Why Were Free Trade Zones Created in China

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Economic and customs enclaves connected to a city, district, or port region are known as free trade zones in China. They use different financial and administrative policies from those implemented at the national level. They have served as a tool to make it easier for foreign businesses to establish themselves in China’s command economy.

Early in the 1990s, Shenzhen and Shanghai, two coastal cities, were the first free trade zones. They provide favorable investment conditions, high-quality upgraded infrastructure, and modern warehouses in an effort to draw in international investment. To encourage investment and stimulate economic growth, they provide tax advantages. They also provide warehouses and infrastructure of high quality. 

Why were free trade zones created in china

Compared to the rest of China, these locations frequently offer businesses more favorable tax and regulatory environments. Customs officials believe that imported goods should not be allowed to be consumed in China.

They are therefore free from import duties. Free trade zones were the first to provide sites for international businesses to assemble and produce goods. Since they are special economic zones, businesses are free to import and produce goods there under customs inspection at the point of entry, without having to pay customs taxes.

LIST OF CURRENT CHINA FTZS

Shanghai Free Trade Zone

The first Free Trade Zone to be formed in Mainland China was the Shanghai FTZ. Many additional Free Trade Zones (FTZs), including those in Guangdong, Tianjin, and Fujian, have adopted the legislative framework for investment in the zone.

The zone is separated into four parts and covers an area of 121 sq. km.

  • Bonded Area FTZ
  • Lujiazui Banking District
  • Export Processing Zone of Jinqiao
  • High Tech Park in Zhangjiang

As suggested by their titles, each zone serves a certain function by analyzing requirements and industry.

Waigaoqiao Free Trade Zone

Waigaoqiao Free Trade Zone was the first zone established in 1990 and is presently a component of the FTZ Bonded Area. It’s among the most well-known FTZs.

Covering 6.4 sq. km, the region includes economic services such as free trade, warehousing, logistics, duty-free commodity exhibition, and trading in addition to export processing.

Guangdong Free Trade Zones

The Guangdong Free Trade Zone was created in 2015 and covers more than 118 square kilometers in three cities: Shenzhen, Guangzhou, and Zhuhai.

Guangzhou Free Trade Zone area

Nansha

Nansha is renowned for having a large manufacturing sector. These firms serve as sub-suppliers to some of the major automakers.

The 28 square kilometer region is mostly used by businesses engaged in high-end manufacturing, international trade and commerce, finance, and logistics.

Shenzhen Free Trade Zone area

Qianhai-Shekou

Qianhai, which covers more than 28 square kilometers, is one of China’s most well-known FTZ regions. The sector primarily focuses on banking, IT, and logistics.

Zhuhai Free Trade Zone area

Hengqin

Xi Zhongxun, the father of Xi Jinping, and Deng Xiaoping oversaw the establishment of Zhuhai as one of the first Special Economic Zones (SEZ) in the 1980s.

Zhuhai, which is sometimes called the “Riviera of China,” is home to several enterprises and is active in the logistics sector. Hengqin is a 28-square-kilometer region that is primarily focused on the growth of financial services, tourism, science and education, leisure, and health.

It will significantly affect the development of Macau’s connectivity.

Tianjin Free Trade Zone

One of China’s largest free trade zones, covering more than 120 square kilometers, is the Tianjin FTZ, which opened for business in 2015. Being the only Free Trade Zone (FTZ) in Northern China, the FTZ plays a crucial role in coordinating the growth of Beijing, Tianjin, and Hebei.

The three divisions of the FTZ are as follows:

  • Tianjin Airport Area (43 sq.km.)
  • Binhai CBD Area (47 sq..m.)
  • Tianjin Port Dongjiang Area (30 sq.km.)

Its primary goals are to expand manufacturing, shipping, and logistics services.

Hainan Free Trade Zone

Hainan is sometimes referred to as “China’s Hawaii,” and until 2025, the Chinese government intends to turn the entire island into a free trade zone. With a land area of more than 298 square kilometers, this will make Hainan the largest free trade zone in all of China.


WHY WERE FREE TRADE ZONES CREATED IN CHINA?

Smuggling items from Hong Kong into Mainland China

It is well known that China has suffered—and continues to suffer—from smuggling and imports through illegal channels.

Using Hong Kong as a base for goods imports is a popular way to avoid dealing with China’s complex import laws and procedures.

The process is:

  • To send the goods in large quantities to a Hong Kong-based logistics firm.
  • The logistics provider divides the merchandise into separate, more manageable portions.
  • The packages are transported to Mainland China by the logistics company using different trucks, sometimes on different days.

Shipping over land borders is less controlled. Smaller packages need less time and effort from customs officers to inspect, particularly when combined with other goods.

In addition to having low import taxes, by using the “official” method, one can avoid dealing with complicated registration and clearance procedures.

By creating FTZs, international businesses would be encouraged to pay import duties in Mainland China instead of smuggling, which would generate significant money.

Business Commercial clearance model

While employing the cross-border model, the Chinese government introduced its own Business Commercial (BC) clearance model that is only intended for direct shipment. Due to its quicker customs clearance and lower import taxes, this transportation method is used by the majority of international couriers.

The primary distinction between this method and the personal parcel route, which does not require the items to be registered with Chinese customs, is that payment serial numbers, customer ID card numbers, and order serial numbers are required.

Problems with product quality in the Chinese market

China will be able to regulate product imports, register goods with customs and CIQ (China Inspection and Quarantine Services), and improve product quality in the market by creating FTZs.

This will safeguard Chinese consumers and lower imports through illegal channels.

No need to worry about Customs and CIQ registrations as they are handled by bonded warehouses situated within FTZs. When selling through cross-border e-commerce, it is simpler to register with CIQ and customs than it is with traditional imports.

Higher tax revenues for the Chinese government

By registering the items with customs and municipal authorities, the applicant pays import tariffs and VAT in Mainland China rather than Hong Kong.

Mainland China would undoubtedly benefit financially from the establishment and growth of FTZs.

Mainland China is set to compete with Hong Kong

The rise of Mainland-Hong Kong’s status as a link between the Mainland and the outside world is becoming threatened by China’s FTZs.

Up to 40% of China’s foreign trade passes via Hong Kong, which is used as a gateway to the Mainland by many international businesses. This will change if rules and restrictions in the Mainland are relaxed.

The objective is to improve connection and cooperation between the ports in the region, including Hong Kong, rather than just competing with it.

More foreign companies will be drawn to the FTZs, which will surely benefit Hong Kong as well.


BENEFITS OF FREE TRADE ZONES IN CHINA

Global business environment for foreign enterprises

Some challenges that have been reduced in the free trade zones still exist, despite China’s notable progress in terms of foreign direct investment and the openness of its economy. For instance, certain industries—like the banking sector—may only be completely foreign-owned if they are situated in designated zones. Duty-free imports and exports, as well as an efficient and straightforward customs process, are additional benefits of the China Free Trade Zone tax system that contribute to the development of a favorable business climate for international enterprises.

Strong location economies

Bringing together infrastructure and human capital in one place will also provide investors access to more business economies, enabling them to successfully deliver both quantity and quality of supporting services and resources. If the business activity has significant synergy with the zone’s focus, then being located in such a free trade zone enhances the image of the business.

Fewer restrictions on capital movement

One may create a free trade account that offers free currency conversion between several currencies, including the Renminbi, by establishing a firm in a free trade zone. This facilitates the business’s ability to receive and transfer payments to overseas suppliers and customers, and would not be possible in other regions without prior authorization from the state administration of foreign exchange. Certain free trade zones, like Shanghai, promote capital exchange and movement by allowing financial institutions to engage in cross-border financial operations and services.

Strong human resources

This refers to both local and foreign domestic capital. Many restrictions on foreign firms have been lifted, and this includes talent recruited from outside the nation. To attract skilled workers from overseas, tax exemptions, small housing subsidies, and transportation subsidies have been introduced. Locally, colleges have also proposed collaborations with these businesses to nurture the nation’s young talent.

Reach out to us at Relin Consultants – Leading Global Business Set Up Partners for more information.

FAQs

Why did China establish free trade zones?

They were part of the government’s plan to help China’s economy in making the transition from a socialist planned economy to a free market economy.

Where in China are the majority of its special economic zones located?

The majority of zones were located close to ports and airports and along the coast. In order to further diversify and expand the alternatives accessible to foreign investors, new versions have also been authorized for the inland in recent years.

How many free trade zones exist in China?

There are now 18 free trade zones in China, and more will probably be created in the future. The largest Free Trade Zones are located in the country’s larger cities, including Shanghai, Guangzhou, Shenzhen, Tianjin, and Chongqing.

Does free trade have any drawbacks?

The main drawback of free trade, particularly in China, has been the rise in economic inequality that it has caused.