Location Search and Company Set-Up in North China [1/3]

By Richard Hoffmann, ECOVIS Beijing

Economic development zones are not entirely a Chinese invention. In numerous other countries around the world similar zones were established long before to promote the local economy and test or introduce structural reforms. It is, however, obvious that much of the Chinese growth in foreign direct investment and international trade over the past decades is owed to the expansion and use of development zones nationwide. In general, these are defined as geographically marked areas with economic status in which investors and businesses are offered special incentives, for instance tariff-free imports, lower tax burdens or comparatively developed infrastructure levels. The ultimate goal of these zones is to create the best possible investment landscape to attract foreign capital and thereby develop the local economic environment.

The origin of development zones in China is traced back to the extensive economic and political reforms introduces in the early 80s of the past century. With the end of the totalitarian rule of Mao Zedong, the Chinese economy was left in ruins. Isolationist economic policies and the so-called Closed-Door Strategy of the communist party leadership lead to a systematic weakness, low capacity for innovation and ultimately to the overall loss of competitiveness. To reignite China’s economy, Deng Xiaoping introduced a number of reforms in the late 70s that would pave the way for the country’s enormous growth witnessed over the past three decades. Key to his economic reforms was setting up development zones in which a decentralised market environment could be tested to attract foreign investment for the first time in decades.

Due to the proximity of Mainland China to its economically healthy and liberal neighbour Hong Kong, the first development zone was established as in 1979 in the city of Shenzhen in Guangdong province. Under the leadership of Deng Xiaoping, a number of additional zones were created in Southern China soon after, which laid the foundation for today’s wealth in the region. Through its focus on special economic areas and emphasis on export-oriented business China managed its unparalleled rise without jeopardizing the country’s state-owned businesses through foreign competitors. This success led to the adoption of the development zones concept all over China – one of the most famous of which is located in Shanghai. A six-fold increase in value creation between the years of 1978 and 2000 proves the impact of the zones on local business.

Six Different Types of Zones to Match Individual Needs

There are six different types of development zones in China. The first two types are to be seen as separate from the rest due to their overall larger size and more differentiated investor base. Rather than specifically designated zones, they are geographic regions that offer enough space for investors and manufacturers of all industries to set up their production facilities in China.

1. Special Economic Zones (SEZ): SEZs were introduced in the South of China for the first time in 1979 by Deng Xiaoping as he initiated the country’s opening-up strategy. At the start, a total of six SEZs were set up alongside China’s East coast (Shenzhen, Zhuhai, Shantou, Xiamen, Hainan and Shanghai Pudong). These offered their investors significant tax advantages, for example corporate income tax rates of 15 percent instead of 33 percent which was common outside the zones back in the day.

2. Economic and Technological Development Zones (ETDZ): ETZDs are usually smaller in scope and often specialize on attracting companies from selected industries. They generally provide high quality in terms of infrastructure and facilities on offer and are certified as the country’s most developed zones directly by the Chinese state. Investors should, however, be cautious: Many of the so-called Regional ETDZs are not certified by the state-level and often prove to be less regulated and not recommendable.

In contrast to the above two types of development zones, the following four each provide specific services and investment environments that are more fitting to the needs of particular industries and operations. They are limited in space but able to expand their administrative scope to wider areas given forecasted demand that they then try to attract by offering exemplary client service.

3. Free Trade Zone (FTZ): FTZs are mostly located within the port cities along China’s East coast. Their greatest advantage lies in the transportation of locally manufactured products: Modern infrastructure allows for comparatively smooth logistics processes. The import license can be obtained easily and free of any license fees in order to promote imports. Furthermore, early customs clearance and the almost instant reimbursement of VAT on exports alongside again encourage international trade.

4. High-Tech Industrial Development Zones (HTIDZ): The focus of HTIDZ lies on the area of new technologies – by supervising its start-up companies and supporting their research and development activities, related industries are grown locally in so-called incubators. Oftentimes, HTIDZs are located as subzones within larger state-level development zones and may therefore be subsidized by local or even state-level politicians due to their often strategic importance to develop cutting-edge technology.

5. Export Processing Zones (EPZ): EPZs are comparable with FTZs as both view the ease of exporting and trading internationally as their key advantage – significant differences do, however, arise with regard to the size and scope of both zone types. As part of a larger development zone, EPZs are relatively small and allow only export-oriented companies the chance to invest. Although these firms are ensured incentives for customs clearance and international trade, domestic sales are more difficult to process.

6. Bonded Logistics Zones (BLZ): The main function of BLZs are the grouping and often unlimited storage of products for export and international shipment. Within the zone itself, only the most basic processes of value creation are performed – the mere purpose of a BLZ is rather to clear the notoriously strict Chinese customs. Whenever the down-stream customer places an order for the shipment of products from the zone, these can be immediately taken out of storage and dispatched without delay.

Six Considerations when Choosing the Right Business Location

When searching for the right location and development zones for an investment it is, of course, important to recall the nature of operations to be conducted in China. Whenever a supplier merely follows its largest customer, it will most likely establish its manufacturing site in close proximity in order to fulfil its obligation of reliable supplies in a more flexible way. Whenever an investor plans to pursue its own independent China venture, it should factor the following six points into its decision-making process: local infrastructure, local talent supply, cost structures, strategic industry clusters, special project requirements and governmental relocation policies. The respective weight of these six factors varies according to the nature of each investment project – individually they do, however, bear stark importance for the following reasons.

Local infrastructure must enable convenient access for transportation vehicles, employees and customers alike. These arrive onsite either by car, train, ship or plane which raises the importance of an integrated transportation network. Furthermore, local talent supply is vital to the quality of company employees at all levels. Universities are essential to the supply of qualified personnel whereas an adequate social infrastructure, including river promenades and restaurants for example, are important to retain these in the long term. Another factor is local cost structures – fixed costs such as rental fees as well as variable costs such as employee salaries differ significantly between regions in China. Lowering costs allows manufacturing companies to raise profit margins and increase their financial reserves which are vital in securing any China business.

Over the past few decades industry clusters have emerged within development zones countrywide. Any zone and its cluster should therefore also fit strategically to the investment project in order for regular business transfers to suppliers and customers to run smoothly. This especially applies to investment projects that imply special project requirements, for instance particularly rare services or manufacturing processes that are usually outsourced – the supplier would ideally be located within close proximity to the production site. No matter what decisions are made with regard to the above five factors, governmental relocation policies remain of central relevance to the choice of the business location at any time. The 12th Five-Year-Plan issued by the central government in Beijing increases the effort in pushing the economic frontier further west.

	Richard Hoffmann is a Partner at ECOVIS Beijing China. Richard obtained an honor’s degree in law and worked in Germany, America and China for various prestigious law firms prior to joining ECOVIS. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV. Contact: richard.hoffmann@ecovis.com
Ecovis Beijing is the trusted tax and legal advisor of several embassies and official institutions in China. It specializes in mid-sized international companies and focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up to our Newsletter or give us a call  +86 10-65616609 (ext 811/806)   or contact us directly via Beijing@ecovis.com