 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. a second principle guiding Shenzhen’s development was ―learning by doing. 409 industrial projects operated in Shenzhen. and 10 percent in . During 1982 the rate of construction in Shenzhen raised by 3. 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. structural transformation and technological learning would be necessary for development to become self-perpetuating. and the number of joint ventures to nearly 9. this competitive advantage had extended to the international arena. Wage reform was undertaken at a time when it was taboo elsewhere in China. and the beginnings of a ―free‖ labor market emerged by the early 1990s. The side-by-side operation of domestic and foreign enterprises proved conducive to the diffusion of technologies. whereas the monthly earnings of workers in Shenzhen were from 150 to 200 Yuan.‖ a striving for continued improvement with a view toward the future. Shenzhen’s output of television sets and radio-cassette recorders accounted for one-sixth and one-third. adopted in 1983. the value of industrial and agricultural production in the zone was 340 million Yuan — twice as much as in 1979. manufacturing more than RMB 1 billion worth of products. and all permanent and most contract workers received a social insurance package superior to anything previously available in China. This explains why Hong Kong firms were highly interested in expanding their activities into Shenzhen. Shenzhen’s leaders recognized early on that the aforementioned tax and policy measures applied to firms in the SEZ conferred only a temporary advantage. Improvements in labor productivity followed. With a progressively increasing level of freedom.2 percent of PC motherboards. Shenzhen accounted for 14 percent of world output of floppy disks. the number of domestic projects alone had increased to 1. In 1985. In 1981.10%. the trading results achieved by the Shenzhen SEZ were already considered as positive. the Shenzhen SEZ developed a certain competitive edge in manufacturing. and a variable allowance.000.400. With improving terms of employment and social protections. At this time average earnings in China were of the order of 80 to 100 Yuan per month.

3 percent from the previous year. and in most years Shenzhen’s FDI intake exceeded that of any other single province or municipality in China. reflecting the goal since the late 1980s of moving toward a more technology intensive. Within the domestic market. more than 60 percent of the value of its industrial production and exports originated from foreign investors. In both 2006 and 2007. entertainment. More specifically. the number grew further to 411. On the whole.1 percent (1990).magnetic heads. involving 148 Fortune 500 companies. as well as Great Wall computers. 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. up 31. and 85 percent of the floppy disks.5 percent in 1978 to 50. finance. Shenzhen’s success in attracting FDI also is reflected in its importance as a source of Chinese exports. such as Huawei and ZTE Corporation telecommunications equipment. 30 percent of personal computers. higher-value-added stage of development. logistics. registering 2. as well as the increasing presence of Western companies utilizing firms in the SEZ as subcontractors manufacturing their branded products to international specifications. The share of the primary sector in Shenzhen’s total GDP plummeted from 37. Although during Shenzhen’s early years. 33 percent of digital wireless telephones. with FDI accounting for more than half of total GDP. Until late in 2008. By 1998.1 percent in 2007) and the tertiary sector (42. and the mass media). Shenzhen’s high-tech industries appear to have held up well in the face of the strengthening global financial crisis.982 a trajectory that puts it on a path to overtake Japan (the current world leader in new patents) by 2012 . educational materials. the latter year representing the fifteenth consecutive year in which it ranked as the leading exporting city in China. The package of measures described in the part 1) consistently attracted more FDI to Shenzhen than to the other SEZs. China authorized 351.1 percent in 2007. In fact. in 2007.480 new patents. The third factor underlying Shenzhen’s success has been its ability to attract FDI by providing a favorable environment for foreign investment.5 percent in 1978 to 49.0 percent in 1978 to 4. and then to 0. The sustained rapid growth of FDI and foreign trade in Shenzhen has been accompanied by a structural shift in its economy. . In 2008. Shenzhen by this time produced 70 percent of liquid crystal displays (LCDs). Hong Kong and Macao were the dominant sources of foreign investment. Many Chinese-patented products have large international market shares. the Zone has sought a balanced approach between global and local in its development. 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. Shenzhen’s economy could be described as supported by four economic ―pillars‖: high-technology industrialization. manifest most prominently in the rapid decline in the importance of agriculture. Whether this trend is sustainable going forward will not be known until the release of statistics for fourth-quarter 2008 and into early 2009. by the start of the 11th Five-Year Plan (2006–2010).782 patents. Shenzhen ranked first among all Chinese cities in 2008. at least. and the culture industry (tourism. The number of patents registered in China as a whole has increased rapidly. Shenzhen accounted for about 14 percent of China’s total exports. such as Huawei Technology and Zhongxing Telecommunication.Within China. the domestic forces at work should not be overlooked. by 2008 FDI inflows came from as many as 82 countries. high-tech industries accounted for almost 40 percent of the industrial output within Shenzhen SEZ. Agriculture’s decline was compensated by growth in the shares of the secondary sector (from 20. including Shanghai and Beijing.8 percent in 2007).

For example. but by 2005 had improved to 34 percent. to permit the entry of foreign banks. One of the reasons has been the flow of FDI into Shenzhen from Hong Kong and Macao.In addition to the innovative policies described in part 1). Shenzhen introduced China to several practices associated with economic liberalization in Western countries. 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. 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. the per capita GDP of Shenzhen in relation to Hong Kong is reported to have improved from 11. including day care. Although issues of trans-boundary social support are just now coming to the fore. concluding an umbrella agreement known as the Shenzhen–Hong Kong Innovation Circle. and to establish a stock exchange (1990). Trans-boundary interaction has increased at a time when the gap in levels of the development between the two regions has narrowed considerably. Although this flow as a percentage of total FDI in Shenzhen decreased from 78. under which they would pursue comprehensive technological collaboration across many fields. in a recent visit the Chinese Premier. 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 .4 percent in 1987 to 28.9 percent of Hong Kong’s. education for children. One other factor of its success is its relation with Hong Kong. Post-1997. medical care. and has played an active role in shaping the Greater Hong Kong Economy since the early 1990s. And in fact considerable tangible progress already has been made in the areas of cross-boundary transport and environmental protection. there was a high level of expectation among Shenzhen’s political leaders and academics of closer cooperation between the two cities. the mood for closer cooperation has markedly improved. so that the two places would mutually benefit from the move.5 percent in 2005.9 percent in 1986 to 53. Similarly. the two governments had also taken steps to facilitate sharing of technology and innovations.0 percent in 2005. the two governments signed a memorandum and eight cooperation (1+8) agreements. and old age support and assistance. joint plans to foster collaboration across a wide range of economic activities have progressed considerably further. share resources and upgrade technology. As early as June 2004. with an eye toward establishing a world-class Hong Kong– Shenzhen metropolis. Wen Jiabao. Shenzhen’s GDP in 1981 was only 0. in many respects. to privatize a portion of its state-owned enterprises through stock-sharing plans. strongly advised Shenzhen to ―serve‖ Hong Kong. In fact. However. This has raised questions about whether the Hong Kong Special Administrative region government should be involved in supporting its residents who work in Shenzhen. 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. Hong Kong’s recent return to Chinese rule can only hasten the process. This agreement committed the two parties to exchange talent. has already been integrated economically with Hong Kong. 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. housing. Shenzhen was the first city in China to set up a center to monitor currency exchange rates. Prior to Hong Kong’s reunification in 1997. followed in December 2007 by a major cooperation agreement and six additional (1+6) agreements for the purpose of enhancing bilateral cooperation. these expectations did not elicit a favorable response from Hong Kong at the time. It has been argued that the Shenzhen SEZ. In May 2007.

logistics. Political.in tandem with Hong Kong. the fact that by 1992 these favorable policies had spread to many other parts of China and by 2001. high-tech industrialization. Given its stellar economic growth over the past 30 years. For example. Conclusion After a hesitant but historic start. 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. Nonetheless. 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. 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. which as this paper has shown pioneered many innovative policies and practices that had a truly revolutionary impact on the country’s economic transformation. economic. 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. and finance. The increasing cooperation between Hong Kong and Shenzhen has been widely viewed as an effort to transform the two cities into a single. elimination of taxes on remitted profits. synergistic megametropolitan area that will rank among the world’s largest in terms of population. the China’s admission to the WTO have diluted the ―special‖ aura which was associated with SEZs. China owes much to the demonstration effect provided by its five SEZs. and psychological barriers in China have been broken down due to the implementation of the SEZ. .

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