the implications of foreign investment in special …
TRANSCRIPT
THE IMPLICATIONS OF FOREIGN INVESTMENT
IN SPECIAL ECONOMIC ZONES AND
PUDONG DEVELOPMENT ZONE
(PUDONG NEW AREA) OF CEDNA
Tian Li
A thesis subrnitted to the Faculty of Law
in conformisr with the requirements for
the degree of the Master of Laws
Queen's University
Kingston, Ontario, Canada
November, 1999
Copyright O Tian Li., 1999
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To My Grandmother and Parents
ABSTRACT
The objective of this thesis is to analyze and evaluate the Special Economic Zones
and Pudong Development Zone (Pudong New Area) in China. It deals with international
foreign direct investment and the rise of the Chinese economy since the late 1970s,
China's open-door policy and how it has attracted foreign investment. It will aIso discuss
the advantages and disadvantages to foreign investment from the perspective of Pudong
Development Zone (Pudong New Area), and international investors. Foreign investors
have corne to China to explore its vast market and rich natural and hurnan resources,
bringing capital and technology that China needs for its modemization and development.
The description and anaiysis of the 'open-door' policy, its operation and impact, is
illustrated by study of Pudong Development Zone (Pudong New Area). China's
successful experience with such Zones is an important factor in its claim to qualiQ for
membership in the World Trade Organization. The terms of China 's impending
accession to the WTO will provide guideposts for such accession by other former
cornniand economy countries.
1 wish to express my sincere gratitude to the School of Graduate Studies, Faculty
of Law at Queen's University for offering me this opportunity to pursue rny studies in the
LLM program and for providing financiai support without which my studies would have
been impossible.
No words can adequately convey my sincere appreciation for Professor K.
Venkata Raman, whose supervision and guidance have been invaluable throughout my
work. Much of the content of this thesis has been shaped by his cornments on my earlier
drafts.
1 would also like to thank Professor George W. Alexandrowicz and Professor
Alexander J. Easson for their invaluable help on this research, especially on how to make
effective use of source matenals.
My heartfelt and special thanks also to Professor Tung-Pi Chen, whose support,
concern and encouragement sustained me through some trying circurnstances. 1 am
especially gratefid for Professor Chen's generosity in providing me access to research
materials coilected by hirn over the last twenty years. Without these materiais my
research would have been much Iess comprehensive,
1 am also grateful to my many friends and former colleagues (government
lawyers) in Shanghai, who provided important firsthand research materials.
Last but not least, my thanks go to Vyvien Vella, Phyllis Reid, secretaries of the
Faculty of Law of Queen's University and to those many others who so generously
offered their time and assistance in my research, especially the librarians and staff of the
William R. Lederrnan Law Library.
BlTs
CCH
CGOC
CICT
CPC
DVANLN
ECL
EPZ
ETDZ
FDI
FECL
FIC
FIE
FTCs
FTZ
GATT
GDP
GNC
JV
MFN
Bilateral Investment Treaties
CCW Australia Lirnited
Central Goverment of China
Consolidated Industrial and Commercial Tax
Communist Party of China
Developing and Newly Liberalized Nations
Econornic Contract Law
Export Processing Zone
Econornic and Technologicai Development Zone
Foreign Direct Investment
Foreign Economic Contract Law
Foreign Investment Commission
Foreign Invested Enterprise
Foreign Trade Corporations
Free Trade Zone
General Agreement on Tariffs and Trade
Gross Domestic Product
Gross National Product
Joint Venture
Most-Favored-Nation
MIGA
MNCs
MOFERT
MOFTEC
W C
OECD
PBOC
PDZ
PNA
PRC
RMB
RMRB
SE2
TRIMs
UNCTC
VAT
WTO
Multilateral Investment Guarantee Agency
Multinational Corporations
Ministry of Foreign Economic Relations and Trade
Ministry of Foreign Trade and Economic Co-operation
National People's Congress
Organization for Economic Cooperation and Development
People's Bank of China
Pudong Development Zone
Pudong New Area
People's Republic of China
Renminbi (Chinese currency)
Ren Min Ri Bao (People's Daily)
Special Economic Zone
Trade-related Investment Measures
United Nations Centre of Transnational Corporations
Value-added Taxes
World Trade Organization
TABLE OF CONTENTS
Page
Dedication
Abstract
Acknowledgements
Abbreviations
Table of Contents
Introduction
Chapter One: International Investment and It's Legal Framework
1. Foreign Direct Investment and International Trade
A. Foreign Direct Investment: Worldwide Overview
B. Characteristics of Foreign Direct Investment
C. Foreign Investment and the Law in China
D. Legal Protection of Foreign Investment in China
II. The Impact of Foreign Investment
A. Foreign Direct Investment form Internationd Perspective
B. The Legal Implications of Foreign Investment in SEZs of China
C. Advantages of Foreign Investment for China
D. Disadvantages of Foreign Lnvestrnent for China
Chapter Two: Pudong Development Zone @dong New Area)
1. Special Economic Zones and Their Impact on Its Economic Development
A. The Nature of Special Zones
B. Special Economic Zones
C. Specid Economic Zones in China
II. Pudong Development Zone (Pudong New Area)
A. Background of Pudong Development Zone (Pudong New Area)
B. Characteristics of Pudong Development Zone (Pudong New Area)
C. The Difference between Pudong Development Zone (Pudong New Area) and Special Economic Zones of China
Chapter Three: hvestment Policy and Related Regulations in Pudong Development Zone (Pudong New Area)
1. Preferential Policies in Pudong Development Zone (Pudong New Area 75
A. Policies of the Central Governrnent of China Regarding the Special Functions of the Pudong Development Zone (Pudong New Aea) 75
B. One-S tep Service in the Examination-and -Approval Process of Investrnent Projects in the Pudong Development Zone (Pudong New Area) 76
C. Tax Incentives to Overseas Investment 77
D. The Preference of the Income Tax of Foreign-Invested Enterprise in the Pudong Development Zone (Pudong New Area) 81
E. The Regulations in the Pudong Development Zone (Pudong New Area) Concerning Approval of Foreign Invested Enterprises 84
F. Preferential Policies of a Specid Economic Zone in the Pudong Development Zone (Pudong New Area)
vii
G. Other Preferential Policies Offering in Pudong Development Zone (Pudong New Area)
H. Banking and Finance
1- The Land Use, the Standard of the Cost of Land and BuildLy In the Pudong Development Zone (Pudong New Area)
II. Reasons For Opening Shanghai's Pudong Development Zone (Pudong New Area)
A. The Need for the Rejuvenation of Shanghai
B. The Need for Eradicating Shanghai's "Expansion Disease"
C. Smtegic Vintages of Pudong Development
Chapter Four: Implications of Special Economic Zones For the GATTMTTO Proposed Regime
1- Principles of GATT/WTO Regarding Foreign Investment
A- Introduction to the GATT/WTO
B. Foreign Investment under the GATT/WTO
C. China's Relationship with the World Trade System
D. China Bid to Join the World Trade Organization (WTO)
E. Most-Favored-Nation Treatrnent
F. National Treatrnent in General hternational Law
G. Foreign Trading Rights and National Treatrnent
II. Observations and Discussion
Conclusions
Bibliography
Vita
INTRODUCTION
Investing in the People's Republic of China (PRC) has become a national trend
over the last two decades. Resently, the trend appears to be growing stronger.' Since
China's open-door policy and its endeavour to attract foreign investment have drawn
attention f o m all over the world- Foreign investors have corne to China to explore its
vast market and its rich natural and human resources, when bringing in capital and
technology that China needs for its modernization. The pudongZ Development Zone
(PDZ) pudong New Area (PNA)], located in the eastern part of shanghai,-' China, has
received increasing world-wide attention and is clearly the highlight of Deng Xiaoping's4
' See Daninel J. Brink and Ziao Lin Li, "A Legal and Practical Overview of Direct Investment and Joint Ventures in the "New" China" The John Marshall Law Review. Vo1.28539, (Spring 1995, Nurnber 3), at 567.
Pudong is cornposed of the Chinese character pu which means "river" and dong which means "east" The combination of the two characters Pudong stands for "east of the river." The river here refers to the Huangpu River which divides Shanghai into two parts: Pudong (east of the Huangpu River) and Pwu (west of the Huangpu River). Pudong Development Zone or Pudong New Area in Shanghai refers to a triangular area adjacent to the present city proper of 350 sq km of Shanghai municipality's Chuansha County, stretching to the east of the Huangpu River from the bund, to the southwest of the Yangtze River estuary, where the Yangtze empties into the East China Sea, and to the south of the Yangtze River* Most of the area is within a radius of 1-5 kilometers from the downtown of the city. The 522.75 square morneter area, with a total population of 1.53 million, is up 300,000 since the developrnent project was announced in 1989. Though Iargely undeveloped, hdong is hardly a wasteland: it has more 2,000 indusmal enterprises
involving 400,000 people who tumed out an annual output value of IO billion yuan RMB, roughly 10 percent of the city's total, as does its agricultural output Petro-chemicals, shipbuilding and ship repair, iron and steel, and buMing materials are Pudong's major industries.
Early in this century there was talk of buiiding a bridge across the Huangpu, and Sun Yatsen, who led the overthrow of the Manchu dynasty in 191 1, saw its potential as a port. Both before and afkr World War KI , development plants were drawn up but never implemented due to hostiiities.
Shanghai is located on the western Coast of the Pacific and the mouth of the Yangae River in southeast China, it is the largest city in China, with an area of 6,340.5 square kilometers (including Pudong New Area) and a population of over thirteen million people. Because of its size, its location, and its pivotai role in China's history, Shanghai has become the center of indusiry, commerce and transportation in China
Before the Chinese Comrnunist Party came to power in 1949, Shanghai attracted the majoriy of foreign investors and merchants who transacted business in China During the early years of the 20th century, it was not uncornmon for Shanghai to be handling over fi@ percent of China's international trade value. These foreign companies went to Shanghai, estabhhed businesses and employed local people. For this reason,
modernisation programme in the 1990s. It became clear in the early 1990s, when the
PDZ (PNA) policy was introduced, that it wouid be advantageous that it wouId be better
to turn to a policy of building on existing regional strengths, in the early 1990s, when the
PDZ (PNA) policy was introduced.' PDZ @NA) was granted more speciai privileges
than those which were accorded eadier to the Special Economic Zones (SEZs) in order to
resume Shanghai's histone role as a major international financial, trade, and economic
centre. Summed up as gaige Creform) and kazjrang (opening up), this program was
initiated in 1978 to promote the expansion of economic relations with the market-based
world economy. It consists of a set of sub-policies in the spheres of foreign trade, foreign
direct investrnent and foreign b o r r o ~ i n ~ . ~
The open policy also ernbraces policies adopted to manage China's Special
Economic Zones (SEZs). In order to contaul, in part, the influence of foreign direct
investment, the Chinese reformers set up five SEZs in the rnid-1979. The five Special
Economic Zones (SEZ) and 14 open coastal cities7 played a leading role in the economic
workers in Shanghai have historically had more contact with foreigners than those in other regions of China, and the people of Shanghai, in general, have k e n more receptive to the outside world,
Today, Shanghai has a strong indumial base with a work force of several million. This includes an abundance of speciaüsts in science, t e chno lo~ and management, III addition, it possesses huge commercial and consumer markets, and products fkom Shanghai have a reputation for quality throughout the rest of the nation-
Deng Xiaoping, (1901-1997), the paramount leader of the Chinese Communist P a q after the death of Mao Zedong in 1976.
It was, however, not until 1992 when Deng Xiaoping, in his Spring Wind speeches in South China, referred to the faiiure to include Shanghai as one of the centres for opening up to the outside world, dong with the SE=, as a mistake. The Chimese Govemment then decided to accelerate the development of Shanghai to regain its former status as a major centre of finance, made, and manufacturing in China. The changing role assigned to Shanghai can aiso be seen clearly in the openinp announcement Pudong made at the Fourteenth Central Cornmittee of the China's Communist Party in 1992.
See Jude HowelI, " What is the Open Policy?" China Opens ifs Doors: n e Politics of Economic Transition, (Harvester Wheatsheaf, Lynne Rienner Publishers, 1993), at 3.
reform in the 1980s. After approxirnately one decade of experimentation with gaige
(reform) and kaifang (opening up) policies in the SEZs and open cities, the Chinese
government made an important decision to establish the PDZ (PNA) in the early 90s.
An objective of this paper is to provide an andysis of China's approach to rapid
development and the steps it economy has taken towards a more open, market-oriented
economic system. This approach has involved the designation of a number of specific
coastal areas and cities as SEZs, and has then concentrated on structured reforms within
those narrowly confined areas to facilitate change. An analysis of this kind rnay provide
some useful lessons for other developing countries.
The unique aspect of this procedure lies in developing market zones for industrial
influence exemption through foreign direct investrnent (FDI), which is quite different
£rom normal bilateral arrangements. An interesting question to consider is whether
China, which operates under the principle of "one nation two systems", wi l be able to
permit PDZ (PNA) investrnents to survive when Chùia joins the World Trade
Organisation (WTO).
This thesis will outline how Chinese policies towards the marketplace had to be
changed to allow for PDZ (PNA), examine PDZ (PNA) itself and its impact on progress
in economic reform and development and explore in depth the characteristics of its
approach to economic reform. Extended to the rest of China, these reforms, or such
' The frve special econornic zones are Shenzhen, Zhuhai, Shantou, Xiamen, and Hainan Island. The fourteen cities are Daiian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianguangaung, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai. See Yeung, Yue-man & Hu, Xu-wei, (1992). China's Coastal Cities as Development and Modernization Agents: An Overview. in Yeung, Yue- man & Hu, Xu-wei (eds). China Coasral Cities, (I), (1992), at 9-1 1 .
portion of them as survive China's entry into the WTO, may its economy to become
arnong the foremost in the world.
Chapter one is entitled "international investment and its legal b e w o r k . It
introduces a discussion of advantages and disadvantages of foreign investment from the
standpoint of foreign investors, China as a whole, and PDZ (PNA). This discussion is
later developed M e r in the concluding chapter where it is argued that China, in
particular PDZ (PNA), still offers viable investment oppoaunities despite the recent
decline in the Chinese economy and the potential for political instability indicated, for
exarnple, by the protests of 1989 and the more recent rise and crackdown on the "fulen
gong" movement. This chapter also sets out the developing legal framework that has
made investment possible and viable in China under the curent political system.
Chapter two explores the general nature of Special Economic Zones and, more
particularly, the SEZs, including PDZ (PNA). For close to ten years, foreigners
considering investing in China have been barraged by a media blitz surroundhg
Shanghai's PDZ (PNA). It may well be asked: Why do investors choose PDZ (PNA)?
How does it different from the other SEZs and Economic and Technological
Development Zones (ETDZs) of the open coastal cities?
The third Chapter assesses Pudong's special policies, regdations and specifk
procedures. What legal strategies are used to achieve beneficial agreements? For what
reasons do foreign direct investors choose the PDZ (PNA)?
Chapter four discusses the principles and implications of the SEZs for the General
Agreement on Tariffs and Trade (GATT)/the Woi-ld Trade Organisation (WTO) proposed
regime. The object of this chapter is to identify and examine the general Erarnework of
mles and principIes that have been developed under the auspices of the GATT to govern
international trade and fore@ investment and to assess their implications for the SEZs
and PDZ (PNA). These include national treaiment, most-favoured-nation treatment
(MFN), foreign trade rights and national treatment in China The fuil participation in the
GATTNCrTO by a large and expanding Chinese economy WU be si,onificant for the rules-
based multilateral trading system. There will be market opportunities for both China and
its trading partners. At the same tirne, Chinese enterprises worry about the impact of
increased international cornpetition, while many WTO members are concerned about the
possibility that some low-cost Chinese imports may adversely affect their local
manufactures.
Finally, the conclusion offers an overall assessrnent of the viability of SEZs and
PDZ (PNA), and China as a whole for foreign investment, The argument that is
presented here holds that SEZs and PDZ (PNA) can serve a defining and invigorating
role in the ongoing developrnent of the Chinese economy by encowaging foreign
investment through new polic y initiatives.
CaAPTER ONE
INTERNATIONAL INVESTMENT AND ITS LEGAL FRGhlEWOREC
The encouragement of foreign investment, since the 1970s, has been a
cornerstone of Chinese economic policy. With the establishment of the Special
Economic Zones many political, legal and economic changes were necessitated. This
chapter tries to give a brief overview of the implications of foreign uivestment in China,
its role in the development of the economy, and its effect on Chinese policy.
1. Foreign Direct Investment and International Trade
A. Forei' Direct Inveshnent: Worldwide Overvie w
Foreign direct investment8 @DI) has been growing rapidly across nation-state
boundaries in recent years. The tremencious increase of FDI has resulted in its growth
outpacing, by as much as a factor of four, the growth of international t r~ ide ,~ which until
recently has been the prirnary mechanism establishing linkages between national
Direct investment means the investrnent of money, goods or services in a project, especially by establishing subsidiary companies, or by the take-over of an enterprise and acquiring equity holdings in corporations with powers of management and control. It is in contrast to "portfolio investrnents" which are placed through the capital market without entrepreneurid cornmitment. See Voss, 'The protection and Promotion of Foreign Direct Invesanent in Developing Countries: Interests, interdependencies, intrîcacies" 3 Int'l & Comp. L. Q. 686 (1982). Although foreign portfolio investment through the security market also exists in China, ttiis thesis wili focus on foreign direct investment in Pudong New Area in China Unless otherwise noted, the term "foreign investrnent" in this thesis refers to foreign direct investment.
economies. The increase in diirect investment flows since the niid-1980s is more
spectacular in total volume than the rapid expansion of FDI in the early 1950s and
1960s.'~ The Organization for Economic Cooperation and Development (OECD) is the
international body that has done most to deal with the policy obstacles to investment.''
While its member countries have remained the principal actors in this process, accounring
for more than 95 per cent of world-wide outfiows during the 2980s and early 1 WOs, their
share of FDI inflows decreased to close to 75 percent in 199 1 .12
FDI inflows are, however, not unifonn, as they are usually concentrated in a few
countries. The largest host countries received two thirds of total inflow in 1995, while
the smallest 100 recipient coumies received only 1 percent.'3 Thus, the United States,
Gerrnany, the United Kingdom, Japan, and France represented the five largest home
countries, which collectively accounted for about two thirds of dl outflows in 1995.14
FDI, in developing countries, is a major factor contributing to the economic and social
development of these countries .15
See Michael A. Geist, "Toward A General Agreement On The Regdation of Foreign Direct Inesment" Law & Policy In International Business, vol. 26, (1995), at 26.
'O See Yadong Luo. International Investiment Straregies In The People's Republic Of China, (Ashgate AldershotBrookfieId USA. Singapore. Sydney, 1998)- at 3.
" See Clark N. Eiiis, "Foreign Direct Investmeat: and International Capital Fiows to Third World Nations: Usited States Policy Considerations", Cynthia Day Wallace and contributors, forwards by Murray Weidenbaum, Foreign Direct Invesnnent in the 1990s: A New Climre in the Third World, (Miminus Nijhoff Publishers, Dordrecht/Boston/London, 1990), at 20.
" See Dr. William H. Witherell, 'Towards an International Set of Rules for Investment" OECD DOCUMENTS, Towards multilateral Invesrmenr Rules (Organization for Economic Co-Operation and Development, 1996) 17, at 19.
l3 See World Investment Report, (1996).
14 See Yadong Luo, International Invesrrnenr Straregies in the People 's Republic of China 1 Sc ed. (England: Ashgate, 1998), at 1, also see World Investment Repon. (1996).
Modern communications and financid inkgration have strengthened the tendency
for international companies to operate more and more on a regional or even global basis,
Mergers, acquisitions, and alliances have become the dominant f o m of investment,
increasingly favoring the service sectors rather than the manufacturing or the resource
development sectors. This reflects changes in the structures of the economies and in the
nature of production, as the service dimensions of economies have becorne i n t e p l in
gIobal trade. Since technologies and know-how are becorning more widely and rapidly
dispersed, contributing to the technological changes in the FDI, it is imperative for firms
wishing to remain competitive to take an international perspective, seeking new partners
and new markets. International investment thus increasingly involves not o d y large
multinational CO-operations- but smdl and medium-size enterprises as weil.
The direction of flows has also changed. Whereas, in the past, a few advanced
industrial States, mostly the OECD countries, accounted for the bulk of direct investment
flows, a number of advanced non-OECD countries are also now exporters of direct
investment. At the sarne time, some of the main exporting countries have become major
host countries as weH. Certain non-OECD countries in Asia and Latin America have
experienced si,o;nificant increases in FDI inflows after having been at depressed levels
throughout most of the 1980s. Thus, FDI assumes increasing importance in expanding
l5 Other rneans contributing to developing countries' development include official development assistance (ODA), foreign pordoiio iuvestrnent, technology transfer, soft Loans from international financial institutions, etc. Due to the Iimited volume of financial inflow and the unbalanced geographic distribution of FDI, foreign investment can ody be considered as a compIernentary source of financing for developing countrïes. However, FDI has the import advantages of providing an integrated package of financing, managerial skiils, technical knowledge and marketing connection, see 1. Shihata, MIGA and Fireign lnvesnnent 4 (1988).
industries among a growing range- of countries, Linking them together within an
Historically, foreign investment is seen by many developing countrïes as a
phenomenon of exporting their fragile economies to the demands of western nations,
which inevitably leads to the economic dependence of the weaker nations on their
wealthy partners. Since the 1980's more and more developing countrïes have come to
realize the benefits of FDI, and that this procedure can be organized toward the
realization of their goals.L7 In order to attract foreign investment, many preferential
arrangements are made in the SEZS.'~ The development of foreign investment in China
in the last decade is a good example of a developing country's endeavor to attract foreign
investment in the course of its special development program.'g In a country where both
the inflow of foreign investment and the legal framework for its regulation are relatively
new, the specSc procedures and the preferential policies rnaintained by China are worth
examinhg in some detail.
16 See Piene Sauve, "Market Access through Market Presence: New Directions in investment Rulemaking," Investment Rules for the Global Economy: Enhancing Acess ro Markets, Poerre Sauve and Daniel Schwanen, CD, Howe Institute, Toronto, 1996), at 26-34.
17 See UNCTC, Transnational Corporations in World Development: Trends and Prospects (Executive Summary) (hereinafter "Trends*') 34 ST/CTC/87 (New York 1988). see also Shihata, supra note 15, at 5.
16 China's open policy commenced in 1980 with the establishment of four special economic zones dong the south-eastern Coast: Shenzhen, Zhuhai and Shantou in Guangdong Province and Xiamen in Fujian Province (hereinafter referred to singularly as the 'SEZ7 and collectively as the 'SEZs'). Three years later. Hainan Island was declared open to foreign investors. In the early 1990's, the Chinese State Council declared that it would open Pudong to foreign invesünent. Hereinafter Pudong Development Zone is discussed in this thesis.
19 See Correspondent of Tconornic Reporter" Hong Kong, 'Tssues on China's Utilization of Foreign Capital, InteMew with Mr. Wei Yuming, Vice-Minister of Foreign Economic Relations and Trade of the People's Repubiic of China", in Policy Research Dcpamnent and Foreign Investment Administration, Ministry of Foreign Economic Relations and Trade, PRC ed. Guide to China's Foreign Economic Relations and Trade-- invesment Special, (Economic Information and Agency, Hong Kong, 1983), at 3, (in Chinese Language ed,).
The liberalization of FDI policies by many countries and its increasing
competition for FDI at the national and sub-national level attest to its growing
importance. The phenornenon is striking among OECD counûies. It is also more
apparent among non- OECD countries that see the need for FDI to supplement domestic
savings and stimulate economic growth and development as a higher prioriw than the
promotion of domestic ownership and controlFO
Bilateral investrnent treaties (BITS) are international IegaI instruments under
which each party reciprocaliy agrees to an investment policy that accords the other party
certain nghts and to refrain from imposing a number of the more common political
obstacles to foreign investment, These treaties are generally made between a developed,
capital exporting country and a developing, capital importing country.21 However,
bilateral, regional and sectional FDI agreements have brought clear benefits to
developing countries. Foreign direct investrnent in developing countries is a major factor
contributing to the economic and social development of these co~ntries.'~ Yet the
relatively unfavorable investment climate in these countries has, arnong other factors,
caused a shortage of F D I . ~ A variety of elements, including political, psychological,
20 See Mickael Hart, "A Muitilateral Agreement on Foreign Direct Investmenc Why Now?" invesmenr Rules for the Global Economy: Enhancing Access tu Markers. Pierre Sauve and Daniel Scheanen eds., (Poiicy Study 28, C.D. Howe Institute, Toronto, 1996). at 36-39.
21 See Clarke N. EUis, supra note 11, at 17.
22 Other means connibuthg to developing counuies' development include officiai developrnent assistance (ODA), foreign portfoiio investment, technology transfer, soi3 loans fiom international financial institutions, etc. Due to the Iirnited volume of financial infiow and the unbaianced geographic distribution of FDI, foreign investment c m ody be considered as a complementary source of financing, managerial skills, technical knowledge and marketing connections. See Ibrahim F.I. Shihata, MIGA and Foreign invesmzenr 4 (1988).
cultural, as well as legal, affect the investment climate of a country. When these factors
combine to create an unfavorable investrnent climate, the result is a hi$ degree of non-
commercial risP4 faced by foreign investment, which adversely affects prospective
investors' de ci si on^.^^
B. The Characteristics of Foreign Direcf htvesfment
Foreign direct investrnent occurs in a number of ways. The purchase of assets in
another country, the transfer of assets fiom one country to another and reinvesting profits
earned in another country are most popular methods of direct investment. Where shares
are acquired, direct investment (in contrast to portfolio investment) involving a
substantial acquisition shareholding would turn over control or, at l e s t allow for the
participation in the management of the Company. Usually, a threshold figure of 10
percent is taken to distinpish direct from portfolio investment. A loan to a subsidiary or
an affiliate is norrnaLly regarded as investment, whereas a loan for the purchase of bonds
of an unrelated Company is considered portfolio investment.
-
See United Nations Center of Transnationd Corporations (LJNCTC), World Invesrment Report 1991: The Triad in Foreign Direct Invesmzent , (hereinafter " T M ~ " ) 10, 1 1 ST/CTC/118 (New York 199 1 ), at 18.
24 Here the term "non-commercial risks" is used to cover a wider scope than the traditional notion of "politicai risks". Accordingly, the legal protection, investment policy discussed in this thesis also goes beyond the preferentid policies of a special economic zone under the political risks in China,
" Investors make their investment decisions on the basis of a risk-return anaiysis. Any increase in risk must be balanced by a higher r e m . See Voss, supra note 8, at 690.
According to Shihata, "Perceptions of unfavorable climates and voIatile economic policies have continuously discouraged investors frorn seeking projects in deveioping counmes. Investors' behavior shows a consistent preference for "safer" investments even when they are comrnercially less attractive." See Shihata, supra note 15, at 8.
Foreign direct investment 'invoIves the transfer of tangible or intangible assets
fiom one country to another for the purpose of generating wealth under total or partial
control by the owner of the relevant assets? This has led to the promulgation of laws
relating to economic development, whkh permit the governrnent to intervene when
necessary in market activities to protect vital national interests. A variety of specific
delegated powers, the exercise of which directly affects individual's rights and interests,
have been conferred on the relevant government departments responsible for trade and
industry. At the municipal and provincial levels discretionary powers may be aven even
to gan t certain import and export Licenses, approve certain industrial developrnents and
to make orders prohibiting industrial niergers and monopolistic practices. The rninistry
responsible for environmental affairs deterrnines questions relating to planning
Many developed economies have begun to feel the need to protect their own
domestic interests pursuant to their own political, economic and social objectives.
Accordingly, conîrols perceived to be especially desirable in view of the fast growing
reach of their multinational corporate operations2* have been put fonvard as necessary
criteria for permïtting FDI to enter some developing countries. A good example is in
patent control regimes, another would be the overall legal regime governing treatment of
26 See M. Sornarajah, The International Law on foreign Investmenr (Cambridge: Cambridge university Press, 1994), at 4-5. Sornarajah provides a fine introduction to the Iegal issues invoIved in the international replation of investment,
27 See Demis CarnpbeIl "Historicai Perspective," Environrnenral Regulation: Its Impact on Foreign Investrnent, Dermis Campbell, ed., (Graham & TrotmaniMartinus Nijhoff, London/Dordrech/Boston, 1992), at 1-6.
28 See Hawkins and Walter, 'The Multinational Corporations," Challenges tu a Liberal International Economic Order ed. Amacher et al. (Washington: American Institute for miblic Poiicy Research 1979) at
investments by host countries. Host governments are concemed with the repercussions
fkom the vertical integration of domestic subsidiaries with their foreign parents. They
fear that the most important entrepreneurid decisions of these subsidiaries are made
outside the host countries, and local resources are not necessarily utilized in the best
interests of the domestic economies. For example, the level of research and development
in the host countries rnay be abnormdy low, or export markets rnay be lirnited by the
direction of the foreign parents. Sales by domestic subsidiaries to foreign parents or
oîher overseas affiliates rnay occur at depressed price levels, which rnay then suppress the
"ikee markety' price for, and thereby reduce the profits of, independent domestic
producers. Such inîra-company transfer-pricing policy rnay also result in loss of
govenunent revenue in the host countries. Similarly, goverment revenues in the host
countries rnay be diminished when foreign-produced components are sold to domestic
subsidiaries at inflated pnces. Foreign ownership is therefore perceived as irnplying a
loss of control over local economic decisions and rnay introduce instability into the host
e c o n ~ r n ~ . ~ ~ Conflicting objectives between host countries and foreign investors ofien
lead to attempts at national control of foreign investors' operations. Foreign investment
controls of some type exist in most countries, developed and developing alikem30
International investment often involves making very cornplex choices, as the
transnational econornic fiow is a dynamic and ongoing process. International investment
strategies are mainly antecedent decisions focusing on what, when, where, and how a
185-193; Espinosa "The Canadian Foreign Invcstment Review Act: Red, White, and Gray," (1973) 5 L.& Pol'y. in Int'l, Bus. 1018, at 1029.
29 See Hawkins and Walter, supra note 28, at 191-192.
Id., at 192.
foreign investor may find it advantageous to invest in pursuit of its own cornpetitive
advantages in the overall global marketplace. Since antecedent decisions are. made prior
to the formation of foreign ventures, the multilateral corporations' ( M N C s ) choices
regarding investment strategy require the utmost managerial attention and legal
protection. Decisions must be made as to the timing of investment, selection of entry
mode, industry, project and location, sharïng arrangement, partner and so on.
The political and economic trend towards more market-based systems, has
naturally encouraged greater interest by MNCs. This is especially true of international
invesûnent involving the People's Republic of China (PRC), in that it is one of the largest
emerging econornic areas, presenting the biggest foreign direct invesmient absorption
capacity within the developing countries of the ~ o r l d . ~ '
C. Foreign lnvesfment and the Law in China
1. The Development of Foreign hvestment
China's ambitious modernization program since the 1970's has prompted the
Chinese government to experiment extensively with new forms of econornic activity,
including encouragement of foreign investment. China has embarked on a policy of
opening its economy to the outside world by encouraging a variety of activities. This is
the 'open-door policy', as foreigners sometimes refer to it. As contrasted to China's
position previously when it was reluctant to permit economic or commercial reIations
- - - - -
3' See Yadong Luo. supra note 14, at xii,
with Western co~ntries.3~ China's open policy reflects its recognition of econornic
interdependence among nations, and its desire to engage with other members of the
international community, by inviting foreign investment and expanding its commercial
relations and exchanges.
As a result, at the domestic level the political reform initiated during the 1980's
has resuIted in a process of ,oradual, partial decentralization, with clear econornic
planning orïented towards market regulation.33
Officially, this policy started in 1979 with the promulgation of the fust joint
venture law. Since then, through the end of 1996, Chinese authorities approved the
establishment of over 283 joint venture companies, 793 foreign invested enterprises
(FIES) which involved $466.80 billion in foreign capital (Table 1.1). Of these, over
140,000 FIES, representing $175.74 billion investrnent, have commenced operations
(Table 1 .2).34
Table 1.1 Foreign Investment in China: 1979-1996 (Approved Investment in US $ miilion)
Year Total Foreign Foreign Direct Other Foreign Investment Investrnent Investment*
32 See Samuel P.S. Ha and Raiph W. Huenemann, "China's Development Strategy and the Open Door," China's Open Door Policy: The Quest for Foreign Technology and Capital. A Study of ChinaS Special Trade, (University of British Columbia Press, Vancouver, 1984) at 7.
33 See James L. Kenworthy, Esq. A Guide to the laws. Regdations and Policies of The People's Republic of China on Foreign Trade and Invesment, (Wiliarn S . Hein & Co., Inc. Buffalo, New York, 1989), at vii.
34 See Wen Yande, Zhang Tianzi, 'Zun Dui Wai Shang Tou Zi Qi Ye Shi Xing Guo Min Dai Yu (National Treatment for the Enterprises of Foreign Investment)," Lilun Yu Gaige [Chendu](Theory and Reform), F3 (Gongye Jingji ~ d u s t r î a l Econornic], 1996.9.13-15) at 39. (in Chinese language ed.).
*Other foreign investments include 1) international leasing; 2) compensation trade; 3 ) processing and assembling.
Sources: (1) Data of 1979- 1992: China Statistical Yearbook (1 993), English Edition,
China State Statistical Bureau, 1993, at 587; (2) Data of 1993: The Bulletin of the
MOFTEC, PRC, Issue No. 2, 1994, at 10; (3) Data of 1994: the Bulletin, Issue No. 1,
1995, at 13; (4) Data of 1995: the Bulletin, Issue No. 1, 1996, at 1-5; and (5) Data of
1996: the Billetin, Issue No. 1, 1997, at 19-20.
Table 1.2 Foreign Investment in China: 1979-1996 (Realized Investment in US $ million)
Year
1979-1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
Total Foreign hvestment
1,767 916
1,419 1,959 2,244 2,647 3,739 3,773 3,755 4,666
11,291 27,769
Foreign Direct Investment
O ther Foreign Investment*
60 1 280 161 298 370 333 545 381 268 300 284 255
Other foreign investments include 1) international leasing; 2) compensation trade; and 3) processing and assembling.
Sources: (1) Data of 1979-1992: China Statistical Yearbook (1993), EngLish Edition,
China State Statistical Bureau, 1993, at 587; (2) Data of 1993: The Bulletin of the
MOFïEC, PRC, Issue No. 2, 1994, at 10, (3) Data of 1994: The Bulletin, Issue No.1,
1995, at 13; (4) Data of 1995: the Bulletin, Issue No. 1, 1996, at 1-5; and (5) Data of
1996: the Bulletin, Issue No. 1, 1997, at 19-20.
According to the People's ail^:' in 1994 a total of $80 billion in foreign capital
had been invested in all developing countries. Worldwide, foreign direct investment
amounted to $204 billion during the same year. The value of FDI in China alone was
close to $34 billion, accounting for 42.5 percent of the developing countries figure and
16.67 percent of the worldwide total.
At the dawn of China's era of economic reform, China's total foreign trade in
1978 amounted, to $20.6 billion; and it ranked 32nd arnong the world's trading nations.
Foreign investment in the PRC was negligible. In 1998, China's foreign trade reached an
estimated $315 billion (in unadjusted douars). And China was the 10"-ranked trading
nation in the world in 1997, while total contracted foreign investment in China at the end
of 1998 stood at roughly $640 US contracted investment in China now totals
roughly $46 billion, and installed American investment amounts to $21 billion. China is
-
" People's Daily (Ren Min Ri Bao. RMRB), Overseas Chinese Language Edition, (May 22, 1995) at 2.
36 CNN TV news report. (hearing on September 29, 1999).
17
today the 4h-ranked US trading partner, and the United States is the 2nd-ranked Chinese
trade partner.37
China is currentiy the second largest FDI recipient in the world, surpassed only by
the United States (Tablel.3). Of the top countries listed in Tablel.3, China has the fastest
FDI inflow growth. Among emerging economies and developing countries, China has
occupied a leading role in absorbing foreign direct investment?*
Table 1.3 Direct Investment Inflows in Selected Countries ( > US$2000 d o n in 1993)
Countries 1990 1991
United States P.R. China United Kingdom France Belgium- Luxembourg Spain Netherlands Mexico Italy New Zealand Aus tralia Canada Sweden Norway
Source: (1) Financial Market Trends, OECD, 04/1994; (2) China Statistical Yearbook, Various Years.
The above general statistics show the situation of utilizing foreign investrnent in
China. In the past years, China has made remarkable achievements in utilizing foreign
37 See Robert A. Kapp, 'WTO This Time?" 7?ze China Business Review 26:2 (March - Apnl 1999) 6 at 6.
38 See Yadong Luo, supra note 14, at 7.
18
capital, which has played an active role in readjusting China's national economy and
speeding up economic development. The facts show that China has so far achieved great
- success by adopting this policy on foreign investment in the interest of its economic
construction.
2. Laws and Regdations Favoring Foreign Investment in China
China's success in attracting foreign investrnent in recent years has in part
resulted h m its ability to develop a proper legal infrastructure for the regdation of
foreign econornic activity.
In July of 1979, the National People's Congress W C ) , the supreme organ of
state power, promulgated the country's first law on Chinese-Foreign Joint Ventures. This
was followed, in August 1980, by the establishment of three Special Economic Zones
(SEZs) in Guangdong Province - at Shenzhen, Zhuai and Shantou. A fourth one was
set up in Xiamen, Fujian Province, in October of the same year.39
The policy culrninated, in the beginning five years, in the opening of 14 more
coastal cities, as well as Hainan Island, to foreign investment in 1984. In early 1985, the
government opened three more zones for the same purpose-the Yangtze River delta, the
Pearl River delta, and the Zhanghou-Quanzhou-Xiamen region in the southem part of
Fujian Province to encourage foreign businessmen, overseas Chinese as well as Chinese
39 SEZs are discussed oext chapter.
compatriots fiom Hong Kong, Macao and Taiwan -- to enter into joint ventures or other
forms of cooperation with PRC institutions. They are also welcome to establish h n s
under their exclusive ownership.
In a penod of five and haif years from July 1979, when the joint venture law was
fust announced, till the end of 1984, a number of projects were established in China with
the approvai of the Chinese Goveniment. Most of their enterprises were financed entirely
by foreign capital. The undertakings of foreign investments have generally tumed out to
be successfid and satisfactory to both sides because they are protected by Chinese law)'
supportai by the Chinese governrnent, and effected through good teamwork on the part
of the Chinese and foreign participants.
As mentioned above, the Law of the People's Republic of China on Chinese-
Foreign Joint Ventures was promulgated in July 1979. The basic legislation dealing with
foreign investment in China, including the Law on Chinese-Foreign Equity Joint
ventures4' was adopted in 1979, and the implementing regulations were issued in 1983.
They have since been amended, extending their application to joint ventures as well.
This has been followed by other laws and regulations, including: Regulations on Speciai
Economic Zones in Guangdong ~rovince; '~ Regulations on the Exploitation of Offshore
" Hereinafier, legal protection of foreign investment in China is discussed.
4 1 The governing law is The Law of the People's Republic of China on Chinese-Foreign joint Ventures, Adopted by the Second Session of the Fifth Nationai People's Congress on Juiy 1, 1979 ar the 2"d Session of the 5' NPC, promuigated on and effective as of July 8, 1979, and amended at the hed Session of the 7' NPC on April4, 1990. See The law of the People's Republic of China on Chinese-Foreign Joint Ventures, The Law of the People's Republic of China on Enterprises Operated Exclusively wittl Foreign Capital, Provisions of the State Council for the Encouragement of Foreign Investment and Its Implernentation Measures (Publishing House of Law Beijing, China, 1988). at 5.
42 See Fang Chun-ie, Zhang Xin et al. ed., Luw Annual Report of China 1982/3, Editorial Cornmittee of the Law Annual Report of China, (Kingsway international Publications Ltd. 1982). at 365.
Petroleum Resources in Cooperation with Foreign ~nter~rises;" Re,dations for the
Implementation of the Law on Chinese -Foreign joint venture;" Procedures for the
Registration and Administration of Chinese-Foreign Joint ~entures;~' Regulations of the
People's Republic of China on Labor Management in Joint Ventures Using Chinese and
Foreign ~nvestment;~~ Income Tax Law Conceming Chinese-Foreign Joint Ventures and
Rules for Its ~rn~lernentation;~' Incorne Tax Law Concerning Foreign Enterprises and
Rules for Its ~m~lementat ion;~~ Individual Income Tax Law and Rules for Its
~m~lementation:" and Interi. Regulatiom on Foreign Exchange Control and the
different sets of rules for the irnplementation of foreign exchange c o n t r o ~ s . ~ ~ Also in
43 "Reglllations of the People's Republic of China o n the Exploitation of Offshore Petroleum Resources in Cooperation with Foreign Enterprises", adopted at the Regular Session of the State Council on January 12, 1982; prornulgated by the State Council on January 30, 1982. See Collection of laws and Regulations of the People's Republic of China, Concerning Foreign Economic Affairs, Vol.2, ed. By The Department of Treaties and Law of the Ministry of Foreign Econornic Relations and Trade of the People's Republic of China, (China Zhanwang Press, Beijing, 1985)' at 93,
44 'Xeplations for the Implementation of the Law o n Chinese-Foreign Joint Ventures Using Chinese and Foreign Investment, promuigated by the State Councïi on September 20, 1983, Id., at 62.
45 6Xegu1ati~ns of the People's Republic of China on the Registration of Joint Ventures Using Chinese and Foreign Investment," promulgated by the State Council of the People's Republic of China on J d y 26, 1980, See supra note 43, vol. 1, at 47.
46 "Regulation of the People's Republic of China o n Labour Management in Joint Ventures Using Chinese and Foreign Investment", promulgated by the State Councii of the People's Republic of China on July 16, 1980. See Guide to China Foreign Economic Relations and Trade-Investment Special, edited by Policy Research Department and Foreign Invesment Administration, Ministry of Foreign Econornic Relations and Trade, PRC, (Economic Information & Agency, Hong Kong, 1983), at 207.
47 "The Incorne Tax Law Concerning Chinese-Foreign Joint Ventures and Rules for Its Irnplementation" Approved by the State Council on December 10, 1980, Promuigated by M ï s t r y of Finance on December 14, 1980, Id., at 248-251.
48 "The Income Tax Law of the People's Republic o f China Concerning Foreign Enterprise and Rules for Its Implementation" .Adopted at the Fourth Session o f the Fifth National People's Congress on December 13,
. 198 1, id., at261-269.
49 "Individual Income Tax Law and Rules for Its Implementation" Adopted at the Third Session of the Fifth Nahonal People's Congress and promuigated on September 10, 1980, Id., at 257-261.
force are: Trademark Law and Rules for Its ~m~lernentation;~~ Patent law and Rules of
Its implementation;52 and Law on Economic Contracts Involving Foreign hterestss3
Besides, in Shanghai's Pudong New Area, Regdations for Encouragement of Foreign
kvestment in the Pudong New ~rea," promdgated by Shanghai Municipal Government
in 1990.
These laws and regulations provide the legal basis for foreign investment in China
and Chinese-foreign joint ventures, as well as cooperation with foreign countries in
rnining and other fields.
China has a complex infrastructure of over 500 Centrai Government and local
governent laws, regulations, orders, notices and other policy pronouncements that also
affect nearly al l aspects of foreign trade and investrnent. Among these, some 160 relate
directly to economic relations with foreipers." The regulations detail the form and
organization of equity joint ventures. S i d a r detailed d e s for wholly forcign-owned
'O "Interim Re=&ations on Foreign Exchange Control and Different Sets of RuIes for the Implementation of Foreign Exchange Controls" are promdgated by the Stated Council on October 30, 1980: "Provisional Regulations for Exchange Control of the People's Republic of China", adopted at the Regular Session of the State Cound on December 5, 1980; promulgated by the State CounciI on December 18, 1980, see supra note 43, vol. 2, at 85-99.
'' "Trademark Law of the People's Republic of China and Rules for Its Irnplementanon". adopted at 24" Session of the Standing Cornmittee of the Fiftb National People's Congress, on August 23, 1982, see Fang Yunzang, Lin Jiyi ed., Seiection of Foreign Economic LegisLation o f The People's Republic of China, vol. II, (China Guangdong International Economic & Technical Corporation Guangdong Gaders' Cdlege of Economic Administration, 1985), at 53-74.
'' "Patent Law of the People's Repubric of China", adopted at the Fourth Session of the Standing Cornmittee of the Sixth National People's Congress on March 12, 1984, Id., at 19-52.
53 "Foreign Economic Contract Law of the People's Republic", adopted at the Tenth Session of the Standing Cornmittee of the National People's Congress on March 21, 1985, Id., at 1-18, and, the New Contract Law, "PRC, Connact Law," promuigated on 15 March 1999, and effective as O fl October 1999, see China Law & Practice, vol. 13 (No.4, May 1999)' at 19-87.
54 Regulations in Pudong New Area are discussed in chapter three.
'' See James L. Kenworthy, Esq. supra note 33, at vii.
enterprises were promulgated in 1986 and 1990 to permit foreign firms, other economic
entities or individuals, to set up enterprises in China exclusively with foreign capital?
Before the adoption of the Wholly Foreign-owned Enterprise Law and Chinese-
foreign contractual joint ventures7, the nurnber of wholly foreign-owned enterprises
established in China was very small and most of them were located in the SEZs. The
enactment of this law has enabled foreign investors to establish wholly owned enterprises
in other parts of the country. Wholly foreign-owned enterprises are encouraged to sel1 ail
or most of their products in the international market. This refiects China's reco-~tion of
the foreign exchange problem suffered by many joint ventures and cooperative ventures
in the 1980's. As in the case of joint ventures, a wholly foreign-owned enterprise must
also promote the development of China's national economy and must use advanced
technology and equipment or market dl or most of its products outside
At the same tirne, the profits and other Iawful rights and Chinese Iaw protects
interests of foreign inves tor~ .~~
Another important piece of legislation was the
decree, Provisions of the State Council Encouraging
October 1986 central governent
Foreign ~nvestment,~~ cornmonly
56 The governing law is the Law of the People's Republic of China on Enterprises Operated Exclusively with Foreign Investment, ArticIe 1 of the Whoiiy Foreign-owned Enterprise Law adopted at the 4h Session of the 6~ National People's Congress (NPC), on 12 Aprii 1986. The ABC of Investing in China 82 (Beijing Review Press 1989), at 188-
" Chinese-foreign contractual joint ventures are governed by the Law of the People's Republic of China on Chinese-Foreign Conrractual Joint Ventures, adopted at the 1'' Session of the 7& NPC on April 13, 1988. Id., at 254.
" ~ d . , article 3.
59 See Guiguo Wang, China's lnvestment Law: New Direcrions, (Butterworths: Singapore - UK - Australia - Canada - New Zeaiand - USA, 1988) at 19, The legal protection of foreign investment in S E 2 is discussed hereinafrer.
referred to as the 22 Articles- Parts of these provisions dealt with tax treatment, hiring
practices, and parantees against govemment interference.
New investment guidelines were contained in two documents issued in June 1995:
the Provisional Regulations Guiding Foreign Invesment, and the Catalog of Industries
Open to Foreign Investment- These guideLines clarïfïed existing practices, and for the
first tirne, detailed the sectors in which foreign investment was encouraged and those in
which it was restricted or completely prohibited. The govemment's stated intention in
promulgating the guidelines was to channel foreign investrnent into infrastructure-
building and basic industries, especially those involving advanced technologies and high
value-added, export-oriented products. In December 1997, the Catalog of Industries was
reissued in revised form, with a number of additions and deletions in al1 three categories
of foreign investment - encouraged, restricted, and prohibited areas.
In addition to these laws and reguiations, the govemment has issued a steady
Stream of opinions and provisional measures that address specific, and often technical,
issues related to the approval of foreign investment. In November 1996, for example, the
Ministry of Foreign Trade and Economic Co-operation (MoFTEc)~~ issued a document
60 In January 1985, the State Council was entxusted by the NPC Standing Cornmittee to enact provisionai d e s and regdations with respect to the reform of China's economic strucrure and matters of opening up to the outside. See CCH, "l3usiness Regdation" para. 2-210.
"Provision of the State Council of the People's Republic of China for the Encouragement of Foreign Investrnent", Promulgated on October I l , 1986, (miblishing House of Law Beijing China, 1988), at 107-
61 See Michael J- Moser, "The Regdation of China's Foreign Trade" in Michael J. Moser, ed., Foreign Trade, hvestment and the Law in the People 's Republic of China (Oxford: Oxford University Press, 1 984) 8 at 9-10, "China's foreign trade apparatus is headed by MOFERT, which was estabfished in March 1982 as an arnalgamation of two former ministries and two commissions: the Ministry of Foreign Trade, the Ministry of Foreign Economic Relations, the Foreign Investrnent Commission and the State h p o r t -Export Commission- The Ministry is responsible for helping to fonnulate the national foreign made plans in consultation with the State Planning Commission, managing the foreign trade system, approving irnport and export licenses, handling technoIogy transfers, negotiating international trade organizations. In addition, MOFERT s u p e ~ s e s the Iocal foreign trade bureaux in each province, Major City and
entitled "Opinion on Directing foreign investrnent in -a number of specific sectors"
(including road transport, commercial retailing, translation services, hotels, ports, red
estate, and railroads). The opinion also provided guidance to supplement laws and
re,oulations related to establishing certain types of FIES, such as share companies and
holding companies.
Investment projects in China usually go through a multi-tiered screening process,
the f i s t step of which is approval of the project proposal. The central government has
delegated substantial approval authority to local govemments. Until a few years ago,
only the Special Economic Zones (SEZs) and open cities had the authority to approve
projects valued at up to $ 30 million. Now the authority for such approvals has been
extended to aU provincial capitals and a number of other citiez throughout the country.
For most other cities and regions, approval authority is lirnited to projects valued at less
than $ 10 million. MOFTEC approves projects valued at higher value. Investments
involving $100 million or more must also obtain prior approval fiom the State Council.
MOFIEC, however, is authonzed to review a l l projects, regardless of size. W l e the
approval process for projects of over $30rnillion has improved, each such project is still
evaluated against official guidelines to determine whether it promotes exports that
increase foreign currency income, introduces advanced technology, or provides technical
autonomous region, and sorne 16 specialized nationai foreign trade corporations that are primarily responsible for conducting foreign trade on behaif of China. MOFERT aiso control several trade-reIated service cornpanies, including the China Resources Company, the Foreign Trade Constancy and Technical Services Corporation (CONSULTECH), and the Foreign Trade Science and Technology SeMce Corporation. The Customs Administration and the commodity inspection apparatus work closeiy in conjunction with IMOFERT, but they are now speciaiized agencies directly under the leadership of the State Council,"
"MOFERT is organized into 7 administrative and 13 functional or regional departments, including departments for generai planning, foreign trade administration, treaties and law, import - export administration and technology transfers." Note 10, Ludlow, "China's New Foreign Trade Structure", China Business Review, (May-June 1982) at 3 1 .
or managerial training. Projects that meet one or more of these requirements may stiil be
rejected if: the contract is considered unfair; the technology is available elsewhere in
China; the project is an industry or field in which China already has sufncient production
capacity; or political relations between China and the foreign investor's home country are
~trained!~
In October 1993, the Judicial Cornmittee of the Standing Cornmittee of the
National People's Congress of the People's Republic of China set out to drafi the new
Chinese Contract Law, which was finally approved by 92.9 percent of National People's
Congress (NPC) on March 15, 1999 and will take effect fkom October 1, 1999. This
newly approved unified Contract Law, formalizes laws and administrative decisions
taken over the last 20 years covering foreign investment and private sector business. The
new Law replaces and enhances the existing Economic Contracts Involving Foreign
Interests and Law on Technology ~ontract .6~
Chinese law provides a weii-defined set of categones of foreign investment
vehicles. Currently, three types of legal entity are available to foreign enterprises for
investing in china? (1) the Chinese-foreign equity joint venture, (2) the Chinese-
foreign contractual joint venture, and (3) the wholly foreign-owned enterprise. These
62 "Foreign Investment in China-1: Changing Trends and Policies" East Asian fiecurive Reports, Secrion: China 20:4 ( 14 April 1998) 8 at 8.
63 See Volker Pasternak, Freshfîelds, "The new PRC, ContractLaw Special Feature, Contract Law Lays Foundation for e-commerce", China Law & Practice, 13:3 ( April 1999), at 53.
" However, a foreign capital enterprise in Guangdong province has been reorganized as a stock corporation, The First ChineForeign Joint Venture in Guangdong Reorganized as a Stock Company, (The China Press, 9 January 1993), at 4 (in Chinese), and the Chinese government encourages the establishment of high-tech stock companies- China Widens Poiicy and Enacts Important Reguiarions, (The China Press, 8 December 1992)- at 2 (in Chinese).
three are collectively called "the three capital enterprises" in china? Each of the three
types of foreign capital enterprises is also available to foreign investors in PDZ (PNA) .~~
D. Legaz Protection ~f Foreign Znveshnenf In China
Generally speaking, investors in a foreign country wish to find domestic laws
affixting the treatment of foreign investment as well as legal guarantees of investors'
specific rights concerning repatriation of their profits and capital, and management
autonomy in the invested enterprises. They also seek to find af3rrnation and protection
of their private property ri:$&, includinp protection of their contractual and intellectual
property rights in their host countries.
1. Constitution
Chinese law gants foreign investors in China the nght to certain civii activities
and protects their lawful interests. The Constitution of the People's Republic of
States in Article 18:
"The People's Republic of China p e d t s foreign enterprises, other foreign economic organizations and individual foreigners to invest in China and to enter into various forrns of economic CO-operation with Chinese
AS mentioned in this article above, there is as yet no corporation code in China (one is, however, being drafied). Foreign capital enterprises, therefore, are mostiy govemed by the three laws listed supra notes 41, 24,25.
66 Pudong, is named "Pudong new Area. Shanghai's ambitious planners are counting on foreign investors to propel the new development area, which is Pudong discussed hereinafter-
15' "Constitution of the People's Republic of China" adopted on December-4, 1982 by the 5" Session of the 5" national People's Congress (NPC). See CCH Australia limited. China laws for Foreign Business [Chung-Kuo tui wai ching chi fa kuei hui pien], "Business Replation" vol.1 para4-500 (1987). Unless otherwise indicated, the Chinese text and English translation of ali laws and regulations cited in this thesis can be found in thesis loose-Ieaf service collection published by CCH Australia (hereafier cited as "CCH").
enterprises and other economic organizations in accordance with the law of the People's Republic of China." "AU foreign enterprises and other foreign economic organizations in China, as well a joint ventures with Chinese and foreign investment located in China, shall abide by the Iaw of the People's Republic of China. Their lawful rights and interests are protected by the law of the People's Republic of [emphasis added]
Thus the Chinese Constitution grants enterprises, other economic organizations,
and individuals of foreign countries the right to invest in China and undertake various
forms of economic cooperation with enterprises and other economic organizations of
China, provided they observe Chinese law. Chinese Iaw protects their lawful rights and
interests. Since the Constitution is the fundamental law of the country, a constitutional
parantee for the investor's lawful rights and interests is in principle an effective one.
None of the laws, decrees or replations enacted by the central or local governments
should conflict with the Constitution.
Unfortunately, the above provision also has the circular problem of "protecting
lawful rights" as found in Article 18 of the PRC ~ons t i tu t ion .~~ However, the problem is
that in tmth it is empty: the Constitution provides protection for foreign invesmient yet
the content of such constitutional protection is delineated by provisions stipulated in
"laws" subordinate to the Constitution. Thus the Chinese Constitution itself does not
provide concrete protection of foreign investment. It can only serve as the constitutional
basis for other laws and replations to define and protect specific rights of investors.
Article 18, " The Constitution of the People's Republic of China", adopted on March 5, 1978 by the 1" Session, amended on July 1, 1979 by the 2" Session and on September 10, 1980 by the 3d Session of the 5" National People's Congress of the People's Republic of China. and promulgated on December 4, 1982. See Fang Chun-ie, Zhang Xin, Chou Ling-Ling Choy Mei-pik, Cheng Tat-yan et al., ed. Editorial Cornmittee of the Law Annual Report of China h w Annual Repon of China 1982/3, (Kingsway International Publications Ltd. 1982), at 240.
2. The Regulations for the Encouragement of Foreign Investment
Regulations of general or very broad application have been promulgated
encourage foreign investment in China. Such regdations provide for incentives for
foreign investment through offering tax exemptions or reductions, privileges in obtaining
raw materials, energy resources, foreign exchange and export-import permits, and
through specwng a maximum charge of land use fees. They include: The Regulations
Concerning Encouragement of Foreign ~ n v e s t m e n t ~ ~ Regulations on the Foreign
Exchange Balance of Joint ~entures,7' Regulations Encouraginp Investment by
Taiwanese Compatriots (Taiwanese ~e~ulat ions) , '~ and Regulations Encouraging
hvestment by Overseas Chinese and Hong Kong and Macao Compatriots (Overseas
Chinese ~egulations) .73
These regulations dso contain provisions for the protection of foreign investment.
For instance, Article 15 of the Regulations for the Encouragement of Foreign Investment
specifies the investor's autonomy in matters of management says:
69 Article 18 of PRC Constitution is referred in chapter one of this thesis.
"State Council Regulations Concerning Encouragement of Foreign Invesmient", promulgated on October 11, 1986. See CCH, "Business Regulation", vol. 2, para. 13-509.
71 "Regulations conceming the Balance of Foreign Exchange Incorne and Expendinire by Sino-foreign Joint Equity Ventures", promulgated by the Ministry of Foreign Economic Relations and Trade on January 15, 1986. See The Law of The People's Republic of China on Chinese-Foreign Joint Ventures, The Law of the People's Republic of China on Enterprises Operated Exclusively with Foreign Capital, Provisions of the State Council for the Encouragement of Foreign Investment and Its Irnplernentation Measures.
" "Encouraging investment By Taiwanese Compamots Provisions", promulgated by the State Council on July 3, 1988. See China Law & Practice, vo1.2 (No. 7 , 1988), at 56-6 1.
73 "Regulations Encouraging Investment by Overseas Chinese and Hong Kong and Macao Cornpatriots", promulgated on August 1990. CHH, "Business Regulation" vo1.2, para. 13-550-
"Foreign investment enterprises have the right, within the scope of business approved in their contracts, to set their own production and operation plans, to raise and utilize funds, to purchase production materids, to market their products and to set their own levels of wages methods of salary payrnent and systems of bonuses and a l l o~ances . "~~
Article 5 of the State Councii Regulations gives priority to "exporting and
technologically advanced enterprises " (with foreign investment) in obtaining water,
power, and transportation and communication facilities. It M e r provides that these
enterprises shall be charged "in accordance wiîh the standard fees applied to State
enterprises in the same locality.""
It is clear that under these regdations, Taiwanese and overseas Chinese investors
enjoy the same protection as afforded to other "foreign in~estments.'~ However, in these
two regulations, provisions on nationalization are also similar to that provided in the Joint
Venture Law, Co-operative Venture Law and Foreign Enterprises Law. Some of the
provisions in these laws and regulations concern the protection of foreign investment in
SEZs as well.
However, some of the regulations for the special areas have provided foreign
investment more favourable treatment than that applicable in other parts of the country.
Here are two examples:
(1) Article 19 of the Regulations for the Encouragement of Investment in the
Development of Hainan ~ s l a n d ~ ~ distinctly provides:
74 See CCH, supra note 67.
75 Id., art. 5.
76 See China Law & Practice supra note 72 , art 5; and supra note 73, art 5,
"Dividends received by a foreign investor fiam an enterprise invested in and established on Hainan Island may be freely remitted abroad by the investor through the foreign exchange deposit account of the enterprise. The remittance shall be exempt fiom income tax." [emphasis added]
According to this provision, foreign investors in Hainan are exempted fiom the
requirement in the Foreign Exchange Regulations to apply to the Bank of China for the
remittance of profits.
(2) Article 6 of the Provisional Measures of the Sanya Municipal People's
Govemment for the Encouragement of ~nves tment~~ stipulates:
"...In the case of an enterprise fulfdling an existing contract, if a problem arises due to the revision of State policies, permission shdl be w t e d for the matter to continue to be handled in accordance with the provisions of State policies and laws in effect at the time of the contract's approval." [emphasis added]
This provision seems to provide b e r protection of contract terms than Article
40 of the Foreign Economic Contract ~ a w . ~ ' But to what extent a local regulation can
guarantee against revision of State poLicies is questionable.
With more power to conduct foreim trade and to approve foreign investment
projects, and with the right to offer preferential terms to foreign investors and retain an
especially large share of foreign exchange earnings, the five SEZs became the standard
bearer both in econornic developrnent and in economic reform.
3. The Law of PRC Joint Ventures (JV)
LRegulations for the Encouragement of Investment in the Development of Hainan Island ", issued on 4 Mach 1988 by the State Council, in CCH, "Special Zones & Cities" vo1.2, para 96-203.
78 L'îrovisional Measures of the Sanya Municipal People's Govemment for the Encouragement of Investment ", promulgated 20 July 1990 by the Sanya Municipal People's Goverment CCH, L'Business Re,oulation" vo1.2, para. 13-554.
The Law of the People's Republic of China on Chinese Foreign Joint Ventures
provides under Article 2:
"The Chinese Government protects, in accordance with the law, the investment of foreign joint ventures, the profits due them and their lawful rights and interests in a joint venture, pursuant to the agreement, contract and articles of association approved by the Chinese ~overnment . "~~ [emphasis added]
This provision makes it clear that the agreements, conb-acts, and articles of
association signed between foreip investors and their Chinese counterparts, once they
are approved by the Chinese Government, become legally effective, and the rights and
interests of the contracting parties are protected by state laws, while the govemment
assumes responsibility for supervising the fulf3iment of obligations by the parties
concerned. Al1 judicial organs accept at al1 times lawsuits filed by the parties regarding
the contract and provide and make fair decisions according to law.
Article 7 of the same joint venture law is as follows:
' lfter payment out of the gross profit earned by the joint venture of the joint venture income tax, pursuant to the provisions of the tax laws of the People's Republic of China, and after deduction from the gross profit of a reserve fund, a bonus and weLf'e fund for staff and workers, and a venture expansion fund, as provided in the articles of association of the joint venture, the net profit shall be distributed to the parties to the joint venture in proportion-to their respective contributions to the registered capital."' '
l9 See supra note 72.
" The PRC Joint Venture Law, supm note 71, art. 2, at 5.
'' Id. m.7, at 8.
32
The term "gross profit" used in this context means the profit arrived at after
deduction of the total expenditure of the curent year from the total income of the same
year before the payrnent of incorne tax, The exact ratio of the reserve fûnd, the bonus
and welfare fund, and the venture expansion fund is prescribed in the articles of
association agreed upon between the parties to the joint venture. Once the board of
directors makes a decision, each shareholder may receive a share of the remaining profit
available for distribution in proportion to its contribution to the registered capital.
Article 10 of the joint venture law says:
"The wages, salaries and other legitirnate incorne earned by the foreign staff and workers of a joint venture, after payment of the individual income tax under the tax laws of the People's Republic of China, may be remitted abroad through the Bank of China in accordance with the foreign exchange regulations."82
These are the provisions, which parantee the rernittance of profits, of funds, and
of personal income to a foreign country or region. The Law on Chinese Foreign Joint
Ventures is state legisiation that provides full, effective guarantees for the rights and
interests of foreign investors.
II. The Impact of Foreign Investment
A. Forer'an Direct Inveshnent fiom International Perspective
As discussed in Part 1 of this chapter, the increasing importance of FDI has
resulted in its growth of international trade. FDI provides the host state with many other
82 Id., art 1 O, at 1 o.
benefits. These include the management skills, the introduction of new technologies, the
creation of new jobs, ~ a ~ i t a l . 8 ~ Moreover, the presence of an internationally competitive
service provider or manufacturer can ofien raise the overd performance of competing
firrns within a domestic The advantage rnay arise h m the fact that foreign
investors regularly lobby their home governrnent for favorable policies toward the host
state to protect their investments. Although the lobbying arises out of self-interest, major
multinational corporation may have a more siDanificant effect than the host state lobbying
on its own behalf?
It was discussed above that many countries, recognizing the benefits, have in
recent years made a concerted effort to attract FDI by establishing lucrative investment
incentive programs. Those include the availabüity of tax holidays, land at reduced pnces
and tax, inexpensive financing and so on? Although a l l countries have established
incentive programs, recent studies have cast doubt on the effectiveness of the incentives,
particularly where disincentives, such as complex regdatory fiarneworks, are also in
place. OECD review concluded that:
"The general impact of international investment incentives on the broad directions of direct investment flows is also generally limited.. . [AJs seen from the above discussion, disincentives, in cornparison to investment incentives, are likely to have a wider impact on international direct investrnent decisions; they are more
83 See ORGANISATION FOR ECONOMIC COOPERATIO AND DEVELOPMENT. THE O E C D DECLARATION AND DECISIONS ON ENTERNATIONAL INVESTMENT AND MULTINATIONAL ENTERPRISES: 1991 Review76-86, (1992), at 8.
" See ïbrahim F.1. Shihata, Factors infuencing the Flow of Foreign Investment and the Refevance of a Muftilateral Investment Guarantee Scherne, 21 INTZ LAW. (1987), at 674-75,
86 See OECD DECLARATION. supra note 83, at 77-86.
closely associated with investors' perception of the business chnate.. . ~t 87
Therefore, it has become increasingly apparent that although incentives may be of
some assistance in attracting FDI, the elimination of disincentives has a far more positive
effect. In developing countries, this is particularly m e in the case of srnall and medium
sized tïrms, which often possess desired technologies and a willingness to invest but Iack
the resources to negotiate their ways through complex regulatory framew0rks.8~
"FDI presents a foreign investor with a large number of potential advantages and exposes the investor to large scaie risks that flow fkom the prevalent instability in Developing and Newly Liberalized Nations (DVANLN). Notwithstandinp these risks, the potential economic benefit from FDX is great, both for the host nations and for the overall prosperity of the world economy. As a result, participatiw countries have developed policies and programs encouraging more FDI. ,188
The policies and procedures adopted in the SEZs, and especially PDZ (PNA),
have gone a long way toward overcoming the difficulties of the usual complete
regulatory framew~rk.~O
Foreign investors stand to gain a great deal fkom investment in China and PDZ
(PNA), despite the perceived risks that are involved. The WorId Bank, dong with certain
developed countries, has created agencies that operate to provide political nsk
Id,, at 85-86.
'* See Jurgen Voss, "The Protection and Promotion of Foreign Direct Investment in Developing Corntries: Interests, Interdependencies, Inûicacies" 31 INT'L & COMPLQ. (1982) at 686-689.
'' See George Thomas EUinidis, "Foreign Direction Invesment In Developing And Newly Liberalized Nations" Journal of international Law and Practice, 4:299 (1995), at 399.
'O Id.
ins~rance.~' The goal of these agencies is to provide a positive investment c~irnate?~
While investors cannot control political factors that may have an adverse effect on
investments, they cm, through these agencies, be offered protection. Although "these
public agencies provide protection against acts of foreign govemments which result in
expropriation and currency incontrovertibility as well as providing coverage for losses
that are a result of acts of war, political violence and insurrection ... they do not provide
coverage for more typical commercial risks, such as currency de~aluat ion."~~ S till, it can
be said that these agencies, added to the other attractions of investment, serve to heighten
the advantages linked to foreign investment in China.
Foreign direct investments using the subsidiary form offer advantages that are not
available in other forms of direct invest~nent.~~ As opposed to joint ventures the
subsidiary form allows the investor to keep control over the entire business ~ ~ e r a t i o n . ~ ~
Because the subsidiary still operates as part of a conglomerate, it encourages the
exchange of ideas and " developments between the subsidiaq and the parent by
excluding issues and concerns inherent in joint vent~res.'~ Whereas in a joint venture
partners may be reluctant to fieely transfer technology, for fear that the partner will
'' Id. at 300.
'' Id-,at 300.
93 Id.,at 301.
94 K a t 303.
'' Id.
96 Id.
become a future cornpetitor, in a subsidiary/conglomerate relationship this nsk does not
exist ?'
On t5e other hand, joint ventures can also be to the advantage of foreign investors.
They allow the investor to meet ownership requirements that exist in the host country's
laws, which therefore allows for irnproved access to, and interactions with, labor unions,
financial institutions, and government at the local l e ~ e l . ~ ~ A joint venture can also serve
to spread risk among partners, therefore reducing the risk of each one.99
Whatever course the foreign investrnent takes, either subsidiary/congIomerate
relationship or a joint venture, these alternatives both offer considerable advantages to the
prospective investor and the means to reduce risk through insurance against political nsk
as rnentioned above.
B. n e k g a i Implications of Foreign Investment in SEZs of China
"The foreign sector of the economy is still very smaU relative to the domestic sector. China, under pressure from foreign businesses, has been rnoving towards convergence between the law governing the domestic economy and that regulating foreign investment." l W
100 See Hilary K- Josephs, "Foreign Investment in China: The Administrative Legal System" The international Lawyer, Book Review, 32: 1, (Spring 1998), at 109.
In the Iate 1970s, a formal legal system was considered necessary to maintain
"order and build a strong socialist state." 1°' At that tirne the administration also realized
that in order to attract foreign business a legal h e w o r k was needed in which business
could be transa~ted.~*~ In 1979, a total of seven national laws were adopted, including a
commercial law, The Law of the People's Republic of China on Joint Ventures Using
Chinese and Foreign ~nvestment.~" The joint venture law is a declaration of
pinciples .lM Lt simply encourages capitalist investors to associate with Chinese
economic units in the making of profits.105 The foreign participants are permitted to f o m
limited liability companies with Chinese participants, "produce goods for the domestic
and foreign markets" , " remove profits from the country after paying stated taxes or fees,
and make contributions of cash, capital goods, industrial property, or technology, the last
of which the Chinese prefer."L06 By way of exchange for these concessions, China had
hoped to encourage the importation of advanced technology, acquire experience with new
production techniques, the provision of jobs and training, meet domestic demand for
consumer goods, reduce marketing costs by having the foreign participant market the
goods outside the country, and make considerable profits.107 This proved to be a very
'O' See Charles C. Valauskas, "China Special Ecommic Zones in Perspective: A Contextual Discussion with Emphasis on the Shekou Industrial Zone" Hastings Int'l and Comparative Law Review, vol. 9, (1986), at 175.
IO2 Id.
IO3 Id.
imovative advancement for China at that time. By making this step, China was able to
accomplish a diverse range of economic objective^.'^^ However, the establishment of
the free trade zones in the coastal and boarder areas was by far the most encouragïng step
taken by China towards opening its economy to achieve an even greater number of
economic objectives.
In 1981, Guangdong officids developed a new set of policies for the SEZs. The
policies took the form of a ten-point plan. The first point provided that the planning and
construction of the SEZs should meet local conditions, with a certain emphasis on the
actual effect.lo9 The second point stated that certain types of irnported goods had to be
given "preferential tariff treatment". The third point recognized that the methods of
control over the Chinese border would be simplified. For example, "multiple entry visas
could be issued for one year for those wishinp to enter and leave the zone frequently."l10
The fourth point required that employees of zone enterprises be employed under contract.
The fifth point gave the zones independence in conducting foreign trade and, for
guidance, would be required to attend to the state's foreign trade policy. The sixth point
established the renminbi (RMB) as the principle currency, although foreign currency
could be used in specified areas of the zones.LL1 In the seventh and eighth points
infrastructure development was discussed. The seventh point specified that an attempt
should be made to raise development funds domesticaily, at the same t h e alIowing for
'Og Id., at 179.
'O9 Id.,at 202.
' 'O Id.,at 203.
I I I Id.
capital fkom overseas Chinese and foreign capital. The eighth point stated that foreign
capital should be utilized "to build airports, harbors, railroads, and telecommunications
facilities.'12 The ninth point directed the People's Congresses of Guangdong and Fujian
provinces to create new le@ measures in order to regulate zone activity. The final point
specified that the zone bureaucracy should be reduced to provide efficient and basic
administration. The point emphasized the "autonomous nature of the zones and that
security should be strengthened to ensure law and order." LL3
The above steps, applying to the SEZs, served to provide within China's legal
fiamework a more suitable chnate for investment.
C. Advantaaes of Foreign Investment for China
China has experienced a trernendous increase of foreign direct investment in
the1990s. FDI has grown to a Ievel of nearly $40 billion each year, making China a
leading candidate for FDI. In 1995, China received six times as much investment as the
second-place developing country recipient of FDI, ~ a l a ~ s i a .
The causes in the influx in FDI are several and varied. The rnost siapïficant
feature of the Chinese economy as an investment site is the rapid growth of its economy
and the massive market that it wiU
companies, China offers low-cost,
in al1 likelihood
high-skill work
become in the future. For many
force, huge market, adds to the
'14 See Greg Mastel "China's Political and Economic World" The Rise of the Chinese Econamy, The Middle Kingdom Emerges, (M.E. Sharpe, Arrnonk, New York London, England, 1997), at 9-15.
attraction for potential ùivestors. "Components from other countries are often shipped to
China for final assembly and later exported to other market^.""^ By seeing the economic
potential for development of this type of assembly operation, China has attempted to
encourage it and, "through investment performance requirements, virtually mandated
it," 116
The introduction of foreign capital to the special economic zones has greatly
increased exports, however, it is mcult to Say how much exactly. However, in terms of
total export volume, foreign capital has not sibgnifïcantly affected exports. There were
three major reasons for this: first, the size of foreign capital influx was not substantial;
second, it was mainly invested in real estate and services, that is, sectors unrelated to
exports; and third, a significant portion of foreign-capital Company production is not
exported, but sold in Chinese domestic. Of these reasons, the most si,onificant is the
third.' l7
Foreign capital also had important effects on inter-industrial relationships, in
terms of how much raw material or intermediate material is purchased fiom the Chinese
domestic market for use by foreign capital companies investing directly in China. When
foreign capital is invested in a certain industry and used to purchase raw matenals in the
Chinese domestic market, demand for these materials increases and greatly contributes to
the development of the industry that generates the mate rial^."^ Through this demand-
l i s rd.
l6 Id-
Llï Id.,at 95.
creating process, foreign capital strengthens the attraction of investment in the entire
nation.
D. Disadvantuges of Foreim Investmenf for China
FD1 heading to China used to be drawn naturally to fiee-trade zones, especially
Shenzhen, PD2 (PNA) and the other SEZs. Liberal trade rules, advanced inhstructure,
generous tax breaks and proxùnity to Hong Kong, Macao, and Taiwan were powerfil
magnets.' lg
Thomas Chan, coordinator of the China Business Center at Hong Kong
Polytechnic University said: "There's nothing special now about special economic zones
,t fli1120
Choices of economic zones used to be clearer under Deng Xiaoping's open-door
policy of economic reforms in the 1980s.'~' The advanrages enabled the SEZs alone to
acquire 20% of China's total foreign investment between 1980 and1995. However, now
that infrastructure has improved considerably in other areas of China, officiais would Like
to spread the wealth inland. Constantly increasing costs are supporting such movement.
The trend these days is to elhinate tax breaks for foreign interests. However, the PDZ
- - - - -- - -
'18 See Brian Palmer, "What the Chinese Want, From the Gobi Desert to Shanghai's Bund, Gallup poiisters fanned out across China to paint by numbers a picture of Chinese life. Here is what they fouad" FORTUNE vol. 140, no.7 (October 11, 1999), at 229-232.
' 1 9 See Gene Linn, "Investors, beware: Free-trade zones in China not what they used to be; Exclusive tax break, other draws are the perks of yore" Journal of Commerce, Section: TRADETAB; (Decernber 31, 1997), at 13C.
121 See Hilary K. Joephs, supra note 100, at 190-191.
(PNA) in Shanghai-while on the wrong side of the river and has become a prirnary
laboratory for new policies. Tt was the first to allow foreign banks to deal with Chinese
currency, and it allows some overseas companies access to foreign trade. PDZ (PNA)
also provides for access to the "advanced work force of Shanghai" and a large market.'"
However, Iabour is expensive and PDZ (PNA), Like other areas, is being cnticized for a
get-rich-quick policy.
At this moment, many companies such as Daimler Chrysler and AhoId NV are
pulling out of "China's own statistics explain why: M e r attracting foreign
investment for the past twenty years, China now is profitable for about a third of the
companies that took the bait."lZ4 This has occurred before during the pro-democracy
crackdown in 1989. According to the Globe and Mail, " the toll [of pullouts] is nsing as
China's slow economic growth and shifting regulatory environment Wear out an
increasing number of investors--and warn others off."125 Foreign investment inflows t h i s
year (1999) will drop to approxirnately 27 billion (US.) from about 40 billion (U.S.)
(1998) -- for the first time since the pullout that foilowed the 1989 u n r e ~ t - ' ~ ~ More
passive direct investment capital-- foreign money invested in equity stakes of Chinese
'" See Louis Kraar, "China's Car Guy, Hu Mao Yuan has skillfully blended GM's best practices into a creaky state auto indusny" supra note 118, at 238-246.
'" See Caraig S. Smith, The Wall Street Journal, Shanghai, "Foreign firms retreating from China, Sea of red tape, unfettered local cornpetition too rnuch for mon outsiders" The Globe and Mail, (October 26, 1999), at B 15.
ventures-is aiso shruiking as investment hinds recoil from China after posting losses in
china.'"
Id.
CHAPTER TWQ
PUDONG DEVELOPMENT ZONE (PUDONG NEW AREA)
For close to ten years now, foreigners considering investing in China have been
barraged by a media blitz surroundhg Shanghai's Pudong Development Zone (Pudong
New Area). Propaganda aside, two questions arise: Why did they choose Pudong? How
does it differ fkom the Special Economic Zones (SEZs) or the Economic and
Technologïcal Development Zones (ETDZsj of the open coastal cities? This chapter
discusses the general nature of Special Economic Zones and the Pudong Development
Zone (Pudong New Area). Tt will concentrate particularly on the ciifferences between
PDZ (PM), and the SEZs and ETDs, while also discussing in detail why Pudong was
chosen for development.
1. Special Economic Zones and Their Impact on Its Ekonomic Development
A. The Nature of Speciul Zones
According to Alexander J. Easson, "special 'zones' exist in a variety of forms and
under a number of different names. A cornrnon feature is that they are all designed to
attract investment--especially foreign investrnent--and to provide a location for
manufacNnng andor the provision of ser~ices." '~ Among the most commonly referred
to zones are "customs zone, duty free zone, enterprise zone, free economic zone, free
port, fiee trade zone, international trade zone and special economic zone."129 There are
"more than 500 such zones exist around the world, in 50 or more different countries,
providing employment for 5 million or more workers, and contrïbuting substantidly to
the volume of world trade."130 A feature common to al l is the speciai tax andor customs
duty arrangements are applicable that are not generally available outside the zone.13'
However, a fundamental distinction can be made between duty free zones and special
economic zonesn2 Duty fiee zones are exempt fiom import and export d ~ t i e s . ' ~ ~
However, because enterprises located in duty f k e zones rnay receive exemptions from
other taxes as well, and whereas customs duty exemptions may be granted in special
economic zones, t h i s makes some zones difficult to cl as si^..'^^ However, a duty free
'" See Alexander J. Easson, "Duty-Free Zones and Speciai Economic Zones in Central and Eastern Europe and the Former Soviet Union" Special Reports, Tex Notes International, (February 9, 1998) at 445- 446, note 3, "The World Export Processing Zone Association listed, in June 1996, over 500 export- processing zones alone: Bolin and Haywood, World Labor Leadership Wrong About Export Processing Zones' (1997), 21 Journal of the Flagstafflnstitute 1 , at 27. Export processing zones are proliferating at such a rate that there may now well be as many as 800 zound the world."
129 See Alex Easson, Id. at 446, note 4, "Usuaiiy there is also exemption from other consumption taxes, such as VAT, but this not invarïably the case."
''O See Alex Easson, Id. note 3, "The World Expon Processing Zone Association Iisted. in June 1996, over 500 export-processing zones alone: B o h and haywood, World labor Leadership Wrong About Export Processing Zones' (1997), 21 Journal of the Flagsrafl insrirute 1, a t 27. Export processing zones are proliferating at such a rate that there may now weil be as many as 800 around the would."
132 Id.
13' Id.
134 Id-, note 7 "This is so for purposes of customs duty (and often also for VAT purposes); imports into, and exports frorn, the zone are usuaily counted for statistical purposes (e.g., in computing made balances)," at 446.
zone is characterized at a basic level is the "absence of customs duties", while
"preferentiai treatment in one or more other forrns of taxation" may be considered one of
the basic defining characteristics of the special economic zone. 135
B. Speckl Economic Zones
In a "special economic zone" special tax exemptions or reduced rates apply to
designated areas or regions of a country.136 Accordiog to A. Easson,
"Tax advantages (other than customs duty exemption) are commonly avdable in duty free zones, especially export processing zones (EPZs), and are often more important to potential investors than is the duty free status. Nevertheless, it is that status which is an essential characteristic of such zones. It is that status, too, that requires the zone to be a clearly defined geographical location and (usually) to be securely f en~ed . ' "~~
The SEZs resemble export processing zones and free trade zones that came into
being near the end of World War II mostly in developing c~un t i e s . ' ~~ Unlike export
processing zones, the SEZs promote a varied range of enterprises besides export
i3s Id*
136 Id.. ar 447-
'37 See Alex Easson, id. note 12 "This is, of course, unnecessary where an entire country, or a physically separate part of a country (e-g., an island), is designated as a duty-free zone." ar 447.
13* Free trade zones and export processing zones are "industrial estates wherein made barriers applicable to the rest of the national economy do not apply and where export-oriented indusrries can operated fiee of import duties or quantitative restrictions and are granted other advantages, including tax exemptions." Fenwick, Evaluaring China's Special Economic Zones, 2 Int'l & Bus. Law 376, 37611.1 (19841, (citing Maex, Employment and the Multinationais in Asian Export Processing Zones, International Labor Organization Working Paper, cited in MoreUo, Sweatshops in the Sun?, Far E.Econ. Rev., Sept. 15, 1983, at 88); Heurings Before the Special Bubcamm On U.S. Trade with China of the House Comrn. On Energy and Commerce, 98" Cong., 2d Sec. at 277-78 (1984),(statement of Richard Y.C. Yin, Institute for Sino- Soviet Smdies and Department of Economics, Geroge Washington University); Niskitateno. China's Special Economic Zones: Experirnental Unirs for Econornic Reform, 32 Int71& Comp. L.Q.(1983), at 176. There are approximately 350 export processing zones and fiee trade zones in approximately 70 counmes. Id.
industries.i3g As well as industrial investment, tourism and real estate, including land
development, are also e n c o ~ r a ~ e d . ' ~ ~ SEZs, like other zones, are designed to develop
export-oriented industries, to increase export trade and attract foreign capital and
technology by allowing special privileges to foreign investor~'~'. On the other hand,
granting exemption to qua-g enterprises fiom taxes such as the corporate income tax
does not require that their premises be physically mapped off from their smoundings.
Tax incentives are comrnonly given to enterprises without considering their location
within a country. It is also comrnon for certain tax privileges to be conditional upon
location within a designated area. That area may be an entire region, province or country,
or it may be a relatively small location, such as an "enterprise In any case, the
area must be defined, even though it does not have to be physically partitioned fkom the
surrounding c~untryside. '~~ Therefore, the term "special economic zone" is referred to in
'" Klitgaard & Rasmussen, For a discussion of the reversion of Hong Kong to China, see Day, The Recovery of Hong Kong by the People's Republic of China-A Fm Year EXpen*ment in Capiralism and Freedom, I l Syr. J. Int'l, & Com. 625 (1984), at 381, Foreign enterprises may seU their products in the domestic market in China Guangdong Regulations, Id- Art- 9 Regulations of the PeopIe's Republic of China on Special Economic Zones in Guangdong Provice, 15" Session of the Standing Committee of the 5& National People's Congress, Aug. 26, 1980.
140 Id,art. 4. Ail projects of industry, agriculture, animai husbandry, aquaculture, tourism, housing and constxuction, and research and manufacturing involving advanced technology that have a positive significance for international economic cooperation and technical exchanges can be estabiished, Id.
See Ronaid C. Brown, "The role of the legai environment in doing business in the People's Republic of China," Lane Keiley and Oded Shenkar eds. International Business in China, (Routledge, London and New York, 1993), at 63-88.
142 See Alex Esson, supra note 128, note 5 "'Parks' may nevertheless offer incentives of a nonfiscai nature, such as subsidized infhstructure, low rem, simplified approval procedures, etc. It is not uncornmon for indusrrial or technology (or science) parks to gant reductions in property taxes - in which case they may be considered a type of special economic zone." at 446.
143 Id.
this paper as a physically restricted area, which offers particula. tax priviieges to some or
aLl enterprises operating within it?
Because many factors overlap in China's SEZs, they cannot be simply classified.
The SEZs do not have a no-tax privilege. There is a 15% corporate income tax, and a
personal income tax, which is Ievied on monthly incomes greater than 800 yuan. AU
materials are taxed except those used for production or consumption. The special
economic zones can be distinguished from fiee ports in that both irnported and domestic
raw materials are used in large quantities. They also are distinguished from export
processing areas by the types of industries present, which include commerce, housing and
tourism, and public works such as roads or electricity.
To conclude, a special economic zone is an area where, among other conditions, a
relatively fieer management system is developed for the achievement of economic
objectives. It gains the benefit of econornic cooperation with foreign corporations in
various relationships, ranging from mergers to independent management, and is an
complete economic development area where disparate businesses, including
manufacturing, agriculture, rivestock, fishing, commerce, housing, tourism, banking, and
insurance, are conducted. '"
144 "Special Econornic Zones" fund at website at h~//www.qsilver.queensu~c~aw/eIectro course mareriais/course materials by professor/A. easson/law of foreign investment/class notes and readings, at 10.
14' See Jung-Dong Park, The Special Econornic Zones of China and Their Impact on Its Econornic Development (Praeger Publish, Westport, Connecticut London, 1997), at 1 1.
CI Special Economic Zones in China
The objectives for the SEZs have not been constant. Their focus has graduaily
chanpd over tirne. Before 1983, primary objectives were the hansfer of technology, gain
of foreign currency, and creation of employment opportunities. At that tirne, the zones
were intended to operate as export processing areas. Now, China wants to reforrn its
domestic economic system centring on the zones, wMe integrating itself into the
international economy. And, through the zones, it also wants to solve its political
problems with Hong Kong, Macao, and ~ a i w a n . ' ~ ~
Other economic areas that can help establish externd markets are transit zones,
fiee p a s , and expoa processing areas. M a t is the difference befween these econornic
areas and China's special economic zones? The characteristics of each type are discussed
in the foilowing section.
Transit Zone
A transit zone,14' also known as a free zone or a free transit zone, is a port with a
bonded warehouse that serves as a trade transit area. This type of zone attempts to extend
business advantages to landlocked countries. Goods that are brought to the bonded
warehouse are not considered as imports, and customs duties are not imposed as long as
they do not enter the domestic market. The transit zones have a narrower scope of
econornic activity than both the free port and the export processing area.
Free Port
A free port refers to a l l or part of a trade port designated by the state where
imported foreign goods are not subject to customs and are perrnitted to enter freely. It
exempts foreign commodities from customs and provides a degree of freedorn to foreign
ships using this port, unlike other ports where customs duties are levied and numerous
inspections and s u p e ~ s o r y controls are enforced. It's possible at a free port to re-export,
repack, blend, process, manufacture, and exhibit commodities, and also establish a
sarnple market. In addition, it is possible to build or rent warehouses where finished
products may be stored.
Export Processing Zone (EPZ)
An export-processing zone is a specific area near a port, which is required to
export ail or some of the manufactured products. In the 2960s, Taiwan, Hong Kong,
Korea, Singapore, and Mexico created such areas. This move indicates that they had
altered their economic development strategy from irnport substitution to export
promotion. An export processing area can therefore said to be the core of an export
promotion industrialization strategy.
For the most part, corporations in export processing zones receive special
treatrnent. They are exempt from a custom's duty on the import of raw rnaterids, finished
products, semi-finished products, processing facilities, parts, and on the export of
147 U.S. Department if Commerce, Bureau of International Cornmerce, ( 1970). at 14.
51
products. Taxes levied on these corporations tend to be low, and tax exemptions are
permitted for a designated period of time after the corporation's inaubouration. Foreign
corporations in the processing area can fkeely transfer their profits elsewhere and, at the
same time, are not subject to any restraints on foreign currency management, The
government also pmts them facifities; such as, communications (telephone and postal
service), transportation, banking, and foreign currency exchange.
In summasr, an export-processing zone is a special economic area established to
facilitate export and trade of whoily domestic products via looser regulations on taxation
and foreign currency management.
SEZs can be seen as special areas open to foreign business, finance, and trade.
The SEZs are forerumers in the implementation of China's open policy and domestic
refoms. Over the last twenty years, the SEZs have been playing an increasingly
sibonificant part in boosting foreign investment and expanding Sino-foreign economic co-
operation. Any evaluation of the SEZs must include their impact on China's industrial
and agriculturd growth, employrnent, foreign investment and export earnings, and their
importance as laboratories for economic r e f~ r rn . ' ~~
After 1979, when the open-door poLicy towards trade, payments, and investment
with Western countries was adopted, the goal of increased efficiency called for a greater
emphasis on the coastal region. Such an emphasis involved the promotion of uneven
income distribution geographically, through the forced growth of particular areas, very
often wiîh the expectation that this growth wrll cover a wider area at a later stage. The
fundamental change under this policy was establishment of SEZs on China's south
coastline in the eady 1950s and the opening up of coastal cities and other areas later.
These areas were expected to grow rapidly and become bases of expanded foreign trade,
and were encouraged to act as training grounds for transmitting knowledge and
technology to other parts of the country. Such areas were also to continue to receive
preferential polices.
Five Special Economic Zones and 14 open coastal cities14' played the Ieading role
in the 1980's in China The zones are ~henzhen,''' ~huhai, Isl ~ h a n t o u l ~ ~ and ~ i a m e n . ' ~ ~
14' See Wang Guiguo "The Relaxed Rules of the SEZs" China's Invesmzent laws New Directions, (Butterworths & Co [Asian] Pte ltd. 1988), at 92.
149 The five special economic zones are Shenzhen, Zhuhai, Shantou, Xiamen, and Hainan Island. The Fouteen cities are Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianguangaung, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai. See Yeung, Yue-man & Hu, Xu-wei, China's Coastal Cities as Development and Modernization Agents: An Overview. (1992), in Yeung, Yue- man & Hu, Xu-wei eds. China Coastal Cities. 1 (1992), -at 9-1 1,
'" Shenzhen is 174 km from Guangzhou City and 32 km from Kowloon (in HongKong) whîch is bordered by the Pearl River. In 1979, when it was designated as an SEZ, Shenzhen was stiil a sleepy township of 23,000 in largely mal Baoan county and was economically underdeveloped and infiastuctuaily weak Brrsiness China, (29 September 1982), at 3940. The Shenzhen SE2 covers an area of 327.5 sq km, stretching 78.4 km dong the border of Hong Kong's New Tenitories, incorporating fuliy one-third of the area of the Shenzhen municipality The curent population of Shenzhen SEZ is 469.800. [China International Economic Consultants, Inc., The China Investment Guide, 3d edn, Hong Kong ; Longman Group Ltd., (1986)- at 931. To be sure, Shenzhen has. since its establishment, developed from a small rural fishing township into a medium-sized and relatively modern city.
"' Zhuhai is situated on the western bank of the mouth of the Pearl River and was far less weil-developed when it was nominated as an SEZ. The initial size of the Zhuhai SEZ was 6.7 sq km which was subdivided into fûur separate areas with 45 % of the land to be devoted to indusmal enterprises. In Iune 1983, the State Council, in response to local requests, enlarged the size of the SEZ to 15.16 sq km, of which 10.8 were designated for industrial development_ With a population of 20,000 and facing Hong Kong across the sea toward the east and bordering on Macau in the south, the Zhuhai SE2 has been developing successfully Into an indusmal city. Its industry has already become a predorninant force with a total output value making up 72% of the city's total industrial and agricultural ouptput value, as against only 39% in 1978. [People's Republic of China yearbook 1986, (Beijing: Xinhua Publishing House, 1986)], at 459.
Is2 Unlike Shenzhen or Zhuhai, Shantou in 1980 was already a medium-sized city. With a modest old port area, Shantou had been involved in international trade for over 100 years and about 120 of its 352 factories and enterprises were engaged in production for export in 1983. In 1980, the State Council designated 1.6 sq km as the Shantou SEZ. [People's Republic of China Yearbook 1986. (Beijing : Xinhua Publishing House, 1986)- at 4601. With such a moderate scheme, it was clear that Shantou wouid not be built into a comprehensive SE2 and its main goal was to develop a processing industry to support its agriculturai industq- In November 1984, however, the Starte Council decided to expand the Shantou SEZ into a larger area covering 52.6 sq km. The enlarged zone is divided into two areas: Longhu and Guang'ao. Initiaiiy, the Longhu area, which covers 22.6 sq km, concenuated on light industry and processing projects, packing
The first three are located in Guangdong Province and the other in Fujian Province,
Afterward, Hainan Island was allowed to attract foreign investment, In the late 1980's,
the Seventh national People's Congress adopted the resolution of designating Hainan
Isluid as China's fifth SEZ, which in fact is 100 times larger than the combined areas of
the dore-mentioned four economic zones.'" With more power to conduct foreign trade
and to approve foreign investrnent projects, and with the right to offer preferential terms
to foreign investors and retain an especidy large share of foreign exchange earnings, the
five SEZs becarne the standard bearers both in economic development and in economic
reform.
Special Econornic Zones have been described as areas "where enterprises are
treated more preferentially than in other areas, in relation to such matters as the tax rate1"
and preservation of food and vegetables, and poultry, eggs md aquatic products. However. at present the area, has developed into a multipurpose indusmal district. The Guang'ao area, covering 30 sq km, concentrates mainly on developing the petrochernical industry and support services for offshore oil exploration and developrnent.
lS3 The Xiamen zone was the first to designated as a special economic zone the entire ciy-not just the 2.5 square kilometer Huli export processing area It as10 took the lead in encouraging the establishment of 100 percent foreign-owned enterprises. The Xiamen SE2 has undergone a development process sunilar to that of Shantou SEZ The State Council of China first designated 2.5 sq km in the Huii area as a special zone in October 1980. Four years later, the S E 2 was expanded to include the entire Ziamen Island (including Gulangyu Islet), covering a . area of 131 sq km, and with a population of 349.165. Xiamen was an old trading port, with a good naturai harbour, rail links to the interior and a rnodest light industrial base consisting of 770 factories and an industrial workforce of 100,000. Its solid educational and technicai foundation and its location in productive agriculturai region have provided strong support for an export- development effort as weil as a market for tbe products of the enterprises in. the SEL [Beijing Review, no.50, (14 December 198101. Having developed at a fast pacc, the Xiamen SE2 was able to achieve an industrial output value totalling RMB2.141 b in 1985, representing a 45% increase over that of the previous year. Its industrial output value in 1986 recorded a 10% increase over that of 1985. Economic Reponer, (7 March 1987), at 29.
la Hainan Island is a 34,189 square kilometre zone located south of mainland China. The area of the other four SEZs totdled 338.38 square kilometres when they were first established (later the total area expanded). See Zhun Jian, "Historical Observations and Contemporary Reflections of the Development of China 's Special Economic Zones" (1993) 5 Journal of Central China Nonrial University, at 46-52.
'55 Interim Provisions Concerning the Reduction of and Exemption from Enterprise lncome Tax and Consolidated Industriai and Commercial Tax in the Special Economic Zones and Fourteen Coastal Cities,
and the scope of operations, Tnvestors c m operate their enterprises independently in the
special zones and employ foreign personnel for technical and administrative work. 9 9 1 5 6
Although products are to be sold on the international market, an enterprise may sell its
products on the domestic market in China if the approval of the Guangdong Provincial
Administration of SEZs are gïven and customs dulies are paid.'57 The SEZs have also
been described as "the 'second tier' in China's three tier e c ~ n o r n ~ . ' ~ ~ Designed to serve
as a bufTer and liaison between the 'first tier', the capitalistic enclave of Hong Kong due
to revert to China in 1997,lS9 and the 'third tier', socialistic China with its cenûaily
controlled economy. 3,160
The objectives of the SEZs include: attracting foreign investment and capital;'61
irnporting new and sophisticated t e ~ h n o l o g y ; ' ~ ~ improving Chinese managerial skills;
-- - - -- - - -
(State Councii, Nov. 15, 1984). A translation appears in East Asian EXEC. REP., (15 Decernber 1984), at 12.
Is6 Regulations of the People's Repubtic of China on Special Economic Zones in Guangdong Province, 15th Session of the Standing Cornmittee of the 5" National People's Congress, Aug. 26, 1980, m l 0 . bereafter Guangdong Regulations]. A translation appears in Collection of Rules and Regulations of the Special Economic Zones in Guangdong Province of The People's Repubiic of China, Volume IJ, & III, (Compiled and Printed by the S henzhen Municipal Law and Regulations Division).
''13 china*^ three-tier economy is a phrase used to describe China's policy with respect to this sociaiist nation's future coiitrol of a capitalist enhty, Hong Kong. Between these two divergent ways of Iife there are the SEZs that are intended to bridge the gap that exists between governing a socialist nation and capitdist Hong Kong. Consequently, one of the goals of the PRC is to gain experience in rnanaging and governing a capitalistic entity and to smoothly bnng about the transition of Hong Kong from a British territory to a Chinese possession. This is consistent with China's announced policy of "one country, two systems".
ls9 For a discussion of the reversion of Hong Kong to China, see Day, ï7ie Recovery of Hong Kong by rhe People's Republic of China-A Fifiy Year Experimenr in Capitaiism and Freedom, 1 1 Syr. J, Int'l. & Com. 625 (1984).
''O See Klitgaard & Rasmussen, Preferential Treatment for Foreign Investznsnt in the People's Republic of China: Special Economic Zones and industrial Development Districts, 7 HASTINGS W ' L & C0MP.L.REV. 377,38 1 (1984).
expanding foreign trade;'63 increasing foreign exchange earni~~~s;'~~ acquiring experîence
in international business;'65 strengthening China's position in the world market;'"
influencing Hong Kong and Taiwan both politicdy and psycho~ogically;167 and seMng
as a school for learning and practicing cornpetition and assisting in gaining experience in
the use of market me~hanisrns.'~~
The role of the SEZs in China's overall modernization plan has increased.'" The
SEZs, particularIy the Shenzhen SEZ, have become a controiied environment for
legislative experiments regarding potential measures that may, if proven successfid in the
- -- --
161 See KLitgaard & Rasmussen, Supra note 139, at 381- Direct foreign investment is given prioriv over rnerely securing foreign loans because of the failure of the latter policy. 'The government learned an important lesson fiom this failure: to împrove economic efficiency and raise productivity it was necessary to effect a fundamental transformation of economic institutions (especially in management style and the pricing systern) while ailowing enterprises greater autonomy" Huan . The SEZF: Problems, Success, Outlook-I, East Asian EXEC. REP., (15 May i985), at 11.
16' See statement of Richard Y-C. Yin, Institute for Sino-Soviet Studies and Department of Econornics, (George Washington University); Hum, Id.,at 1 1.
Id., in 1984, the total value of China's irnports and exports was 15% of the nation's GNP. Id.,, (citing World Bank, World DeveIopment Report 1984, July 1984), at 21 8-34.
Id.
16' Id., from 1979-1983, some foreign businessrnen have defrauded the CMnese by Gepriving them of the loans and commissions to which they were entitled. Huan, The SEZs: Problerns, Successes. Outlook-II East Asian EXEC-REP., (July 15, 1985), at 15. This is primarily due to the inexperience in dealing with foreign businessmen. Id.
166 See Hum, Supra note 16 1, at 1 1.
1 67 Id., the "lack of confidence in the Chinese govemment remains the most important reason businessmen in Hong Kong are channeiing their investments elsewhere, notably to North Arnerica" Id.
Niskituteno, China's Special Economic Zones.. Erperirnental Units for Economic Reform, 32 Int'l & Comp. L.Q. 175, 176 (1983). SEZs may be formed "in order to develop external economic cooperation and technical exchanges and promote the socialist modernization program." Guangdong Regulations, supra note 156, art-1.
'" Regulations of the People's Republic of China on Speciai Econornic Zones in Guangdong Province, 15" Session of the Standing Committee of the 5h national People's Congress, Aug. 26, 1980 Fereafter Guangdong Regulations]. A translation appears in [Speciai Zones & Cities] China Laws for Foreign Business, at 554.
SEZs, be applied nati~nwide. '~~ An example of this is illusû-ated by the passage of the
Foreign Economic Contract Law on March 21, 1985,'~' only one year after the
promulgation of the Shenzhen SEZ Foreign Economic Contract Regulations. The new
Foreign Econornic Contract Law and Dornestic Economic Contract Iaw were recently
legislated to define the right to contract for both foreign investors and domestic economic
units. The new P K , Contract Law (Contract Law), which came into effect on October 1,
1999, can be described as one of the most modem contract laws in the world in terms of
coping with legal challenges posed by new rneans of communication. The Contract Law
clarifies issues left unanswered by previous contract legislation, namely the PRC Foreign
Econornic Contract Law (FECL) and the PRC Economic Contract Law (ECL) and the
PRC Technology Contract Law. The old legislation, which will continue to govern the
interpretation of contracts concluded before 1 October 1999, failed to address the
question of whether a contract can be vaIidly forrned by modem means of
communication, including electronic mail (e-mail), the Internet and even facsimile.
Assisting in this role, the fourteen coastal cities are being used as a further testing ground
for the legislation enacted in the SEZs because of their established manufacturing and
trading base."2 AU of these are also be available to the foreip investors in PDZ
(PNA) . 173
"' Foreign Economic Contract Law of the People's Republic of China, reprinted in 24 U.M. 799 (1985).
'" See supra: note 61, at 554. 'The role of the fourteen coastal cities wiii be to adopt the economic policies that have been proven to be successful in the SEZs and hopefully improve on the development Pace of the SEZs by blending togettier flexible poiicies with an established manufacturhg and trading base." Id., 'Thus, the SEZs wil becorne the experîmental ground for more economic legislation so that policies can be tested first on a small scale before being applied to the fourteen coastal cities and elsewhere in China" Id.
Reducing tax is one of the incentives for foreign invested enterprises in China's
special investment zone. Compared with western countries, China's tax system is
relatively simple. Until China opened its door to foreign investors in 1978, i t did not
have nay t a . statute governing foreign opexations. Today, China offers preferential
treatment to foreign investors to encourage investment in china.'" Foreign investment
enterprises enjoy greater tax benefits if they are located in the SEZs. (Table 2.1) This
preferential tax treatment particuiarly encourages establishment of foreign investment
enterprises with advanced te~hnolo~y and equipment.
Incentives for Foreign-Invested Enterprises in China's Special Investment Zones (Table 2.1)
TAXATION
15% income tax rate for manufacturing ventures for non-manufacturing ventures for foreign joint-venture banks or foreign bank branches
T a exemptions for manufacturing ventures with terms of at least 10 years: 2yr. Exemption after first profit- making year, followed by 3yrs, at 50%
SEZs
See Regulations of the Shanghai Municipaiity for the Encouragement of Foreign Investment in the Pudong New Area, promulgated by Shanghai Municipal Govemrnent on September 10, 1990 [hereinafter Pudong Regulahons], art-27, reprinted in Guide tu Invesment in Shanghai.1 (Shanghai Invesment Commission, 199 l), at 1 17. ActuaUy, article 2 of the Pudong Regulations suggests that these laws rnay be established in Pudong.
'" See John Zhengdong Huang, "An Introduction to Foreign Investment Laws in the People's Republic of China" The John Marshall Law Review, Vol.Z8:47 1 (Spring 1995, Number3), at 480.
for service sectors ventures with terms of at least 10 years: lyr. Exemption after f ~ s t profit- making year, followed by two years at 50% for banks with terms of at least 10 years and $10 million in capital: 1 yr. Exemption followed by two years at 50%
Exemption form taxes on profits remitted abroad
Additional tax exemptions/reductions available for TechnoIo@caly advanced, export ox-iented, or Mastructure enhancing ventures.
Eligibility for exemptions/reductions in CICT taxes, Under certain conditions
on imports on exports
Exemption from export duties when at least 20% of Value is added by an FIE to non-coastal zone materials Prim to export
Exemption fkom property taxes, under certain Conditions
LAND USE RIGHTS
Maximum gant
Tram ferable
BANKING AND FINANCE
Priority lending fiom Chinese financial institutions
Xght to establish foreign bank branches, Sino-foreign Joint-venture banks, and financial corporations
50 or 70 years, depending on location
v
v
70 years
v
70 years
v
II. Pudong Development Zone (Pudong New Aeâ)
Invested with foreign capital
CICT tax Ievied at 3% on Ioan business
Sources: Coudert Brothers, US De partment of Commerce
A. Background of Pudona Development Zone (Pudona New Area))
Pudong New Area (Pudong Development Zone) is within the context of the
x
Not applicable
rejuvenation of Shanghai. For four decades, Shanghai chafed as its wealth, output, and
talent flowed to Beijing and other parts of China for seemingly little in return. In order to
v
v
regain its former pre-eminence, Shanghai embarked in 1990 on a massive development
v
v
scheme of its Pudong district. The Pudong development scheme's huge scale made many
local and foreign observers sceptical of its chances for success. While the obstacles were
numerous, there have been enough countervailing factors, not the least of that is the
aggressive business style of the Shanghainese, to consider the Pudong experiment with
optimism and already a major success.
O n April 18, 1990, the Chinese State Council declared to the world that it wouid
open up Pudong to foreign inve~tment , '~~ and promised to apply many of the policies
175 Xiao Guan Gen, Chinese Communist Party Central Cornmittee arrd Stare Council Agree to accelerate Beijing, Chinese language edition. Development in Shanghai Pudong, People's Daily, (Apd 19, 1990), at 1. (overseas Chinese language ediîion).
RMRB: Renmin ribao (People 's Daily), the officiai newspaper of the Chinese Communist Party, published in Beijing, Chinese Ianguage edition.
previously available only to the £ive SEZs. Shortly thereafter, the Sharghai government
in tuni announced that certain additional preferential policies176 beyond those applicable
in the SEZs would also be adopted in ~ u d o n g " ~ The Shanghai municipal govemment
subsequently issued severai important regulations relating to development of Pudong.
These will be discussed in detail in the next chapter.
The Party. Central Cornmittee and State Council hailed this decision after
summing up the experience of the decade-long reform and enin in^.''^ In the opinion of
the writer, Pudong development is a milestone of the modernisation program started by
Deng Xiaoping. Deng Xaioping, in his Spnng Wind speeches in South China, 1992,
referred to the failure to include Shanghai as one of the centres for opening up to the
outside world, dong with the SEZs, as a mistake. He then urged the city to accelerate its
development to regain its former status as a major centre of finance, trade, and
rnanufacturing. Meanwhile he also encouraged Guangdong to catch up with the four East
Asian "Little Dragons" (South Korea, Hong Kong, Taiwan, and Singapore) within twenty
The Shanghai government has decided to develop Pudong in three stages. First, fiom 1992 to 1995, it-emphasised irnpraving the infrastructure. This includes construction of three bridges (the first of which, the Nanpu Bridge, has already been opened), a belt-way bypassing the city centre and a 50,000-line cornputer-controlled telephone system, as weii as gas and water works. Thomas B. Gold, "Can Pudong Deiiver?" China Business Review, (Novernber - December, I991), at 23; Bai Guo Liang, 'Troject That Goes Beyond the Century, People's Daily, (29 May 1990), at 3 (overseas Chinese Ianguage ed.). The second stage, 1996-2000 will be marked by a new international airport, in addition to vehicle tunnels, a subway, a railroad, and updated laws, regulations and policies, Id-, the final stage will extend for two or three decades into the next century and will focus on the continued modernization of the region. Id.
176 Pudong preferential policies are discusses in the next chapter.
in Bai Guo Liang, Pudong Uses Flexible and Various Methods t Absorb Foreign lnvesrment and Applies Some Polices That Are More Preferential Thun Those in the Special Economic Zones, (People's s Daily, 29 May 1990), at 1. (oversea Chinese language ed.); See Thomas B. GoId, "Can Pudong Deiiver?', China Business review, (Novcmber-Decernber 1991) at 23. Pudong New Area is to be divided into five sub- districts: (1) Lujiazui Fiance Trade Zone, (2) Jinqiao/Quingningsi Exporr Processing District, (3) Waigaoqiao Free Trade Zone, (4) Zhoujiadu/Liulu Industrial Zone, and (5) Beicaii'hangjiang Zone- Gold at 22-23.
17' Dong Guolang et al., Hua Shua Pudong, SangLian Bookstore, (1994). at 65. (in Chinese).
yexs. It has exerted and wiU continue to exert immense impact on both the existing
political institutions of the party-state in China and its economic development.
The Chinese govemment announced to the world the development and opening
up of Pudong, giving it the role of a "locomotive" in the development and opening up of
other urban centres dong the Yanaee River and decreeing that Shanghai build itself in
the shortest time possible into an international economic, finance and trade centre, thus
enabling the economy of the Yan-e Delta and the whole Yano@ze Valley to take a fresh
Lift-off- The development and opening up of Pudong has aven the city of Shanghai a
historïcal opportunity for development. After nine and Aalf years of development and
opening up, the economy of PDZ (PNA) has now got on the fast track.
Since the announcement of these various governmental developments, many
foreign businesspeople have visited PDZ (PNA), and nurnerous overseas investors have
already decided to invest there.17' By the end of 1996, over 4300 foreign capital
enterprises from over 60 countries had a total of US$124 billion invested in PDZ
(PNA).'~' Banks and financial instituhons have taken a conspicuous lead in investment
in PDZ (PNA).'~' During the first yea. of the application, branches of domestic and
foreign banks were approved by the Shanghai govemment in PDZ (PNA).'~' By the end
of 1997, 162 banks and financial institutions had opened branches in PDZ (PNA). '~~
179 However, it has been noted that foreign investment in Pudong up to end of 1991 had been reiatively minor, See Thomas B. Gold, "Can Pudong Deliver?" China Business review, (November-December 1991). at 28, and rnost of the individual projects have averaged around $1 million-
See Chen Shao Neng, et al. ed., Treatise Selection of Pudong Developrnenr, 11 (1996-1997), lS' ed., (Shanghai f idong New Area Yearbook Office, 1997), at v. (in Chinese).
181 See Xia Ru Ge, 'Finance Pioneei' in Pudong, People's Daily (1 October 1991). at 3, (overseas Chinese language ed.).
PD2 (PNA) has dso attracted. investment and business fiom neighbouring
provinces, reflecting a pattern experienced by the SEZS,'" over 4,500 Chinese enterprises
from other provinces have established themselves in PDZ (PNA).'~' An increase in
population has accompanied the economic expansion in the area. Approximately 20,OO
families moved fiom Puxi to Pudong. The condescending Shanghainese attitude that
"one bed in Puxi is better than one flat in PDZ (PNA)" is rapidly changing.lg6 Perhaps,
with an absence of any govenunentd restrictions on movement, PD2 (PNA) may become
as or more crowded than PUX~.'~'
Amazing changes have taken place in the appearance of this new urban area- As a
base for the development of Hi-Tech industry and an up-to- date rnanufacturing sector,
the PDZ (PNA) is now a new econornic growth point of Shanghai and the focus and
symbol of China's efforts at reform and opening up in the 1990's.
182 See Xia Ru Ge, "Pudong's First Year", People's Daily, (Aprii 23, 199 l), al 3, (Overseas Chinese Language edition),
Arnong foreign banks that have established branches in Pudong are Citibank and Bank o f Amenca fiom United States, The Royal Bank of Canada fkom Canada. Industriai Bank of japan Ltd., Sanwa Bank Ltd. And Bank of Tokyo from Japan, and Credit Lyonnais and Banque indosuez fiom France. Pudong on the March, CHINA TODAY, (January 1992), at 25.
Ig3 See Chen Shao Neng, et al. ed., supra note 180, at 15.
la4 See "hidong on the March", supra note 179, at 25, (reporting that every province and region of China has shown enthusiasm in investing in Pudong),
l8S See Shao Yu Dong & Bai Ge Liang, Pudong, A New Area Full of Hope, PE0PLE"S DAILY, (1 October 1991) at 3 (overseas Chinese language ed.); also see Norman P. Givant, ''Putthg Pudong in Perspective". China Business Review (November - December 1991) at 32, (reporting that the Shanghai govenunent in May 1991 approved the Provisional Measures of Shanghaj Municipality to Encourage Investment In Pudong by Domestic] Regions Outside [Shanghai] ). It is also reponed that "several provincial governrnents have announced plans to build their headquarters in Pudong, including the $28 million Jiangsu Mansion to be built by nearby Jiangsu province."
t 86 Guo Chang Zi, Pudong - The Bright Futrire of Shanghai, (People's Daily, 31 May 1990), at 2 (overseas Chinese language ed.). Most Shanghai residents have traditionally lived in Pwri in extremely crowded conditions. Pudong, on the other hand, possesses relatively more room in which to live.
B. Characteristics of Pudona Development Zone (Pudorra New Area)
Pudong, backed up by Shanghai's economic strerga and the sociocultural
resources that have been accumulated over a long period of t h e , sliares with the city its
unique advantages in geographical position, traffic facilities, and industrial power.
Pudong would also benefit fiom its being given a pilot role in China's reform and
opening up. Having a sound and efficientiy fùnctioning administration, harmonious
social relationships and social environment, it is widely acclaimed as "the gateway to
China's econorny", "a golden key to the China market" and "the bridge Linking China to
the world e c ~ n o r n ~ . " ' ~ ~
The concept of "development zone" as it applies to PDZ (PNA) is related to and
derived fkom the concept of "special economic zone" (SEZ) which was forrndy
approved by the Chinese Communist Government in 1979 . '~~ The original version of
SE2 was called "Special Export Zone," to distinguish it from the "export processing
zone" which was rooted in capitalist countrïes or reg ion^.^" On May 15, 1980, the
special zone was officially named a "Special Economic Zone" in the official documents
of the Chinese govemment.lgl The purposes of establishing SEZs for introducing foreign
capital and advanced technology and equiprnent were announced in the official
la' Based on the expenence of the five SEZs, it appears that many people from other parcs of China wodd move into hidong as weii. See Nie Chuan Qing, Special Zones - A big PLagom for People to Show Their Capacities, (People's Daiiy, 5 May 1992), at L (overseas Chinese Ianguage ed.).
'" See Shao Yudong et d- (1998), Shanghai Basic Facrs: Pudong New Area, China International Press, at 8,
189 See Crane, George, T. (1990). The Political Econorny of China's Economic Zone. Armonk, N-Y,: M, E .S harpe.
190 See Zhong Jian, "Historical Observations and Contemporary Reflections of the Development of China's Specid Econornic Zones," Journal of Central China Nonnul University, vol. 5, (1993), at 46-52.
documents of the Chinese g o v e ~ e n t . 1 g 2 - However, there is no official definition of
SEZS .lg3
Tt seems to the writer that the key word in SEZs is the first word "SPECIAL," by
which it is meant that SEZs are designated areas whose economic system and poiicies are
different fiom those of the rest of China. Indeed, the favourable policies instituted by the
Chinese Cornrnunist Central Governrnent have a set of characteristics that set the SEZs
apart £rom other areas of For instance, preferentid tax regimes are available to
foreign capital enterprises, e-g., the enterprise income tax rate c m be as low as fifeen
percent195 -- with exemptions from customs duty and consolidated industrial and
commercial taxes.lg6 Foreign capital enterprises in the SEZs are given a great deal of
autonomy in the operation and management of their businesses, without suffering much
interference from the centrai and local government.197 They generally enjoy expedited
govemment approval proceedings that are much simpler than those existing elsewhere in
China. lg8
19 L Id-, note 8.
Ig2 See Xu Dixin, China's Special Economic Zanes, Beijing Review, 50 (December 14, 198 l), as 64-83.
193 See Bin Xue Sang, Pudong: Another Special Economic ZoBe in China? -- An Analysis of the Special Regularians and policy for Shanghai Pudong New Area ' Northwestern Journal of International Law & Business (14), 1993, at 130-159.
195 See Chen, Zhao Bin, China Special Economic Zones, (1986), (In Chinese Language Ediaon).
Ig5 In the rest of China, manufaciring foreign capital enterprises should pay thirry percent enterprise income tax plus an additionai three percent local tax. See Income T m h v of the People's Republic of China Conceming Enterprises with Foreign Capital and Foreign Enterprises, adopted at the 4th Session of the 7th National People's Congress on April9, 1 99 1. People's Daily, Apr. 17, 199 1, at 3 (overseas Chinese language edition).
196 See Chen, Zhao Bin,(l986), supra note 194.
19' Niskitaieno, China's Special Economic Zones: Experimental Economic Units for Economic Reform. (32). Intl & Comp. L.Q. at 175-176 (1983).
C. The Dïfference Between Pudong Development Zone (Pudona New Area) And Special Economic Zones o f China
Overall responsibility for developrnent of PDZ (PNA) rests with a leading group
headed by the mayor of Shanghai. The Pudong Development Office is responsible for
implementing the plan, while the Shanghai Foreign Tnvestment Commission (FIC)
handles foreign investment in the area.
These planners view Pudong's development as integral to the econornic and social
development of Shanghai. The development scheme, accordingly, is comprehensive in
scope. This is perhaps the greatest distinguishing feature between PDZ (PNA) and the
Special Econornic Zones (SEZs).
However, PDZ (PNA) is also different kom other SEZs in China in other ways.
As noted earlier, soon after adopting the "welcome policy" for the investment, the
Chinese governent sought to attract foreign investment by establishing special areas
where favourable conditions were created for the development of foreign investment. A
special set of laws and regulations apply to the four SEZs, and 14 coastal open cities,
Hainan Province and various cities or provinces designated as specid development
areas.''' For instance, in August 1980, the four SEZs of Shenzhen, Zhuhai, Shandou (in
Guangdong Province), and Xiamen (in Fujian Province) were created. In 1981, Hainan
Island was allowed to attract foreip invesûnent. In A p d 1988, the Seventh National
People's Congress adopted the resolution of designating Hainan Island as China's fifth
SEZ, which in fact is 100 times Iarger than the combined areas of the afore-mentioned
lg8 See Chen, Zhao Bin, (I986), supra note 194.
Ig9 For a collection of such Iaws and reguiations, see CCH, "Special Zones & Cihes" vol. 1.2.
66
four economic zones?'' ln order to protect foreign investment, some of the provisions in
these laws and replations concerning the protection of foreign investment are examuied
below.
Article 1 of the Guangdong SEZs ~ e ~ u l a t i o n s ~ ~ ~ provides:
"Certain areas are delineated from the three cities of Shenzhen, Zhuhai and Shantou in Guangdong Province to form special economic zones fiereafter referred to as special zones) in order to develop external economic CO-operation and technical exchanges and promote the socialist modernization program. In the special zones, foreign citizens, overseas Chinese, compatriots in Hong Kong and Macao and their companies and enterprises (hereafter referred to as investors) are encouraged to open factories or set up enterprises and other establishments with their own investment or undertake joint ventures with Chinese investment, and their assets, due rofits and other legitimate rights and interests are legally 4 protected." O2 [emphasis added]
In the wake of the creation of SEZs are 14 cities in the coastd area listed as open
~ i t i e s . ~ ' ~ There were a number of "development zones" established in these open
~ i t i e s . ~ ~ ~ As the absence of the word "Special" has suggested, the legal and political
systems of the coastal open cities are not as favourable to foreign investors as those of the
SEZs, although they offer benefits that are not available elsewhere in China. Shanghai is
Hannan Island is a 34,189 square kilornetre zone located south of mainland China The area of the other four SEZs totalled 338.38 square kiiometres when they were first established (iater the total area expanded), see Zhong Jian, supra note 190, at 346 of note 8.
20' "Regulations of the PRC on Special Economic Zones in Guangdong Province", approved 26 August 1980 at the lsh Session of the 5" NPC Standing Cornmittee. CCH, "Special Zones Br Cities" vol.1, paa70-800.
202 Id.
203 See supra note 7.
By 1994, there are over 100 "development zones" at the narional level and 400 "development zones" at the provincial level. See Chen Yu. Yuan Pin & Zhang Hong, (1994): The Creation of Development Zones: Transition fiam Dependence on PreférenM Policies to That on Market Sysrem. In The Economy in the Special Economic Zones and Development Zones (2), 1994, at 4345.
one of the 14 coastal open cities that enjoys a special regulatory regïme, though not to the
extent of that in the SEZs-
In contrat to the fact that Shanghai lagged behind the overall refonns in the
southern provinces, Shanghai took on an initial role in China's banking and financial
reform in the mid-1980s. The city set up an interbank lending market in 1986 and
inaugurated a foreign exchange swapping market in 1988. PDZ (PNA) policy brought
Shanghai the authority to implement several special policies it had long hoped for, such
as the authority to issue stocks to overseas investors: to set up stock, bond, currency, and
commodities markets; and to d o w branches of foreign banks to open in the Shanghai
Somehow Pudong has not been designated as an SEZ, but is referred tu only as
Pudong Development Zone or Pudong New Area. However, PD2 is for aLl intents anci
purposes not only a de facto SEZ, but also in many aspects it is more "special" than the
five officially designated SEZs. This is because not only are a l l the preferential policies
that the Central Government instituted for the five SEZs likewise applicabIe to PDZ
(PNA), but the latter also enjoys certain preferential treatment that the five SEZs do not
have. For exarnple, PDZ (PNA) incorporates the same fifteen percent tax rate as the
s ~ ~ s . 2 ' ~ Moreover, rnanufacturing enterprises in PDZ (PNA) which have been in
operation for over ten years may be exempt from enterprise income tax in the first and the
second years after the enterprise has started to redise profits, and are also entitled to a
fifty percent reduction fiom the third through the fifth profitable years.206 In addicion,
205 See Reguiarions of the Shanghai Municipality for the Encouragement of Foreign Invesment in the Pudong New Area, promulgated by Shanghai Municipal Government on Sept 10, 1990, article 5.
foreign capital enterprises in PDZ (PNA) "will be completely exempt from local income
tax until the end of this c e n t ~ y . " ~ ~ '
As well as especialiy favourable taxation exemptions, PDZ (FWA) has other
privileges that the other SEZs do not have. In PDZ (PNA), foreign businesses are
allowed to operate third industry enterprises such as supermarkets, department stores,
etc.; foreign capital has permission to open such financial institutions as banks, financial
corporations, and insurance companies within the boundary of Shanghai; Shanghai is
perrnitted to establish a securit. market, and its stock exchange agency c m examine,
approve and issue RMB stocks and B-type stocks for PDZ (PNA); in ~ a i ~ a o ~ i a o ~ ~ *
within PDZ (PNA) is established a tax-haven zone which has been regarded as "open to
the maximum degree throughout ~ h u i a . " ~ ~ ~
Pudong is simcmtly different fiom the SEZs and ETDZS in the free-trade
zone in Waigaoquao. Firms located in this zone will be allowed to import and export
goods duty free for use in the zone. Other areas of China have put in place bonded
warehouses to aid with export processing, but PDZ (PNA) was the first to establish a
free-trade zone.210 Foreign companies, generally prevented from developing trading
206 See Regulations of the Shanghai Municipaliry for the Encouragement of Foreign Invesrmenr in the Pudong New Area, promulgated by Shanghai Municipal Govermnent on Sept. 10, 1990, article 5; also see Foreign Enreprises Tax Law, article 8.
'O7 See Regulntiom of the Shanghai MunicipaIity for the Encouragement of Foreign lnvesmenr h rhe Pudong New Area, article 12.
'O8 Waigaoqiao. is located in Pudong. Shanghai Waigaoqiao Bonded Free Tade Zone (Waigaoqiao). formed by the Shanghai government in 1990.
Located at the mouth of the Yangtze River and in the centre of China's thnving coastal region, Waigaoqiao is weii suited to its role as a trading hub. Three types of investment dominate Waiaoqiao's landscape-trading, exporting, and warehousing. The special policies of Waigaoqiao are discussed in the chapter four.
209 See Dang Guoliang, Hua Shuo Pudong (in Chinese), Sanlian Bookstore, (1994), at 69.
companies in China, are ailowed to engage in entire-pot trade in Waigaoquao. Expoa
processing companies in the zone usuaiiy handle their own imports and exports.
However, it is diffcult to determine whether the zone will generate sufficient entrepot
trade to attract foreign investors to establish full-f3edged trading companies.
To corne to terms with the specid requiremeuts of a fkee-trade zone (which for tax
and custorns purposes must be considered separate frorn contiguous areas), authorities
have made four regulations dealing exclusively with Waigaoquao. These reguIations
contain measures detailing customs and foreign exchange. An increasing amount of
foreign companies are using the Shanghai Waigaoqiao Bonded Free Trade Zone to avoid
these restrictions. Waigaoqiao, one of China's 15 bonded zones, is designed to increase
exports and reduce regulatory pressure on foreign businesses by providing a number of
incentives, and exemptions from the withholding tax on technology transfers including
the duty and value-added tax (VAT). Because it is outside PRC customs jurisdictiou,
Waigaoqiao allows for opportunities in export processing, bonded warehousing, and
trading.21 Arnong the many advantages Waigaoqiao provides foreign-invested
enterprises (FIEs) is the ability to engage in multiple business functions under one entity,
and to make a de facto distribution of goods. FIEs in Waigaoqiao dso gain fiom
simplified customs procedures, liberal foreign exchange privileges, and the lack of export
quotas and bond requirements on imports.
Waigaoqiao's tax incentives are equally as attractive. In most cases, non-
manufactunng cornpanies that set up in Waigaoqiao and that have business terms of at
210 See Norman P. Givant "Pritting Pudong in Perspective: Pudong's investment Incentives are on Par with Those Offered by the SEZs", The China Business Review, 18:6 (November - December 1991) at 32.
least 10 years are supposed to pay a base income tax rate of 15 percent rather than the 33
percent rate of foreign entities outside the zone. Since Waigaoqiao is located within the
PD2 (PNA), FIEs in the zone also are exempt untiI the year 2000 from Shanghai's 3
percent local income tax. Moreover, FIEs in Waigaoqiao can defer value-added taxes
(VAT) and are exempt fiom VAT for intra-zone
Foreign-invested enterprises (FIES) in the zone are able to open both local-
cwency and foreign-currency accounts. Since these accounts do not need to be in
bdance, foreign capital or eamings do not have to be converted into renminbi (RMB);
domestic sales can be settIed in either RMB or foreign currency; and foreign currency
accounts can be undertaken at a Waigaoqiao branch of any bank, whether it is domestic
or foreign-owned. Payment or coUechon in foreign currency does not demand approval
or verification, and any foreign bank in Waigaoqiao can convert RMB. If a Company
without a registered presence in China undertakes a technology transfer with a firm in the
zone, Waigaoqiao authorities may be able to ,orant complete exemptions, or in part, from
withholding taxes. Royalties, interest, rents, and other income are subject to a maximum
withholding tax of 10 percent for foreign companies without a registered presence in
China. The maximum for entities outside Waigaoqiao is 20 percent. For entities from
countries that have a tax treaty with China, the rate will be reduced under the guidelines
of the treaty. For US companies, the maximum rate is 10 percent.213
-- - -- -
211 See Francis Bassolino, 'Why Waigaoqiao? Shanghai Waigaoqiao Bonded Free Trade Zone." The China Business Review, Section: NoS. Vo1.25, ( 1 September 1998), at 18.
212 Id.
213 Id.
The primary objective of the central Chinese govemment in its decision to
develop PDZ (PNA) is to encourage the traditional role of Shanghai as the powerhouse of
the country's economy. Expenence in developing SEZs in the 80s has demonstrated that
economic development in the SEZs should promote the economy of the adjacent areas.
The two provinces of Guangdong and Fujian have gained from the SEZs and stood as
leaders of economic reform and economic development in China. In the T9807s, the rate
of reform of Shanghai's foreign trade structure was siDonificantly slower than of
Guangdong. Among other things, the preferential policies provided by the central
government for Guangdong were extremely important factors in its growth.
From a low base in the 2980s, exports from the PDZ @NA) came to US$1.8
billion, one-fifth of Shanghai's total. With the implementation of special policies,
Pudong's exports grew quickly. Foreign trade in îhe Waigaoqiao free trade zone, for
example, grew very fast in the first eight rnonths of 1995, amounting to US$351 million,
which was thïrteen tirnes higher than during the same period the previous year.214 It
should be stated, however, that exports from PDZ (PNA) included products that
originated in other regions of Shanghai and, to a lesser degree, in other provinces. This
occurred especially after 1993, when the establishment of foreign trade corporations
(FTCs) in PDZ @NA) was slowed.
"4 RMRB (People's Daiiy), (15 April 1995), at 3. (overseas Chinese language edition).
72
INVESTiMENT POLICES AND RELATED REGUALTIONS IN PUDONG DEVELOPMENT ZONE (PUDONG NEW AREA)
The Pudong Development Zone (Pudong New Area) as discussed above, is not
just another SEZ in China. It is better organized, primarily as a result of the experience
in other SEZs, although some problems r e r n a i ~ ~ ~ ~ ~ The preferential policies in PDZ
(PNA) parallel many of the regulations already established in the SEZs. These
preferential treatments include iiberal foreign capital reception in areas such as red
estate, taxation and operations, which are not available in other regions of China. These
policies extended in the SEZs are not always identical in their scope or intended
objectives. First of a l l are the policies of the central governent of China regarding the
special functions of the PD2 (PNA). Afterwards, the Shanghai municipal government
has subsequently issued several important regulations relating to developrnent of Pudong.
These include The Regulations of the Shanghai Municipality for the Encouragement of
Foreign Investment in the PDZ (PNA);~'~ Provisions of Land Administration in Shanghai
- - -
'15 It will be discussed later.
2'6 It was promulgated by Shanghai Municipal Govemment on September 10, 1990. [hereafter Pudong Regulations].
PDZ (PNA);~' Examination and Approval Measures of Enterprises with Foreign Capital
in Shanghai PDZ (PNA).~''
When a foreign investor makes the decision to iDvest in PDZ (PNA), other
decisions conceming the format of such investrnents, such as whether to form an equity-
based or contractual joint venture, or to fashion a fully foreign-owned enterprise, wiIl
depend on the investor's particular objectives?lg Regardless of the corporate form the
investor selects, the specid policies and regdations designed for the PDZ (PNA) will be
applicable. The Werent type of recom~tion that PDZ (PNA) has so far received may
lead to distinctive impacts on the development of PD2 (PNA). Investors recognize that
Shanghai and PDZ (PNA) are unique fkorn the rest of China for specialized projects.
Efowever, they need to fully understand the special characteristics of Pudong's regulatory
reme and the nature and score of its preferential policies.
1. Preferential Policies in Pudong Development Zone (Pudong New Area)
A. Policies o f the Central Government o f China Reaurding the Special Functions o f the Pudong Development Zone (Pudona New Area)
In China, an increasing nurnber of pnvate enterprises have b e p n freely operatuig
in specific areas of the country as a result of a modern economic reform process,220
'17 It was prornulgated by Shanghai Government on September 10, 1990 mereafter Pugdong Land Reguiations].
''13 It was ratified by the Shanghai government o n September 6. 1990 [hereafter Pudong Approval Reguiations].
219 Preferential treatment us the key factor in attracting foreign investrnent, See Chen Zhao Bin, China Special Economic a n e s (12 1986 in Chinese), at 28.
aithough the majonty of enterprises are still state-owned? Chinese law provides a well-
defined set of categories as foreign investment vehîcles. As it was discussed earlier, there
axe three types of legai entity to be available to foreign enterprises for investing in
china? (1) the Chinese-foreign equity joint venture, (2) the Chinese-foreign
contxactual joint venture, and (3) the wholly foreign-owned enterprise.=
Three to four Sino-Foreign foreign-trade join ventures in export/import trade are
set up in the PDZ (PNA) on an experimental basis. The overseas partners can be chosen
from among countries and regions that are representative in the trade. The Shanghai
Municipal Governrnent first m u t propose a plan to be examined and approved by
See Chen Zhao Bk, China Special Economic Zones 12, (1986) (in Chinese Edition). Shennien alone by 1987 had more than 5,000 foreign capital enterprises. Between 1979 and October of 1992, Shenzhen signed approximately 9,8000 contracts with foreign £kms representing a totai investment cornmitment of $9.15 billion, of which over $4-3 billion has already been actuaiiy invested. See ShenSren Has More Than Five Thousand Foreign Capital Enterprises, (The China Press, January 8, 1993) at 10. (in Chinese); Also see Owen D- Nee, China's Special Economic &nes and Fourteen Coastal Cities, Commercial, Business and Trade Iaws, People's Republic of China, Booklet 10 (1987). at 1-3. These enterprises, together with private entrepreneurs and collective factories (often nui by an individual entrepreneur who uses the name of a village or socid organization to avoid political problems), are considered by economists as China's private sector. Ln 1991, state-owned enterprises were responsible for onIy 52.8 percent of the country's indusmal output, compared to 54.5 percent in 1990 and weU over 80 percent a decade ago. See James McGregor, Reality 1s Ouerraking Ideology in China, (Wail Street J., March 2, 1992) at Ag.
in Shenzhen, Shantou, Zhuhai and Ziamen, 51 percent of the total indusmai output value, and in Hainan 23.8 percent, is from foreign capital enterprises. Zhang, Yi, The Ten Years' Grear Changes of China's Special Economic Zones, (People's Daily, August 27, 1990)' at 1. (in Chinese language ed.). In 1991, the output of state industries grew 8 percent; coIIecuves' output grew 18 percent ; private entrepreneurs' output grew 24 percent ; and foreign capital enterprises' output grew 56 percent. McGregor, supra this note.
The Provisional Regulations of the People's Republic of China Goveming Private Enterprises was dso prornulgated by the State Council on June 25, 1988. Nee, supra this note, Booklet 2 (1991), at 239.
"' See XlANFA [Constitution], art 7 (P.R.C.).
'22 However, a foreign capital enterprise in Guangdong province has been reorganized as a stock corporation, The First China-Foreign joint Venture in Guangdong Reorganized as a Stock Company, (The China Press, January 9, 1993), at 4 ( in Chinese language ed.); and the Chinese govemrnent encourages the establishment of high-tech stock companies. China Widens Policy and Enacrs Important Regulations, (The China Press, December 8, 1992). at 2 (in Chinese language ed.).
223 The governing law is the l aw of the People's Republic of China on Enteprises Operated Exclusively with Foreign Invesrmenr. adopted at the 4& session of the 6" NPC on April 12, 1986, see supra note 44, at 188.
MOFTEC to assess the business scope and trade value of the companies, and then submit
it to the State Council for final approval-
Besides, business operations of a bonded nature are also allowed in the
Waigaoqiao Free Trade Zone excluding retail trade, while service trade will be gradually
expanded. Once the Central Govenunent gants approval for overseas-funded banks to
engage in RMB business locally, the PDZ (PNA) can be perrnitted to be the first to make
experiments in such business, and individual banks registered in PDZ (PNA) will be
given priority in this.
Finally, subject to approval by the People's Bank of China, overseas fmancial
institutions registered in the Lujiazui Finance & Trade zone2" may run branch offices in
Puxi (west of the Huangpu) and the Waigaoquao Free Trade Zone and a few more
overseas wholly-owned and joint-venture insurance companies may be set up in the PDZ
(PNA)-
B. One-stop Service in the Examination-and-Approval Process o f Investment Proiecfs in the Pudong Developrnent Zone (Pudong New Area)
In the past China gave to Western couniries an impression of being very slow to
change. However, the open policy the Chinese govenunent has adopted is a strategic and
decisive policy, which appears unlikely to change. Many foreign investors acknowledge
224 This are& directly across the river f3om the Bund, is earmarked as a center for finance, trade, and commerce. Ideaiiy, it will become an extension of the Bund, Shanghai 's histoncal business center. Foreigners will be pennitted to purchase and transfer land-use rights and engage in retail sales this area Office buildings, apartment houses, and exhibition facilities will be Iocated in the nearby Huamu Dismct.
it as wise and practical- Especially in PD2 (PNA), one-step senrice in the examination
and approval process of an investment project is a si,onificant step forward,
One-stop service has been launched in the PDZ (PNA) to simpl* the procedures
in the examination-and-approval process of investment projects. All relevant
administrative departments and services of the goveniment that have to do examination
and approval work for investment projects are centred in one office to provide investors
with information and advice on government policy and on procedures of work and to
process applications for examination and approval of projects.
At the sarne tirne, for overseas-investment projects of under US30 million in no-
restrictive areas for which the local governrnent has the authority to grant approval, the
government promises that for all applications the examination-and-approvd procedures
will be completed in not more than ten working days on condition that the govenunent's
polic y requirements for indu strial investment projects, city planning control and
environmental protection are met. With the tirne limit, procedures have been much
sirnplified and work efficiency raised.
C. Tax Incentives to Overseas Znvestment
Before setîing up a business enterprise, one of the most important and cmcial
factors for an investor or businessperson to consider is taxation.
However, in order to draw foreign capital, expand economic CO-operation and
technical exchange with foreign countries and speed up the exploitation of offshore
petroleum, resources, machinery and equipment, spare parts and other materials imported
for direct use in prospecting for and exploiting such resources and parts, components, and
raw and processed materials imported for manufacturing such machinery and equipment,
are exempted fkom customs duties. Foreign capital manufacniring enterprises generaiiy
pay a thuty percent enterprise income tax plus an additional three percent capital tax?
However, if such an enterprise is located in one of the coastal cities, it pays enterprise
income tax at a rate of twenty-four percent.u6 In a S E , it pays only fifteen percent.227
Tax incentives to overseas investment in PDZ (PNA).
PDZ (PNA) incorporates the same fifieen percent tax rate of the SEZs, 'Wve years
of tax exemption and five years of tax reduction by half."u8 Foreign investors engaged
in the construction of harbor, airport, railway, highway, power station and other energy or
transportation projects shouid pay enterprise income tax at the annual rate of 15 percent.
For enterprises with a contract period of over 15 years, exemption of enterprise income
tax for five consecutive years starting fiom the first profit-making year shall be granted
and a 50 percent tax reduction shall be ailowed from the sixth to the tenth year.
See Incorne Tor i u w of People's Republic of China concerning Enterprises with Foreign Capital and Foreign Enteprises, adopted at the 4' Session of the 7m NPC on April 9, 1991. and effective on July 1, 1991, art 5, art 5 bereinafter Foreign Enterprises Tax Law], reprinted in People's Daily, Apt3 17, 1991 at 3 (overseas Chinese language ed.). Article 5: "A foreign enterprise scheduled to operate for a period of 10 years or more in farrning, foresrry, animal husbandry or other low profit occupations may, upon approval by the tax authorities of an application filed by the enterprise, be exempted from incorne tax in the first profit-making year and aiiowed a 50 9% reduction in the second and third years-" 'With the approval of the Ministry of Finance, a 15-30 % reduction in income tax may be allowed for a penod of 10 years foiiowing the expiration of the term for exemptions and reductions specified in the preceding paragaph."
*' Id.
228 Pudong Regulations, See Regulations of the Shanghai Municipali@ for the Encouragement of Foreign Investment in the Pudong new Area. Prornulgated by Shanghai municipal Government on September IO, 1990 Fereinafier Pudong Regulations] art. 5, reprinted in Guide tu Investment in Shanghai, at 1 15.
The PDZ (PNA) tax arrangement has been sumrnarized as "two years of tax
exemption and three years of tax reduction by haIf. 7,229 Overseas investors engaged in
manufacturing (including overseas-funded enterprises engaged in infrastructure
construction over large tracts of land in addition to their manufactured projects) pay
enterprise income tax at the annual rate of 15 percent. For those whose contract period is
more than 10 years, exemption of income tax for two consecutive years starting from the
first profit-making year shall be ganted, and a 50 percent tax reduction fiom the thïrd to
the fifth year. Overseas-invested enterprises engaging in hi-tech activities may pay
enterprise income tax at the reduced rate of 10 percent for two years after the expiration
of the above-mentioned tax-break period. This policy also applies to overseas investors
who have investrnent projects and, at the sarne time, engage in infrastructure
development on large tracts of land.
"One year of tax exemption and two years of tax reduction by half" applies for
overseas wholly-owned and joint-venture banks, financial companies and other financial
institutions. If the amount of investment exceeds US$10 million and the contract period
exceeds 10 years, the annual rate of enterprise income tax is set at 15 percent. After the
expiration of the tax break period given to export-oriented enterprises in accordance with
governent policies, the enterprises pay enterprise income tax at the reduced rate of 10
percent on condition that their expoas account for more than 70 percent of their total
output value of that year. Overseas businesses without any operations within the territory
of China pay enterprise income tax at the reduced rate of 10 percent on dividends,
interests, rents, franchise fees and other earnings generated in the PDZ @NA) unless they
229 Id.
are eligible for a tax exemption according to relevant laws and policies. Those that
provide capital and /or equipment on favourable terms or transfer-advanced technology
may enjoy further preferentiai tax treatment subject to approvaI by the govemment.
Equipment for production and management, building materials, fuel for
production, a reasonable number of vehicles needed for production, means of
communication, office appliances and spare parts for the machinery and vehicles
rnentioned imported by foreign-invested enterprises in the area for their own use are
exempt from import duty as weil as £Yom consolidated industrial and commercial ta^?^
Raw materials, spare parts, components, packing materiais and ingredients for food and
beverage imported by fore@-invested enterprises in the areas to produce goods for
export are exempt from both import duty and consolidated industrial and commercial tax.
A reasonable quantity of building materials, office appliances, equipment for
management imported by administration organizations and non-production institutions in
the area for their own use are exempt from both import duty and consolidated industrial
and commercial tax. Products exported by foreign-invested enterprises in the area,
excluding crude oil, Snished oïl and other products prescribed by state, are exempt f?om
export duty as well as fkom consoLidated industrial and commercial tax. Machinery,
equipment and other rnaterials irnported for infrastructural construction in the area are
exempt from import duty.
"O In accordance with the provisions of the new tax rules effected on J a n u q 1, 1994, the value-added tax, consumption tax and business tax has substituted the expired conventional consolidated industrial and commercial tax, The export goods manufactured by a foreign-invested enterprise will be exempt from the VAT. The levied consumption goods for export will be exempt from the consumption tax except for the goods specially stipulated,
AU the enterprises are exempt fkom local income tax before the year 2000. A
foreign-invested enterprise, which builds or purchases household wares for its own use or
for production and management use in the PDZ (F'NA), are exempt fiom house property
tax for fwe years, starting frorn the date when the transaction is done. Overseas partners
in Sino-overseas joint ventures are exempted fiom income tax for that part of their profits
gained fiom the joint venture (JV) that they intend to remit abroad. Overseas investors
that have reinvested their share of the profits made in the same enterprise or in another
overseas-funded enterprise or in a new overseas-invested project in China with an
operating period of more than five years may apply for a refund of the income tax which
they have paid and, when approved by the tax authority, may get a refund amounting to
40% of the income tax paid for the reinvested part. If the reinvestment is made in a new
export-onented or hi-tech enterprise or in the expansion of an existing one with an
operating period of more than five years, the overseas investors concerned may apply for
a fidl refund of the enterprise income tax which they have paid for the reinvested surn.
D. The Pre ference of the Income Ta. of Foreign-Znvested Enterprises Zn Pudona Development Zone (Pudona New Area)
Based on the provisions on taxation promulgated by the Chinese government, the
Shanghai Municipal government has drawn up for reference the following table of
regulations on tax rate and exemption, as well as reduction of enterprise income tax of
foreign-invested enterprises in the Shanghai PDZ (PNA).
(1) Non-production Enterprises (see note
(2) Production enterprises (see note No.1)
8 1
Enterprise Incorne
Tax
Local income tax
Foreign investors who reinvest their share of profit
Tax rate 0%
Period &
scope of tax
reduction &
exemption
Tax rate %
Reduction & exemption
Refund about enterprise income tax
(see not no.2)
(3) advanced hi-tech
enterprises 15%
With a period of operation over 10 years
shall be exempt from income tax in
the f is t 2 profit-making
years and allowed a
reduction for next 6 years, a 7.5 96 income tax fiom the
With a period of operation over 10 years shall be exempt fiom income tax in the first 2 profit-making years and allowed a 50 % reduction for next 3 years
Shall be exempt fiom local income tax before 2000
--
~ e i n v e s t in their enterprises for a business penod no Iess than 5 years shall be refûnded 40 % of the enterprise on the reinvested amount (not including local income taxi
With a business period over 10 years shall be exempt fiom income tax in the f is t 2 profit making years and allowed a 50 % reduction for next 3
(4) Export-onented enterprises
years and shall pay at a reduced rate of 10 % when their annual value of export goods amounts to more than 70 % as the penod of enterprise income tax reduction
(5) Enterprises engaged in energy & transport projects
With a period of operation over 15 years shall be exempt fiom enterprise income tax in the first 5 profit making years
and a 50% reduction for another 5 years
1 income tax
Foreign + inves tors who reinves t their share of profit
-
their enterprises for a business period no less than 5 years shall be refimded 100% of the enterprise income tax paid on the reinvested amount (fkom 1986 and afterwards) (no t including local income tax)
Sarne as (1)
third to fifth years and a 10
% form the sixth to eighth
years
3%
Same as (1) Reinvest in
Source: The News Office of the People's Governrnent of Shanghai, The Counsel
of Shanghai foreign investment 231
expires
3%
Same as (1)
=' (1) Foreign capitai banks. Foreign banks Shanghai branches, Sino-foreip invested banks and hancial companies in the midong New Area whose foreign capital or whose fund in circulation from the General Corporation exceeds US$ 10 million with a business penod over 10 years shall be Ievied at a reduced rate of 15 % of the their enterprise income tax and shail be exempt from their enterprise income tax in the first profit making year and s h d enjoy a 50 % reduction in the next 2 years. (2) In this table the refund tax rate of the reinvestment from the share of profit can be applied to reinvestment in their own enterprises. Foreign investors who reinvest their shares of profit in any other foreign-invested enterprises s h d get a 40 % refund of the enterprise income tax paid on the reinvested amount except that those who reinvest their shares of profit in advanced hi-tech enterprises and export enterprises can get 100% refund. (3) Foreign investors who get interest form theu investment in foreign-funded enterprises in the Pudong New Area and who get extra incorne from rent and kom the utility of speciaI rights shall pay income tax in accordance with relevant regulations. (4) Those foreign-invested enterprises engaged in infiastructural conshuction on tracts of land in the Pudong New Area can be treated as production enterprises once their appIications are approved.
3%
Same as (1)
E. The ReauCafions in the Pudona Develo~ment Zone (Pudona New Area ) Concerning Approval of Foreign Invesfed Enterprises
The Shanghai governrnent appears to extend itself to the limits of its authority in
order to b ~ g in foreign investment and technology. Many foreign investors have not
been cornfortable with the governent approval process necessary for investment in
TO alleviate such concerns, the Shanghai govemment has adopted regdations
regarding govenurienta1 approval to M e r improve the business environment and
promote work e f f i c i e n ~ ~ ? ~ This effort on the part of Shanghai represents a challenge to
the existing approval system in place in the rest of China.
The PD2 (PNA) Approvai Regulations establish a relatively simple govemmental
approval procedure, provided that foreign capital enterprises "meet the requirements of
the overd planning and invesmient direction of PDZ ( P N A ) . " ~ Fistly, any project
with a total investment of between US$ 10 million and US$ 30 million and any project
invested in the Lujiazui Fiancial & Trade Zone, Joinqiao Expoa Processing 2oneU5 and
any other municipal level key development zone are exarnined and approved by the
Shanghai Foreign Investment Commission (FIC). Projects engaged in energy and raw
232 See Norman P. Givant, "Pudong in Perspective," China Business Review, (November-December 199 1), at 32.
233 see "Examination and Approval Measures of Enterprises with Foreign Capital in Shanghai Pudong New Area", ratified by the Shanghai govenunent on September 16, 1990, (hereinafter Pudong Approvai Regulations); Preamble, Guide To Invesment In Shanghai, 1, (1991), at 135.
234 Pudong Approval Re,oulations, supra note 206, art 1.
235 Situated further north dong the Huangqu River, this zone is designated for hi&-technology, export- onented, non-polluting indusmes. Such industries include elecû.onics, computer hardware and software (a local Silicon Vdey is on the drawing board), and textiies.
matends that require balance, allocation quota or permission for management fiom the
state shall be approved and registered by the authontative department.
Second, any foreign investrnent project with a total investment under US30
million in the PDZ (PNA) Waigaoqiao Free Trade Zone is approved by the Waigaoqiao
Free Trade Zone Administrative Committee and registered by FICS, while those with a
total investment of over US$ 30 million, have to be sent to and approved by the State
Planning Commission through FICS and the Shanghai Planning Commission upon the
approval of the Waigaoqiao Administrative Committee.
Thirdly, any foreign investment project with a total investment of under US$ 10
million is examined and approved by the departments for approving foreign investment
projects in districts, countries or bureaus.
Fourthly, any production project of which the totai investment exceeds US$ 30
million and any non-production project which requires the approval of the competent
department of the State Council is examined and approved by it upon the approval of the
foreign investment committee and the department concemed. The procedures for
approval are: submitting the project proposal; submitting the feasibility snidy report
together with the contract and articles of association; applying for the certificate of
approval; and applying for the business License-
The Chinese investors of both Sino-foreign joint ventures and Sino-foreign
cooperative enterprises are responsible for submitting all documents needed for approval.
Foreign-funded enterprises must entrust an advisory agent with this work.
F. PreferentÎd Policies of a Special Econornic Zone In Pudona Development Zone (Pudona New Areal
Chinese-capital enterprises in the PDZ (PNA) also enjoy the preferential policies
of a special econornic zone regarding enterprise income tax, channels for export, scales of
investment, credit and the keeping of foreign currencies. For instance, it is clearly stated
in Temporary Regdations of the Shanghai MunicipaLity for Encouragement of other
Provincial & Municipal Investrnent in the PDZ (PNA) that the incorne tax of the
enterprises invested by other provinces and cities in the area may be Ievied at a reduced
rate of 15 %.
Chinese-capital enterprises also c m be allowed to retain a higher proportion of
foreign currency and may have both their registered bank draft numbers and quota
numbers. This enabies them to increase the retention of foreign exchange but &es them
autonomy in using it. In this regard, Shanghai Municipal Administration Bureau of
Foreign Exchanges has drawn up methods for the operation of preferential policies.
Another preferential policy is that made of half-finished products or raw materials
purchased outside Pudong and processed in the New Area, the export products whose
value added is over 20 %, such as products rnanufactured from the PDZ (PNA), can be
exempt from export duty and also enjoy preferential policy of retaining foreign exchange.
The State Council of China has granted Shanghai MunicipaLity the right to
approve by itself large and medium sized state enterprises engaged in import and export
businesses in the area. In addition, businesspersons who invest in projects of involving
the introduction of fixed assets into the PDZ (PNA) can be exempted from the investor's
tax. Perhaps the greatest advantage is that overseas businessmen are allowed to invest in
the senrice industry in PD2 (PNA), among which are foreign capital banks, Shanghai
branches of foreign banks. Sino-foreign joint venture banks or financial organizations
whose investment exceeds US$ 10 &on within a business period of over 10 years are
taxed at a reduced rate of 15 9% and enjoy the preferential policy of one-year exemption
and two-year 50 9% reductions.
G. Ofher Preferen f ia2 Policies Offenkg in Pudong Development Zone (Pudona New Area)
Foreign investors are alIowed to open up service industries, such as department
stores and supermarkets in the PDZ (PNA). This breakthrough policy brings about other
preferential policies, such as the rights of retailing, importing sundry goods, purchasing
and exporting, foreip currency exchange and enjoying a reduction of enterprise incorne
tax.
Overseas businessrnen are ailowed to establish financial institutions in Shanghai,
such as banks, fînancial companies and insurance companies. At present, branches of
some foreign banks have been set up in some special economic zones, but their
businesses are quite Lunited. For instance, foreign banks in the Xiamen special zone
cannot operate businesses in Fujian province, and those in Shenzhen special zone cannot
operate businesses in Guangdong province. Yet those in Shanghai can operate businesses
both in PDZ (PNA) and in Puxi.
The Waigaoqiao Free Trade Zone, the most open in the nation, has been
established in the PDZ (PNA). This free trade zone is characterized by its exemption of
customs duties, exemption of licenses, permission on establishing international trade
organizations engaged in interpret made and on fidl retention of foreign currency eanied,
permission on the circulation of foreign currencies and on setting up a production
materids exchange center.
The limit on rights aven to Shanghai Municipality to approve any project in the
PDZ (PNA) has been lifted. The Shanghai Municipal govemment has permission to
approve the establishment of Chinese-foreign joint ventures and foreign capital trading
enterprises engaged in entrepot trade in the Waigaoqiao Free Trade Zone. Shanghai
Municipality has the right to approve on its own the irnport and export businesses of large
and znedium sized state enterprises in the area. The limit on the nght of Shanghai
Municipality to approve non-production projects has been lified. Shanghai Municipality
is allowed to approve any production projects within a total investment of 200 million
yuan in PDZ (PNA). It is also authonzed to approve and issue shares and bonds within
the quota set by the central governrnent. Shanghai can make its own decisions on the
procedures of approval projects. At the same t h e , Shanghai is dlowed to market shares
issued in any other place in China.
H. Banking and Finance
One of the major characteristics of the SEZs that distinguishes them fiom the resî
of China is that of the state's specid policies allowing the establishment of foreign capital
b a n k ~ . ~ ~ PDZ (PNA) enjoys the sarne special policy as the five SEZs, which permits the
establishment of such banks withïn its territoryu'
--
"6 See Shanghai Eases Irs Curbs On Foreign Bank' Branches, WALL ST. J., Sept. 11, 1990, ac A16; Regulations Goveming Foreign Banks and Joint Chinese-Foreign BankF in Special Economic Zones of the
In discussing this aspect of Pudong's development, it is important to keep in rnind
that foreign capital banks or financial institutions were not a weil-hown concept to the
Chinese people ten years ago during the early years of economic ref~rm?~ Although
there had been four foreign bank branches in Shanghai since 1949,~~' foreign capital
banks were not permitted to establish in the SEZs until 1 985.240
PDZ (PNA) ais0 permits the establishment of "foreign b a n k ~ , ' ' ~ ~ ' foreign bank
branches?"2 and joint Chinese and foreign capital banI~s.2~~ As in many other countries,
- - - - -- - . - -
People's Republic of China. prornulgated by the State Council on April 2, 1985 bereafter Banking Regulations of the SEZs]; Owen D. Nee, China' s Special Economic Zones and Fortneen Coastal Cities, COMMERCIAL, BUSINESS AND TRADE LAWS, PEOPLE'S REPUBLIC O F CHINA, BOOKLET IO, (1987), at 39.
However, the State Council recently permitteci establishment of foreign capitai banks in seven other cities: Dalian, Tianjin, Qingdao, Nanjing, Ningbo, Fuzhou, and Guangzhou. China's Seven Cities permit Establishment of Foreign Capital Banks, (The China Press, August 26, 1992)' at 4 (in Chinese Ianguage ed.).
Therefore, "lured by strong business prospects as China pushed ahead with economic refom, many banks are looking to expand their branch networks in the country. Foreign lending to China, which has recovered M y fiom the post-Tiananmen retreat, is resting soling with soaring foreign direct invesmient." Julia Leung, Foreign Banks Renew Interest in China, Ending hiatus Aper Tiananmen Uproar, (Wall Street Journal, August 4, 1992), at A7.
"' See Regzdations for Adminisiration of Financial Innirutions with Foreign Capital and Financial Institutions with Chinese and Foreign Joint Capiral in Shanghai, promulgated by the People's Bank of China on September 8, 1990 mereinafter Financial Regulations], (Shangbi Foreign Investment Commission, Guide to Investment in Shanghai 1, 1991)' at 97, which govern the approval, regdation and supervision of banks with foreign investment, However, joint venture baaks and foreign banks in Shanghai are o d y allowed to do business in foreign currency. See Fidelia Chau, Financial Joint Ventures May Be Set Up in Shanghai, (Reuters, November 29, 1990), mailable in LEXIS, Law Library, Queen's University. At Kingston, Archive file (A banker with a European bank which was negotiating to joint a joint venture bank in Pudong remarked, 'lcverybody wants a foothold in Shanghai because the made finance market there is lucrative.").
See Liu Yan, 'The Acrivity of Banks with Foreign Investment in China" People's Daily, (overseas Chinese Ianguage ed.), (Apd 3, 199 1), at 3.
See Mark Baker et al., 'Foreign Banks in China" 6 China L Rep. 87, 89 (1990). However, these four banks were pennitted to do foreign currency transactions only. Banks of the Yangtze, (China Trade Rep., April 1990), at 6.
240 That year, the Banking Regulations of the SEZs were prornulgated. See supra note 206.
24' There are banks that are formed exclusively with foreign capital. The requirements for establishing such an institution are: (1) the investor shouid be a financid institution; (2) it should have had a representative office of over three years' standing inside China; and (3) it should have total assets of over SI0 billion
however, government authorities heavily regdate banks and financial institutions as well
as banks with foreign investments? Whde there are as yet no private banks in China, it
appears that the existing regdations wiU probably forrn the basis for regulation of pnvate
banks when and if they are established in the future.
Interestingly, one readation promulgated as part of the campaign for the
promotion of PDZ (PNA) applies not just to PDZ @NA), but to Shanghai as a whole.
The Reguiations for the Administration of Financial Institutions with Foreign Capital in
Shanghai allows foreign banks to set up Sino-foreign joint venture financial institutions
dollars at the end of the years prior to the application for such establishment, Financiai Regulations, supra note 207, art, 5.
An application for establishment of a foreign bank in Pudong should be accompanied by the following documents and information: (1) name of the foreign bank, registered capital and actually paid-in capitai and proposed types of business transactions; (2) feasibility study report; (3) financial statements of the investor(s), for the Iast three years pnor to its application; (4) draft articles of association; (5) a copy of the business license of the investor(s) approved and issued by the competent authorities of its home country; and (6) any other documents and information required by the People's Bank of China Financial Regulations, supra note 206, art 8.
242 The requirements are: (1) the bank should have had a representative office of over three years' standing inside China; (2) it should have total assets of over $20 billion dollars at the end of the year pnor to the application for such establishment; and (3) its home country or region should have a sound financial s u p e ~ s i n g system. Financial Regulations, supra note 206, art 6.
An establishment of a foreign bank branch needs the following informaaon and documents: (1) an application signed by t h e chairman or general manager of the foreign bank, including the name of the branch, arnount of operathg funds approved and assigned by the foreign bank and the proposed types of businsstransactions; (2) annual reports for the last three years pnor to the application; (3) a copy of the business License of the foreign bank approved and issued bythe competent authorities of its home country; and (4) any other socumets and information required by the People's Bank of China. Financial Regulatins, supra note 206, art 9.
243 The requirements are that each investment party shouid be a financial institution, and that the foreign investor should have a representative office inside China. Financial Regulations, supra note 18 1, art. 7.
Establishment of a bank with joint Chinese and foreign capital in Pudong requires: (1) and application, including the narne of the bank to be established, the names of each i n v e s ~ g party, registered capital and actual amount of paid-in capital, ratio of the contribution of the parcies and proposed types of business transactions; (2) a feasibility study report jointly prepared by the parties to the bank; (3) the agreement, contract and draft artides of association of the bank to be established; (4) financial staternents of each party to the bank for the last three years pnor to the application; (5) copies of business licenses of each party to the bank approved and issued by the competent authorities of each party's home country; and (6) any other documents and information required by the People's Bank of China. Financial Regulations, supra note 206, art. 10.
and banks, or branches of their own banks anywhere in Shanghai, not just in PD2 (PNA).
The establishment of such institutions is subject to the approval and supervision of the
People's Bank of China (PBOC). Despite Shanghai's efforts to persuade the PBOC to
allow these entities to carry out a broad range of banking activities, the central bank,
under pressure fiom domestic banking interests, has iirnited them to the foreign-exchange
business. Moreover, these banks may handle import-settiement transactions for domestic
Chinese trading corporations ody if they have supplied the funds for the imports. The
profitable trade fmancing business which foreign banks are well qualified to service has
thus f a been largely preserved for the domestic banking industry, Despite this highly
restricted scope of business, over ten joint-venture finance companies and seven new
fore@ banks branches have been approved. These organizations have opened their
offices in Puxi, Shanghai's older, more developed business center across the Huangpu
River from Pudong, and the Shanghai govelament is looking to them to provide much of
the financing that will be required to develop PDZ (PNA).
1. The Land Use, The Standard o f The Cost of Land and BuiIding In the Pudong Developmenf Zone (Pudona New Area)
Land use in PDZ (PNA) is governed by two sets of rneasures. They permit the
long-term lease of land and the purchase of land-use rigfits through public bidding,
auction, or negotiation with the local authorities. The maximum terms for various uses of
land are: a) land used for commercial, tourist, or recreational purposes: 40 years; b)
Land used for industrial purposes: 50 years; c) Land used for the purposes of education,
244 See Financial Regulations, supra note 237. For further restrictions on foreign capital banks in China,
9 1
scientific research, culture, public health, or sports: 50 years; d) Land used for housing:
70 years; e) Land used for other purposes: 50 years. These terms are comparable to
those in the SEZs, but are longer than those granted in the rest of Shanghai, where 50
years is the upper lunit.
However, the land-use is determined and varies in accordance with the principle
that the granàng of land-use ri@ depends on the project and the giving of favorable
treatment depends on its potentiality. The standard charges of land-use in the
W,gaoqiao Free Zone are as follows: (1) Fees to transfer or lease the land-use nght. An
investor can be granted the land-use nght in the f?ee trade zone by means of either
transferring or charging a land-use fee. The grantee of the land-use right is entitled to
use, transfer, inherit, pawn and lease land-use right within the stipulated t e m and enjoys
other rights pennltted by relevant law; (2) The fees for granting of land-use ri& shall be
paid in the form of annual rent. The annuaI rent will remain unchanged for three years
after the land-lease contract is signed. It can be adjusted fiom the fourth year, once every
three years, with the adjustment scale not exceeding 30 % over that of the previous terrn.
II. Impact of Opening Shanghai's Pudong Development Zone (Pudong New Area)
The successes that PD2 (PNA) has achieved have been remarkable. In 1990, the
gross national product (GNP) in Pudong reached 6 billion yuan RMB. But in 1992, the
figure had more than doubled to reach 15 billion yuan RMB. The total retail sale volume
exceeded 5 billion yuan RMB, an increase of 42% as compared with the previous year.245
- - --
see Baker et ai., supra note 239.
With the development of Pudong Development Zone, a modemized super-city is
emerging on the West Coast of the Pacific Ocean. The Chinese governrnent expects
Shanghai not o d y to regain its traditional role as a powerhouse in China's national
economy, but also to reach the goal of becoming a leading financial, trade and
commercial centre in the ~ o r l d ~ ~ ~ and join the WTO.
A. The Need_for the Re iuvenhn of Shanghai
Shanghai has been the largest and the most important city in modem Chinese
history. Since the Communist take-over in 1949, Shanghai has continued to play a key
role in China's economy. This has been the case both in Mao's era (1949-1976) and
subsequently. From 1959 to 1979, Shanghai contributed, on average, one-eighth of the
nation's industrial output and one-sixth of ai1 governent i n ~ o m e ? ~ Up to the end of
1970, the total industrial output of Shanghai accounted for 14.5% of the national total. At
the same t h e , the profits/tax Shanghai contributed to the entire nation accounted for as
much as 18.7% of the national total.248
After China entered upon the reform area pro-oram in 1978, Shanghai's role as the
economic powerhouse met with serious challenges. Shanghai's role in China's economic
development had been changing as the economic reforms and open-door policy
developed in Pace and depth. Frorn having been China's indusaial and foreign trade
245 See Wang Fuxian, 1994, The Econorny of the Special Economic Zone and Developrnent Zone, (No.3, 1994), at 14, ( in Chinese Ianguage ed.).
246 See Jiang Zhimïn's report to the 14th Congress of the Chuiese Communist Party.
247 Lin, Zhimin, "Reform and Shanghai: Changing Centrai-Locai Fiscal Relahons" Changing Central- Local Relations in China: Reforrn and State Capacity Ed. by Jao Hao and Lin. Zhirnin (Boulder Westview Press, 1994), at 239.
centre in the prorefomi period, Shanghai fell behind other provinces, especially
Guangdong, in indushial production, foreign trade, and economic growth. The special
economic zones and the other 13 open cities represented serious challenges to the
supremacy of Shanghai. They mapped out a series of strategies for development, ranghg
from atîracting foreign funds to importing technologies and equipment. At the same
tirne, out of political cons ide ration^,^^^ the Central Chinese Govemment was cautious
with the economic reform in Shanghai in the first half of the 80s. Because of this delay,
by the mid-80s a number of technologies and products of the SEZs and the other open
coastd cities had already caught up with and surpassed those in Shanghai. Partiy because
of the challenges of domestic economic development and partly because of an increasing
number of problems facing the city, Shanghai quickly began to lose its traditiondy
predominant position. In the ten years of economic reform fiom 1978 to 1988, the gross
national product of Shanghai dropped fkom 7.9% of the national total to 4.7%; its national
income dropped from 8.2% to 4.9%; and its total industrial output value dropped from
13% of the national total to 6 % ~ ~ ~ ' In short, the economic importance of Shanghai was
shrinking fast. Shanghai was at the crossroads between rejuvenation and decline.
However, the Chinese Communist government could not afford to lose Shanghai
as a leading industrial and financial centre. Deng Xaioping, in 2 992, urged Shanghai to
become one of the cantres for opening up to the outside world, to accelerate its
development to regain its former status as a major canter of finance, trade, and
248 Chen, M . (1990). Issues on Ci& and Urban Economy, Shanghai Social Sciences Academies.
249 The reasons for this wiii be discussed in the next section.
250 See Li Guangyi & He Xinguang, Talking about the fact of Pudong, (Shanghai People's Publishers, 1992), at 12, (in Chinese ed.).
rnanufacturing. Shanghai is an influentid international metropolis on the western Coast
of the Pacific Ocean, commanding an important geographical position and endowed with
favourable naniral conditions. Its position in econornic development couid scarcely be
replaced by any other city in China. To retain its econornic supremacy, Shanghai needed
a status similar to that of the five SEZs. Clearly this was one of the important reasons
why the Chinese Central Governrnent decided to make Pudong a Development New Area
and accord it the same preferentid policies (or even more preferential than) that which
they had accorded the five SEZs to meet the needs of the strategic urgency to revive
Shanghai,
After 199 1, when the new PDZ (PNA) policy was irnplernented, the difference in
the arnounts remitted by Shanghai and Guangdong started to diminish. In the broad
category of fiscal remittance, Shanghai's cornmitment in 1990 amounted to 11 billion
yuan, which was twice Guangdong's commitment of 5.3 billion yuan in the same year.
Guangdong's broad fiscd commitment rose again in 1991 to 7.7 billion, about 70 percent
of Shanghai's. Furthermore, if central subsidies to the local government are deducted
fiom the "broad fiscal commitment," the gap between the net commitment of Guangdong
and Shanghai becomes even narrower. In any case, the contribution by the two regions
measured by "net fiscal contribution" has converged since the early 1990s when the
central government invested a great deal in Pudong's new projects, if centrally
administered enterprises are incl~ded.*~
Data regarding the net outflow of Shanghai's total income suppoa the above
conclusion. Similar to the trend of that of the fiscal revenue outflow that Shanghai
remitted to the central government, the share of net outflow of its total income feii from
45.1 percent in 1984 to 14.7 percent in 1992.'~~ It is clear that the proportion of the
resources bransferred to other regions in Shanghai's total has become much smailer since
the Pudong policy was introduced, indicating îhat a large proportion of its resources have
been transferred from western Shanghai to the Pudong area. This pattern of capital
movernent is, however, different fiom what happened in the SEZs, which draw large
arnounts of capital from other parts of the nation."
Along with a dramatic rise in local expenditure and investment level, the local
autonomy in investment activities increased after 1991. The share of local financed
investrnent in capital construction and the share of local projects rose to 56 percent in
2992 and 70 percent in 1993 respectively. Under a new tax system, which was
introduced in 1994, although former local revenue in some categories are now collected
by the central government, the local autonomy in investrnent spending, however, further
increased. The local expenditure in Shanghai further rose from 9.5 billion yuan in 1992
to 12.9 billion yuan in 1993 and 19.7 bilLion yuan in 1994, although the local revenue
under the new classification declined from 24.2 billion yuan to 17.5 biUion yuan during
1993 and 1994. In the first year of the irnplementation of this new tax system,
2s 1 This result partly proves the expectation by Liu, Wang, Sung, and Lou (1992) that Guangdong's conmbution would be larger than that of Shanghai after 1991.
2s2 It should be pointed out that al1 these estimations of Shanghai's contribution to the rest of China could be inexact as well as overestimated because Shanghai benefited fiom subsidized raw materials supplies fiom other reaons. However, the extent of overestirnation of the contribution should be rnuch smaller than that during the proreform central planning system.
253 There are no figures available for the net contribution of Guangdong in the early 1980s. However, due to the large amount of centrai investment in Shenzhen and its low level of fiscal cornmitment, a positive resources inflow can be assumed in Guangdong at that tirne.
Shanghai's total revenue also markedly rose fkom 44.6 billion yuan in 1993 to 62 billion
yuan in 1995.
B. The Need for Eradicaîtafin~ Shanghai's "Expansion Disease"
A series of problems that caused Shanghai to dwindle in economic importance in
China in the 80s were due to rnisplaced priorities on the part of the Central Government
of China (CGOC). For many years, Shanghai itself had little control over its vast
resources. From 1949 to 1980, Shanghai had to remit more than 86 percent of its income
to the central goveniment,254 leaving the city stripped of funds which could have been
spent on such critical local needs as housing, transportation, communications and the
environmen t?
In short, the Central Government implemented a policy of making Shanghai a
cash cow. Even Jiang Zimin, the incumbent general secretary of the Cornrnunist Party of
China (CPC) acknowledged this in May 1988, when he was the secretary of the
Communist Party Cornmittee of Shanghai's stating: "In the last 30 years or more since
liberahon, we have attached great importance to economic development, especidy the
development of heavy industry. But for various reasons, we have not initialised urban
renewal and reconstruction during the corresponding period of time. As a result, the
Lin, Zhimin "Refonn and Shanghai: Changing Centrai-Local Fiscal Relations" Changing Cenrral- Local Relations in China: Reform and State Capacify Ed. by Jia Hao and Lm, Zhïmin (Boulder Wesnfiew Press, 2994)- at 239.
255 See Xu. Reqing, Wuoguo Chenshi Jiangshe Caishen Fazhan de Tantao (An inquiry into the developrnent of city finance in our country). Shanghai Shehui Kexue Xueshu Jikan (The Quarterly of Shanghai Academy of Social Sciences), No.1, 1990. The author estimates thar Shanghai had a deficit in spending on city renovation of about 30 biilion yuan from 1940 to 1979.
function as an economic centre and the key role in intemal and extemal communications
has been weakened. This situation cannot be allowed to continue any longer."256
In the 80s, as China's economic reform was in full swing, provinces and regions
enjoyed greater autonomy. If the relationship between the centre and the local could be
charactensed as one in which "the centre wielded unlimited power over different
10calities"~~~ in Mao Zedong's era,+58 such a relation no longer exists in the reform era. In
Mao's era, while the Communist Central Government made Shanghai a cash cow, it also
gave preferential treatment such as ensurhg the supply of raw materials at an artificially
low price and guaranteed shares of markets and hi@ pnces for the goods they
produced.259 In the 80s, however, such arbitrary policies no longer worked. This created
extra difficulties for ~ h a n ~ h a i . ~ ~ '
As a result of these Centrai Government policies, Shanghai suffered for years
fiom what is c d e d "expansion disease". The symptoms of this disease include urban
land scarcity, housing shortage, transportation, congestion, environment pollution, and
economy-environment and investment clïmate de,pdation.
From 1949 and the founding of the People's Republic of China to the end of 80s,
Shanghai's industrial output value increased more than 30 times, but the city core area
Dong, Guolang et al. "Wei Da D e Zan Le Jue Ce" Hua Shua Pudong (Sanghan Shu Ju 1994), at 67.
257 See Jia Han & Lin Zhimin, supra note 247, at 3.
258 Mao, Zedong, (1893-19761, the founder of the Chinese Communist Party, the father of the Chinese Revolution, the Chairman of the People's Republic of China and the leader of the Proletarian Cultural Revolution.
259 Lin, Zhirnin "Reforrn and Shanghai: Changing Central-Local Fiscal Relations" Changing Central- Local Relations in China: Refom and State Capaciq Ed. by Jia, Hao and Lin Zhimin (Boulder: Weswiew Press, 1994), at 239-26 1.
See Li Guangyi & He Xing Gong, supra, note 250, (1992; 19941, at 28.
increased by no more than 80%."' More than 6 million people live in the 149 square
kilometres of the downtown area, where the population density is as hi& as 40,000 per
square kilometre. To make matters worse, in recent years, with the policy of opening, the
city's floating population has increased dramatically fiom 500,000 to 1.65 million. Thus,
the red population is even higher. In the downtown area of 149 square kilometres,
there are as many as 4,700 enterprises, and the average density of enterprise is 31
enterprises per square kilometre. The high agglomeration of population and industries
results in a high building density. The average building density is 55%. In some streets
in the downtown area of Shanghai, the building density is as hi$ as 80%. Such a high
density of population and industries is scarcely seen among the cities not only in China,
but also in the worId. In fact, with row upon row of skyscrapers quickly appearing, the
underground waterpipes are said to be concentrated like spider webs.
The hi& aggegation of population and industries confronts Shanghai with a
grave crisis of space, and constitutes a serious obstacle to the improvement of living
conditions of its citizens and to the development of the city's economy. Fist, in the
downtown area, what with the serious congestion and confusion of residential and
industrial areas, and what with the environmental pollution, the normal living of the local
residents is negatively affected. Moreover, because of the scarcity of urban land, it is
difficult for the local residents to rebuild their houses. They have to make do with very
crowded living space. Secondly, the industrial area in the city covers a large portion of
urban land (as large as 53.5 square kilometres), accounting for 20.5% of the total city
core area. This contrasts sharply with large cities in other countries where urban land for
Urban Economy Yearbook, 1988.
industrial use occupies no more than 15%. As a result, the Iand for other uses has been
relatively reduced. This hinders the development of the third industry, the construction
of infhstructure of trafic and communication, and the improvement of the environment
for capital investment. Thirdly, the hi& agglomeration of industries causes the
enterprises to be short of land area for further development, seriously limiting the
technological progress of urban industries and the upgrading of industrial structure,
thereby hindering the city fiom full participation the world economy.
The "Expansion Diseasey' also manifests itself in the lack of space for expanding
port facilities in Shanghai. It is well known that Shanghai is a poa city, and its easy
access to sea, Iake and river is one of its strengths coveted by other cities. However,
Shanghai faces the acute problem of lack of transportation facilities. Although the poa
was enlarged 17.50 million tonnes during the Six-Five-Year-Plan (198 1-19851, it had a
hard t h e coping with the loading and unloading at its poa. On several occasions, the
ships coming into the harbour could not be unloaded in tirne. It is estimated that, by the
year 2000, the lack of transportation force will be near 90 million tonnes. In order to
meet the needs of Shanghai's economic development, it is imperative to speed up port
construction. However, in the existing port site, there is no space left for port
construction.
C. Strate* Vintaws o f Pudona Development Zone (Pudona New Area)
The solution to expansion disease lay in the development of Pudong. Situated
where the Yangtze River empties itself into the sea, on the western Coast of the PacEc
Ocean, taking China's largest economic city Shanghai as its powerfuI backing, Pudong
commands strategic spatial superiority and enjoys exceptional advantages of both natural
and human conditions.
1. Broad Regional Space and Advantageous Geographic Position
The 350-square-kilometre area covered by Pudong is two and one-half times the
149-square-kilometre area covered by the old city proper of Shanghai. Coast beach areas
that keep increasing night and day will compensate the areas used for development. The
division of Shanghai into Puxi and Pudong makes it more convenient for Pudong to
develop an export-onented economy, join in the world economic circulation and become
the sprïngboard for China to enter the world economy.
As most of its area is within the radius of 1.5 kilometres fiom the downtown of
the city of Shanghai, Pudong plays an important role in implementing the policy of
scattering the population and the industries in the i ~ e r city and reducing the densities of
population and industries. With the improvement of conditions of crossing-river
transportation, the spacial distance fkom Pudong to Fuxi is significantly cut short. The
contact between Pudong and Puxi will be corivenient and close. With further
development of Pudong and narrowing of the gap between Pudong and Puxi, Pudong is
becoming an ided place for the residents and industries in the city proper to relocate.
Particularly, the Pudong area will be self-contained city with its own airport, subway,
ring roads, and China's first tree trade zone adjacent to the Pudong Waigaoqiao Port.
The free trade zone has enabled this area to become a highly open area suitable for
developing an outward-oriented economy in ~hanghai?
2. Favourable Conditions for Port Construction
Compared with Puxi, Pudong is geopphically even closer to the sea and the
Yangtze River. Along the eastern bank of the Huangpu River, there are now 78 births,
32 of which are large enough to accommodate 10000-ton-class vessels. They handled
66.35 milLion tonnes of cargo in 1989, accounting for 45.4 per cent of Shanghai's total
handling volume. Waigaoqiao Port in Pudong has 7-kilometre-long port line, which can
be used to build nearly 100 berths for 100-tonne-class ships. During the 8" Five-Year-
Plan penod (1 99 1 - 1995), four longitudinal barge docks and ten berths for 10000-ton-
class ships will have been constructed. This port site functions as the entrepot of the
inland river transportation and the ocean shipping. Adjacent to Shanghai, and with the
Yangtze River running through, Waigaoqiao Port helps Shanghai port m e r exert its
superiority in geographic position and give better service for Shanghai, Pudong
Development Zone and the Yangtze River Valley. In short, with the development of
ports sihiated in Pudong, the spatial pattern of Shanghai will be changed.
It must be pointed out that the advantageous natural conditions alone that the
Pudong enjoys could not cure Shanghai of its expansionist disease. The Shanghai
Cornmunist government adopted a series measure to reduce population density and ease
industrial aggregation, but these measures did not achieve the desired effect. For
instance, Shanghai set up a series of satellite cities and expanded its urban area from its
original 149 to 280 square kilometres. But the satellite cities atbracted no more than
300,000 people accounting for o d y 4.5 percent of the central city's total population while
expansion of the city resulted in the expansion of sprûwl of the old pattern of the old
city.263 The main cause for the failure of this rneasure is that no better econornic benefit
was offered to those who wished to move out of the imer city. Instead, after moving into
the fkinges of the city or the satellite cities, they not only eam less money and enjoy
poorer cultural Iife, but also have fewer opportunities to get employed or develop their
career.
The only effective solution was to develop Pudong into an area as attractive and
viable as the old city proper of Shanghai so that people who move out of the old city
proper into Pudong can enjoy the same economic benefits and have the same
opportunities for employrnent and career development. With a prospering economy,
Pudong has a strong appeal to the residents of Puxi. It was r e ~ ~ o r t e d ~ ~ ~ that a survey
conducted in 1991 reported that about 70 percent of the residents in Puxi are willing to
move to Pudong. According to a report in the People's Daily, in 1991 alone, as many as
2,400 families moved from Puxi to ~ u d o n g ~ ~ ~
262 Cai Xinghuo. 1990. "Dasilu: kaifa pudong zhenxing shanghai (Developing the Dismct of Pudong to Vitalize Shanghai's Economy)." C M Caijing yanjiu (Financial and Econornic Research). No. 1 1 : at 3.
263 See Li Guangyi & He Xinguang, supra 250, note (1992), at 39-40.
264 Id., at 236.
265 Xia, Rugo. Pudong's First Year, Peop1e1s Daily, Apd 23, 199 1, at 3 (Overseas Chinese Laquage edition).
CaAPTER FOUR
IMPLICATIONS OF SPECIAL ECONOMIC ZONES FOR T m GATT/WTO PROPOSED REG-
China, as o n e - f a of the world's population soon will be forced to follow fiee-
market niles, to join into the World Trade Organization (WTO). China's 1.25 billion
consumers will soon be part of the global economic body, which regulates trade among
134 of the world's biggest e c ~ n o m i e s . ~ ~ ~ If China is able to continue to keep foreign
investment and expoas high and, as a result, enjoy strong growth, it will becorne the
world's largest economy early in the next century. However, China will face regional
disparities and other development problems that the big three economies--the United
States, Sapan, and the European Union have overcome. NonetheIess, China is certain to
become an ever more important player in the world economy. This chapter wiU discuss
the principles of implications of the SEZs for the GATT/WTO proposed regime. China
has continued to implement its outward-oriented development strategy, characterized by
the promotion of international trade, encouragement of foreign investment, and active
participation in the world economic affairs. The observations and discussion wiil also be
explores.
266 See Miro Chemetig, China Bureau, Beijing, "Trade deal opens China to the world, massive economy faces profound changes as Beijing agrees to joint WTO", The Globe and Mail (November 16, 1999), at AI.
1. Principles of the GATT rWTO Regarding Foreign Investment
A. Introduction to the GATZYWTO
Since the conclusion of the Uruguay Round, in 1994, WTO rules have had far
greater application to investment. Further, with the collapse of the negotiations within
the OECD for a Multilateral Agreement on Investment there is a possibility of
negotiations moving to the W T O . ~ ~ ?
The GATT - the General Agreement on TaRffs and Trade - is generally
recoa~zed as the principal international organization and d e system governing most of
the world's international trade. The principles established in the GAïT were first the
aforementioned principle of non-discrimination, which was contained in the Article 1
requirement, stating that any advantage granted to another contracting party would be
immediately accorded to aii other contracting parties. This requirement attacked the
practice of bilateral tanff preferences, which were comrnoniy employed for political
reasons prior to the Second World War, and which compartmentalized and therefore
reduced the flow of trade between nati0ns.2~~ Another aspect of non-discrimination was
found in Article III, which obliged nations to treat foreign products, once they had been
imported and duties paid, no less favorably than domestic products in respect to taxes and
267 'Foreign 'invesment and International Law" fund at websit at htt: f/www.qsilver. queensu-ca Aawl electronic course materialslcourse materials by professorIA, EassonBaw of foreign invesment / class notes and readings, at 2.
268 See Robert E. Hudec, The GAlT Legal Sysrem and World Trade Diplomacy, (Praeper Publishers, New York, Washington, London, 1975), at 10.
other requirements- In general, Article 1 insured a country could not discriminate
externally, and Article I3I insured it could not discriminate intemally?69
B. Foreim Direct Investment under the GA TT/WTO
Investment, or more specificaliy trade-related investment measures (TRIMs) , was
one of the new issues which the Uruguay Round introduced into WTO. It has become
increasingly apparent to international business that investrnent is interchangeable with
trade and, more important, that trade liberalization alone is not as effective as trade
liberalization accompanied by liberalization of investment regimes. The Chinese
economy of the past decades -- under the rigid domination of state planners and isolated
from the outside world--has been substantially changing its market orientation and
openness to trade. The future path of the Chinese economy, now the second largest in the
world, will strongly influence the path of economic development in the Asia-Pacific
region, and with it the path of the world trading ~ ~ s t e r n . ~ ~ ' The major European interest
of future importance is the open access to the Chinese market for investments. The
volume of European direct investment in Asia, and in particular in China, still lags far
behind the investments of its c ~ r n ~ e t i t o r s . ~ ~ ' The European Union bas realized the need to
269 See Gilbert R Winham, 'hlodern Trade Agreements: The FATT Regirne", The Evolution of International Trade Agreements Vniversity o f Toronto Press Toronto Buffalo London 1992), at 47.
270 See Robert E. Hudec, "The Ito Legal S ystem: The role of Legal Obligahons," 77ze GA Z T Legul System and World Trade Diplomacy, 2& ed., (Butterworth Legal Publishers, 1990), at 23-34.
27 1 For an anaIysis of the increase of foreign direct invesbncnts in China see A. Neil Tait & Kui-Wai La, Trade Regimes and China's Accession ro the WorZd Trade Organization, 3 1 JORNAL OF WORLD TRADE 93, 97 (1997). See as well John S. Mo, China, The World Trade Organiuztion and the Agreement on Trade-Relured Investment Measures, 30 JOURNAL OF WORLD TRADE 89-1 13 (1996), in
improve its efforts in this sector: In 1996 the European Commission issued a report on
"European Union direct investment in Asia", analyzing the status quo for direct
investment in Asia and proposing means to increase direct invest~nent.~'~
Nevertheless, the official policy towards foreign invesiment and the legal setting
in China differ substantially. Foreign investors are encourageci to participate in the
Chinese e c ~ n o r n ~ . ~ ~ ~ Yet the legal setting for direct investment is unclear and often
~ o n f u s i n ~ . ~ ~ ~ For example, there is hardly any independent judicial review of
administrative actions,'75 no relevant rules are sufficiently published, thus making it
sometirnes practicall y impossible to determine which rules are applicable.276 Moreover,
according to a survey, only one fifth of ail laws passed in China are ever enf0r~ed.z~~
In addition, foreign investors are disadvantaged in various ways, whiie domestic
investors in China's state trading economy, mostly the governent itself, are
preferentially treated: for example, it is more difficult for foreign investors to acquire
Company shares or to ernploy foreig~ers.~'~ III the European view three types of trade-
Frederick M. Abbott, ed., China in the World Trading System, Defining the Principles of Engagement, (Kluwer Law International, The Hague, Lnodon. Boston, 1998)- at 110.
272 See the study by the European Commission on Investment in Asia's Dynarnism, European Union Direct Invesment in Asia, (1996).
273 Cf. A. Neil Tait & Kui-Wai La, Trade Regimes and China's Accession to the World Trude Organization, 3 1 JOURNAL OF WORLD TRADE 93-97 (1997); Robb M. LaKritz, Foreign Investrnent in China, 1 1 EMORY INTERNATIONAL LAW REVIEW 267 (1 997).
274 See Peter H. Corne, Foreign Invesnnenr in China: The Administrative k g a l Systern 2 ( 1 997).
275 See Robb M. LaMn, Foreign Invesrmenr in China, 1 1 EMORY INTERNATIONAL LAW REVIEW 271 (1997).
276 See Peter H. Corne, supra note 274, at 95.
2n Id., at 190.
"* See EURPOEAN COMMISSION, INVESTING IN ASIA' S DYNAMISM, EURPOEAN UNION DIRECT INVESTMENT IN ASIA 47 (1996).
related investment measures are of particdar importance: local content requirements,
foreign exchange balancing requirements and export performance requirements which in
general o d y apply to whotly foreign-owned companies and joint ventures.
C. China's ReWonship wifh the GATZ7Worul T r d e Svstem
China's relationship with the WTO is one of the important topics presently under
consideration. In order to study it, it is necessary to review China's relationship with the
old GATT, now the WTO."' China was one of the twenty-three founding mernbers of
the GATT. The Chinese Nationalist govemment, on behalf of China, signed the GATT
on October 30, 1947 and became a Contracting Party on May 7, 1948.280 The
govenunent of the Republic of China (Taiwan), which occupied China's seat in the
United Nations until 1971, formally withdrew from the GATT in 1950 ,~~ ' and after the
establishment of the People's Republic of China ("PRC) on October 1, 1949, China's
relations with the GATT were suspended due to political c i r cum~tances .~~~ The validity
279 There are mmy reference materials in this topic. See e.g. Frederick M. Abbott, ed., China in the World Trading Systern, Defining the Pnnc@les of Engagement, 1'' ed, muwer Law International. The Hague London Boston, 1998). See also Anne O. Krueger with the assistance of Chonira Ampane, ed., The W O as an International Organization, lS' ed., (The University of Chicago Press, Chicago and London, 1998); Guiguo Wang, "China's R e m to GATT: Legd and Economic Implications" (1994) 28 J. Worid T. n.351; Wenguo Cai, "China' GATT Membership: Selected Legd and Political Issues" (1992) 26 J. World T. n. 1 35; HaroId K Jacobson & Michel Oksenberg, China's Participation in the IMF, the World Bank, and GATT: Toward a Global Economic Order (Am Arbor, MI: The University of Michigan Press, 1990); Yushu Feng, "China's Membership of GATT: A Practical Proposal" (1988) 22 J. World T. n.6 53; and Chungchou Li, "Resumption of China's GATT Membership" (1987) 21 J. World T. L. n.4 25.
280 See GATT Status of Legal Instruments, 3d rev. GATT Secretaniat (Geneva, 1970).
28 1 See Harold K. Jacobsen and Michel Oksenberg, China's participation in the IMF, The World Bank, and G A T (1990) at 62-63. [hereinafter Jacobsen and Oksenberg]; East Asia Analytical Unit, Ausrnalia Dep 't of Foreign Afairs and Trade, China Embraces the Market, (1997) at 165 [hereinafter EAAU].
of the wiîhdrawal by the Taiwan re,&e is an issue in China's bid to resume its
Contacting Party statu, which stems from the dispute as to whether the Taiwan
government had the right to represent China in 1950, as the PRC cleady had effective
control over the entire rna i~dand .~~~
Since the adoption in late 1978 of an "open-door policy" with respect to foreign
economic relations, China's foreign trade has grown rapidly.284 China had established
trade relations with over 180 countries and regions and had signed trade agreements or
protocols with over 80 c o ~ n t r i e s . ~ ~ ~ In addition to becoming increasingly active in
international trade matters under the auspices of United Nations bodies, China established
observer relations with the GATT' in 1 9 8 0 , ~ ~ ~ and began to attend selected GATT
meetings as an observer, and in November/December, 1984, China requested and
received permanent observer stanis in the GATT ~ o u n c i l . ~ ~ ~ China has stated its belief
that Taiwan's act of withdrawal fiom the GATT in 1950 was not legïtimate,"8 and
282 See GATT Doc. SR2U3. (Geneva: GATT, March 16, l96S), at 21-23; GAïT Doc. SR.27/1. (Geneva: GATT, November 19, 1971), at 1-3.
283 See John. H. Jackson, 7he World Trading System: Imw and Policy of lntemntional Econornic Relations (Cambridge, MA: The MIT Press, 1991) at 288. See dso Ya Qin, "China and GATT: Accession hstead of Resumption" (1993) 27 J. WorId T. n.2 77- The legd implication of this issue, however, is beyond the scope of this article.
See Michael J. Moser, Supra note 61, at 28. "Total export and imports in 1983 amounted to some UD$40.14 billion, up nearly 90 per cent over NO-way trade in 1978. Xinbua Navs Bulletin (Beijing), 25 January 1984, at 28. During the penod of the Sixth Five -Year Plan (198 1-5), total foreign nade is targeted to reach USSS7.4 billion, and China's Minister of Foreign Econornic Relation5 and Trade, Chen Muhua, has announced China's ambitious goal to quadruple its import and export volume by the year 2000, to reach some US$160 billion. Xinbua News Bulletin (Beijing), 20 September 1982, at 22."
285 China 'S Foreign Trade. No. 4, (1982) at 12.
See Michael J. Moser, Supra note 61, at 6.
See Jacobsen and Oksenberg, Supra note 28 1.
Id., at 89.
applied in 1986 to resume its sratus as a GA= Contracting ~ a . r t y . 2 ~ ~ During the Uruguay
Round negotiations it claimed entitlement as a Contracthg Party of the GATT, and
therefore to be a founding Member of the WTO.~~' China participated as an observer in
the Uruguay Round negotiations and signed the Final Act in Marrakesh. However,
China's claim to be a founding Member of the WTO was not accepted by the GATT
Contracting ~arties:~' and China did not become a Member of the WTO when the WTO
Agreement entered into force on January 1, 1995.
Today, China is the iO%irgest trading nation and the largest economy that is not
a member of the WTO. Canada and other WT0 members must make their own
arrangements with the Chinese. The agreement with the United States is seen as the most
serious stumbling block to China's accession to the WTO. Canada and most other
counnies believe China is betîer in the WTO than outside and ~nre~ulated."~ The U.S.
289 A Working Party on China's Status as a Contracting Party h t convened in October 1987, and met 18 tirnes through the concIusion of the Uruguay Round. EAAU, at 165. See Frederick M. Abbott, "Reflection Paper on China in the World Trading System: Defining the Principles of Engagement" in Frederick M-Abbott, ed-, China in the World Trading System D&ning the Principies of Engagement (Kluwer Law International, The Hague London Boston 1998) 1 at 4.
Id., at 87-109. China formally applied to resurne its Contractkg Party status in July 1986. EAAU. at 165.
291 See WorId Trade Organizafion, Daily Report, Shgapore Ministerial Conference Report, Skitement by ML Long Yongtu, Assistant Minister of Foreign Trade and Econornic Cooperation, China, 12 December 1996 ( website at itttp://7~~r~.wto.org). China's schedules of concessions accompanying its signature of the Final Act were not verified or accepted. EAAU, at 165-167. It was not a foregone conclusion during the Uruguay Round negotiations that China would aot be entitied to resume its status as a founding member of the GA'IT, and the foregoing discussion is not intended to reflect on the Iegitirnacy of China's assemon that it had not consented to withdrawd fkom the GATT. The reasons that China's approach were not successful include both economic and political elements, including a change in the political climate in the OECD following the Tienanmen incident in 1989. See Frederick M. Abbott, Supra note 271, at 5.
292 Even if the White House, before the Chinese Premier Zhu Rongji's amival to the United States, the White House had expressed high hopes that a deal on accession to the WTO could be struck, helping to repair strained Sino-U.S. reIations. But the Republican Senate Majority Leader of the United State categoncaliy rejected the idea of WTO accession for China, accusing China of predatory trade practices. He said, "Letting China into the WTO at this time shows how f a . this administration is w i l h g to go in an effort to salvage its failed policy of strategic partnership with China" -. . " Another economist at the Center
Congress need not approve China's membership in the WTO, but it c m withhold China's
most-favored-nation trading s t a t ~ s ; ~ ~ which comes up for renewal an.n~aLI~?~~
The Chinese leaders believe that China d l not be out of the world system
forever. In fact, the WTO will not be complete without China, which is the world's
largest attracting developing country qualifving for inflow of DFI, and therefore also
qualified to be a major trading nation.295 Some analysts believe that Chinais m e r away
from joining the WTO than it was a year ago, another blow to those who argue that
engagement will push China into joining the global trading However, regarding
trade in goods. China ranks as the World's tenth largest trading country,297 though
China's share of the world's in trade in services is relatively ~ r n a l l . ~ ~ ~
for Strategic and Internationd Studies, Sidney Weintraub said: "If the Chinese are prepared to make a lot of rneaningful concessions, even if they are not everythuig the US. is seeking, I think it's crazy to keep them out. U.S, opposition to a trade deaI with China is based prirnarily on politïcs, not economics." See Barrie M c k e ~ a , Washington Bureau, Washington, "Chinese Premier's visit fails on more than one count, Zhu will leave amid growing Sino-US. tension, without WTO ded", The Globe & Mail, International News, (Friday, April9, 1999), at A18.
w3 General Most-favoured-Nation Treatment is the major provisions of the GATT. It is discussed in chapter 4 of this thesis. Id.
294 Id.
"' See Zhuang Xiaqin & Shen An, Tresident Jiang Gives TV interview on WTO, Taiwan. Asian Currency Cnsis" Xinhua News Agency (2 December 1997, Beijing),
296 See Miro CemeMg "China, Dragons and Doves" The Globe and Mail, Section D (Saturday, 16 January 19991, at D 1.
w7 In 1997, China exported $182.7 billion or 3.3% in worId merchandise Bade and ranked as the IO& leading exporter, while it imported $142.4 billion or 2.5 % and ranked as the 22" leading importer. The total amount of the expoa and import made China as the 10" leading trading country in good, afcer G-7 countries, Hong Kong and the Netherlands. See WTO, 'World Trade Growth AcceIerated in 1997, Despite Turmoil in Some Asian Financial Markets" WTO press (19 March 1998).
298 In 1997, China exported $23.3 billion in world commercial services rade as 16& leading exponer, and imported $23.8 biliion as 14" leading importer. The share is 1.8%. See Id.
D. China Bid to Join the World Trade Omani&n
As described earlier in more detail China is engaged in an aggressive campaign to
j o b the WTO in order to ensure its trade privileges and its continued access to export and
capital markets and foreign direct investment. Membership in the WTO would also make
available to it facilities for neutrai dispute r e s o l u t i ~ n . ~ ~ ~ China's prospective membership
in the WTO has been characterïzed as "one of the most s i b 6 c a n t developments relating
to international institutions to take place in the last severai de cade^."^^^
The overall trade liberalization policy pursued by China since 1979 and, in
particular, tbe development of the SEZs, including PDZ (PNA), as described herein, have
provided the conditions under which China's accession to the WTO is clearly possible
and, indeed, appears likely to become a reality in the near future. Work on the accession
process has been in progress sioce a working party in that behalf was formed in 1987.301
In addition to the negotiations conducted under the auspices of the working party in
Geneva, China has been an actively engaged in ongoing bilateral negotiations with major
contracting parties such as the United States and canada?02
299 See Frederick M.Abbott, "Rei3ection Paper on China in the World Trading System: Defining the Principles of Engagement," in Fredenck M-Abbott ed- China in the WdrZd Trading Sysrem, Defining the Principles of Engagement, (Kluwer Law International, The Hague-London. Boston, 1998), at 3.
"' See Jeffrey L Gertler, "The Process of China's Accession to the Wald Trade Organization." in Frederick M. Abbott ed., China in the World Trading System, Dejining the Principles of Engagement, (Kluwer Law International, The Hague-London. Boston, 1998), at 66. Gertler notes that the working pany met on over 20 different occasions between 1987 and 1995. In December, 1995, it was converted into a WTO working pam on the Accession of China
' O 2 See Murray G. Smith and Xu Xianquan, ed., "Introduction and Overview," China and the World Trade Organizafion, Requirernents. Reaiitïes, and Resolution, (The Center for Trade Policy and Law, 1996), at 2-
China faces a nurnber of obstacles in its bid to accede to the WTO. Such
obstacles are of two basic types. The first, and more important for the purposes of this
discussion, are the systernic resistance factors in the Chinese system to that openness and
transparency which membership in the WTO requires. The second is the resistance of
other countries to admission of a country only now emerging fÏom the economic
inefficiencies and other continuing vestiges of a planned economy.
Untd the 1979 and subsequent reforms, China maintained an almost wholly
closed economy based upon the comrnunist doctrine of state ownership and management
of the means of production and its principles of independence and self-reliance
amounting to virtual isolation fkom the outside world. This thesis has set out in some
detail the legal framework upon which China has made a significant transition toward a
market economy. This le@ fkamework and the outstanding success it has engendered in
terms of China's integrahon into the global economy provide a strong foundation for
m e r rnovement in that direction, of which rnembership in the WTO is without doubt
the most simcant. Nevertheless, numerous difficulties remain. One of these is the
continued existence and closed nature of the state-owned enterprises. Sibonificant changes
are in progress in the nature of decentralization and pnvatization of these enterprises-
However, much remains to be done. China's tariffs remain far above the Ievels
acceptable to the WTO. There have been a great many reductions and exemptions, but
more is required to convince foreign investors that the Chinese system of tariffs is both
transparent and fair.303 A variety of non-tariff trade barciers such as quotas and import
Licenses, price controls, export subsidies and foreign exchange controls are among the
303 See Pang Rongqian, "Selected Economic and Politicai Issues of China's GTT/WTO Mernbership," Id., at 43.
matters, which must be addressed- The "transparency" required by Article X of GATT is
a particular challenge for China, where internal regdations and stipulations, unknown to
the rest of the world, are quite su al.^^^ Again, some improvernent has been made in this
area but it is far fiom complete.
One of the aspects of the regdation of foreign investment in SEZ's discussed
earlier is that of performance requirements imposed on joint ventures aimed at re-
exporting products manufactured or assembled. New investors will resist such
performance requirements in the context of China's accession to the WTO, although those
aiready subject to such requirements may be concerned that further opening of the
Chinese economy will undermine their existing investments.
One of the main issues is whether or not China will succeed in being
charactenzed as a developing country, thereby entitling it to special and difTerential
treatment. China is a unique case in that regard in that, while it has a low gross domestic
product (GDP) per capital by OECD standards, it is one the world's largest economies
and a major exporting country. China cIaims that developing status is self-designated,
and should not be the subject of a WTO Member accession decision. However, it is clear
fiom the broad tenns of Article XII of the WTO Agreement that Members may decide to
make a determination on this subject a condition of accession. Frederick M. Abbott has
proposed a solution305 as follows:
"A logical solution to the unique case of China would be for China and WTO Members to reach specific agreement on what aspects of
3w Murray G. Smith, "Potential Implications of China's Membership in the World Trade Organization," Id., at 69.
305 Professor of Law, Chicago-Kent College of Law, Illinois Institute of Technology. See supra note 302, at 28.
developing Member treatment would be available to it, and what aspects would not be. For example, a good case c m be made for pedtt ing China's economy-in-transition to make use of the transition penods generaliy available to developing Member. On the other hand, given China strength as an exporting Member, it might not expect to receive trade concessions in the absence of quid pro quo concessions in future trade negotiations with developed Members."
E. Most-Favored-Nation Treafment
Most-Favoured-Nation Treatment (MFN) of foreign investment is a cornmon
provision in modern Bilateral Investment Treaties (BITS)?~ That is, the treatment
received by investors of one contracting par^ shall not be lower than that received by
investors from any third state with respect to their investments and activities in relation to
the inves t~nen ts .~~~ However, exceptions nom MFN treatment apply to the obligations of
one party resulting from participation in a customs union, economic union, free trade
zone or other regional economic integration arrangement or tax trea$08
The PRC-Japan Treaty broadened the application of MFN treatment in previous
treaties by not allowing an exception for advantages aven according to participation in a
comrnon market or free trade area.309 This treaty aiso contains the most extensive list of
matters where MFN treatment shall be given to foreign investors, these include: a)
'" See Kohna, "Some Major Provisions in Modem Invesmient Protection Agreements," in Zhang Lixing and other ed., Economic Law of the Pacifrc Rim 7, (1987) at 34, para. 137. It is noted that some countries, especially the Latin Arnerican countries, do not agree to a MFN clause. Id., at 35, para. 138, 140.
'O7 See e-g. PRC-Australia Treaty, art- 3(3).
308 See e-g. neaties with the UK, art. 3(4).
approval of investment; b) investor assets, returns, and business activities in relation to
investmenG c) access to the courts or administrative agencies in exerting or maintaining
rights; d) expropriation, nationalisation, and measures with equivalent effects; and e)
measures taken in times of animosity or national emergency?O
The Japanese treaty fùrther describes the "activities in relation to investrnent" in
Article 3 as follows:
"(2) the maintenance of branches, agencies, offices, factories and other appropriate establishments;
(2) control and management of established or acquired companies;
(3) ernployment and discharge of specialists, including technicians, executives attorneys and other workers;
(4) the making and performance of ~ont rac ts . "~~ '
These detailed provisions give us a better view of the substance of MFN
treatment.
F. National Treatmenf in General International Law
National treatment clauses are found in the majority of modem ~ l T s . 3 ' ~
However, since by entering into BITS, States do not give up tbeir rights of approval
309 The treaty only permits discriminatory tax treaaent based on the principle of reciprocity or treaties for the avoidance of double taxaaon and prevention of tax evasion. See Protocol artached to PRC-lapan Treaty, art 6.
311 Id., art 3(3).
'12 UNCTC, BITS, See Anonymous, "Outstanding Issues in the Draft Code of Conduct O Transnational Corporations", in UNCTC, Bilateral Inveshnent Treaties (B hereinafier "BITS") Annex VII, 156 ST/CTC/65 (1988), at 33, para 130.
regarding the admission of foreign investment, a nationd treatrnent clause in a BIT does
not extend to the admission of foreign investments unless otherwise stated in the treaty?13
Another classical limitation of national treatment is to allow restrictions necessary for the
maintenance of public order or for the protection of national sec~rity?'~
It has been the traditional position of China and other socialist countries that
national treatment shall not be given to foreigner inves tor~?~~ But in negotiations of
BITS with some major capital-exporting countries, the Chinese governrnent has made
some concessions. In the treaty with the Federai Germany, Article 3(4) provides:
"Either Contracting Party guarantees, where its law concerning joint ventures with foreign investment and wholly-foreign-owned-enterprises are not hstrated, not to adopt discriminatory measures to joint ventures in which the other Contracting Party's investors hoId shares and inveshnent made by investors f o m the other Contracting ~arty."~~~
The next move away appeared in the PRC-UK Treaty, which provided that each
party shall "to the extent possible," accord national treatment to investors in accordance
with its laws and regulations."3'7
A breakthrough occurred in the China-Japan treaty, where
been given to foreign investors with respect to its "investments,
national treatment has
returns, and business
313 Id., at 33. It is also noted that the U.S. Prototype Treaty (anne V, art II, para. national treatment standard should apply to the ueamient of admission of in~estment
1) expressly stated that the
314 Id., at 34, para-133.
315 rd.
316 National Treatrnent is considered to be of vital importance by Federal Germany that it wiii uisist on its inclusion and rather abandon a treaty negotiation than give up the national treatment clause. Id., at 34, para. 134, Thus the provisions in the treaty with China is a compromise by both parties.
317 PRC-UK Treaty, art. 3(3). This treatment is provided with respect to the investors' investments, rerurns, and, management, use, enjoyment or disposal of their investments. See art. 3, (1) (2).
activities in connection with the in~es tment . "~~~ But a realistic examination of this
provision leads to major questions, as explained below-
In China, there are three types of enterprises re~o~onized by law: state-owned
enterprises, collectively owned enterprises and private enterprises. State-owned
enterprises have privileges in obtaining raw rnaterials, energy and labor, but they are
subject to state planning in production and pricing and are subject to higher tax rates.
The other two types of ownership have more fieedom, yet at the sarne tirne do not have
the above privileges. Which type should foreign investments fit into?
Furthermore, in the Protocol of the PRC-Japan treaty, besides the cfassic
limitations of public order and national security, exceptions to national treatment are
allowed when it is "according to relevant laws and regulations," and "for normal
development of national economy and in time of practical needmW3l9 Since "normal
development of national economy" and "practicd need can be interpreted very widely,
this provision potentially Limits very sib@f5cantly the scope of ArticIe 3 of the treaty.
While the abstract provisions on national treatment in the Chinese BITS rnay be
ciifficult to implement in practice, it should be noted that under Chinese dornestic
legislation, foreign investment enterprises that are export-oriented or with advanced
---
3 18 See the PRC-Japan treaty, Article 3(2). In the Minutes attached to the treaty, specific actions contraq to the national treatrnent of investors are defined as discriminatory restrictive measures on the following activities: buying raw material or aiding matenal, electricity or fueI, various productive or operative tools; sales of production within or out of the country; gening loans within or outside the country; introducing technology; establishing branch offices abroad.
319 PRC-Japan Treaty, art. 3 of the Protocol provides that different treatment given to investors "according to relevant laws and regularions, for public order, national security, or normal development of nationai economy and in tune of practical need," shouid not be deemed as inferior.
technology are given the same treatment as state-owned enterprises with regard to the
price of water, elechicity, transportation and communication fa~ilities?'~
G. Foreign Tradinz Riahts and Nafional Treatmenf
One of the fundamental pnnciples of the WTO and of the GATT is that of
"national treatrnent." While the most-favoured-nation (''MFN") obligation of Articles 1
and II prohibit a Member from discriminating among other Members, Article III imposes
another type of non-discruninatory obligation -that of "national treatrnent." Article 1 of
general MFN is considered to be one of the cornerstones of the world trading systems,
setthg out the Agreement's unconditional most-favoured-nation ('WiFN'") obligation.
Subject to certain exceptions, this MFN obligation prohibits Members from
discriminating among the products of other Members. Any favour, privilege or immunity
that a Member gants to a product of another Member must be extended automatically
and unconditionally to the like product of dl other Members. The MFN obligation
applies generally to all customs duties, other import or export charges, to all rules
concerning imports or exports, and to al1 intemal replations and taxation measures
related to goods. Subject to certain exceptions, the nationai treatrnent obligation of
Article IIi prohibits Members from discrirninating between like imported and
domesticdly produced products. This non-discriminatory obligation is applied broadly
by the various paragraphs of Article IiI to cover a.U internal taxes and charges, and all
laws, regulations, and requirements affecting the internal sale, offering for sale, purchase,
distribution or use of a product. Specifically exempted fkom the national treatrnent
obligation are non-commercial government procurement practices and domestic
subsidies, rneaning that a Member will not violate Article III by prefemng to procure
local to imported goods, or by granting subsidies only to domestic producers.321
In other words, national treatment means, generdy, that foreign imports will be
treated no less favourably than domestically produced goods, and foreign enterprises will
be treated no less favourably than domestic enterprises. But in China, only certain
authorised companies have "foreign trading rights," that is, the right to engage in impoa
and export. In other words, a foreign company cannot sell its imported products directly
to an end-user or distributor in China, which did not have foreign trading rights, but must
instead get an authorised Chinese foreign trade corporation that wouId act as an
intermediary. Similarly, a Chinese manufacturer, which is not permitted to sell export
products directly to a foreign trading one, discriminates against irnports and raises the
costs of foreign company. This system of exclusive foreign trading rights discriminates
against irnports, raises the costs of foreign companies and impedes cornpetition by
foreign businesses, and is contrary to the WTO principle of national treatment.
The restriction that only "approved foreign trade operators" shall have the right to
engage in foreign trade is codified in the PRC Foreign Trade Law and the Foreign Trade
Agency System Tentative Provisions. It is a vestige of the Soviet-model planned
econorny that prevailed in China up to 1978, when only about 130 Chinese companies
-
320 See "State Council Regulations Concerning Encouragement of Foreign Invesrment," promulgated on October 11, 1986, art. 5. See CCH, "Business Regdation" vol. 2, para. 13-509, and accompanying text.
321 Jeffrey S-Thomas & Michael A-Meyer, nie New Rufer 0fGlobal Trade, A guide ro the World Trade Organization, Carswell, Thomson Professional Publishing, 1994, at 56.
were authonsed to deal with imports and exports. Since then, the foreign trade system in
China has been greatly expanded, and currently as many as 10,000 Chinese enterprises
are reportedly authonsed to handle foreign trade. These include all mmufacturing plants
in the five Special Economic Zones of Hainan, Zhuhai, Shenzhen, Shantou and Xiamen.
For much of the past two decades, China has taken a number of steps to
accommodate foreign investors. Since the inauguration of the SEZs in 1979, foreign
investors have been granted special preferences on many fronts. In exchange for
transfeming technology, capital, and management expertise to investments in the SEZs,
foreign business people have been able to take advantage of a system of tax benefits and
other fonns of preferential treatment. To date, the "special" areas offering benefits to
foreign investors have multiplied to include the five SEZs, over 20 "free trade zones"
(FI'Zs), 14 "open" coastal cities, and 32 national-level "economic and technological
development zones" (EDTZs). Inducements Vary among these types of zones, but rnost
offer income tax breaks of roughly haif the national rate of 33 percent and reductions or
exemptions in import duties. The rapid proliferation of multinational cornpanies with
plants in these zones seemed to indicate that such inducements offset, at least partially,
the uncertainties of investing in a relatively untested market.
But there is no question that in the last few years the gatekeepers of China's
economy have become more selective. In many ways, China's playing field remains
tilted in favour of domestic £ïrms, which enjoy prionty access to low interest loans, raw
materials, and other State subsidies. This of course remains a disadvantage to potentiai
outside investors. Nonetheless, PRC industry leaders, Company executives, and even
government rninisters have complained about the disadvantaged state of Chinese foreign-
invested enterprises (FIES). Renewed nationalism fuelled by a sense of unity derived
form the Taiwan crisis of 1996 and a sense of destiny instilled by the irnpending r e m of
Hong Kong encouraged China's leadership to take m e r steps in 1996 to protect
domestic industries. Toward that end, the govenunent has rescinded some of the tax
incentives that formerly enticed foreign companies to invest in China.
II. Observations and Discussion
The remarkable achievements of economic reform, both in the SEZs including
PDZ (PNA) and in the rest of China, inspire the hope that economic reform "in some
foms of comrnunism ... cm be achieved without changing the d e s of the game."
Perhaps this may prove to be true. With PDZ (PNA) as the model, institutional
development on a national scale may eventually take shape, which wiil pave way for the
full play of a market mechanism in the entire national econorny. This may finally solve
the present confusion surrounding the urban reform as described before. In short, the
successfid development of PDZ (PNA) represents an important step forward in China's
refonn program.
But there does rernain reason for caution. While PD2 (PNA) has been making
sit)onificant headway in the Iast nine years, it is still at a formative stage. It stiU faces a
number of problems. Domesticdy, it is true that PDZ (PNA) is a de facto SEZ, but there
has yet to be a legislative action approving Pudong as a SEZ? The establishment of the
322 See Bin Xue Sang, Pudong: Another Special Econornic Zone in China? - An Analysis of the Speciai Regulations and policy for Shanghai Pudong New Area Northwestem Journal of International Law & Business (14), 1993, at 130-159, at 154.
five SEZs was mandated and rectifïed by the National People's Congess, but the opening
up of Pudong and application of sorne special policies that are applicable only in the
SEZs were o d y announced by former Chinese Premier Li Peng in 1990. While at
present stage, this should not be a concern for potential investors, the conspicuous
absence of the word "special" may discourage investments. Moreover, the fact that
Pudong is not narned as a SEZ &es rise to speculation about the intense stniggle among
the regions. As discusseci before, the magic word "special" as applies to SE2 only
si30nifies "preferentiai". It is a well-known fact PDZ (PNA) and the five SEZs have
benefited from the preferential policies adopted by the Central Government. But such
development could, to varying degree, be achieved at the expense of the rest of the "non-
special" regions in China (that is, regions that are not treated preferentially). The special
policies adopted by the Central government make cornpetition unfair. This in itself is a
breach of the principle of market economy. Moreover, with PD2 (PNA) becoming a de
facto SEZ, the gaps in economic development and living standard that already exist
between the coastal areas and the landlocked provinces will be further widened and the
region tension will be aggravated. Furthennore, as PD2 (PNA) is considered as more
"special" than the five SEZs, this could lead to a tense relationship between PDZ (PNA)
and the five SEZs. If PDZ (PNA) should be treated more preferentiaily, it could be
diverted from the five SEZs to PDZ (PNA). As a result, development of Pudong codd be
at the expense of the SEZs.
~ntemationall~,~" with the development of Pudong, Shanghai will ernerge as a
financiai and econornic centre. Within China, and in a world context, this will threaten
the position of Hong Kong as an international commercial and economic centre as the
two cities are not far fiom each other geographically.
Locally, the relation between Pudong and Puxi needs to be treated carefully. On
the surface, there should be no problem on this issue. One of the concerns behind the
decision of the Chinese Central Government is revitalising Shanghai. P& is already a
relative highly developed ciq, but it needs further development. Benefiting fkom the
preferential policies adopted by the Central govemment, PDZ (PNA) is fast catching up
with Puxi. The tirne may corne when Pudong will surpass Puxi and this may induce Puxi
to ask for the sarne preferential treatment that PDZ (PNA) enjoy-
For the tirne being, Waigaoqiao probably provides international investors and
business development managers the opportunity to create the most flexible production
structures and have the greatest control over their PRC distribution and sales channels of
any location in China. Indeed, Waigaoqiao's success in instituting liberal regdations may
hold the seeds of the zone's dernise. Other bonded zones have already adopted many of
its policies. Moreover, SEZs are now requesting permission to institute policies similar to
Waigaoqiao7s. Whether Waigaoqiao WU offer even more incentives 10 stay ahead of the
garne remains unclear.
So far, the Chinese government's market economy reform has achieved
remarkable successes even thou& the market has been introduced within the framework
of the existing political institutions of the Party-state. One of the major factors for its
success is that the approach has ensured political stability. This has to be considered a
great success, not only fiom the standpoint of the Chinese, but also from the position of
The word "intemationaiiy" may not be accurate as after reversion of Hong Kong in 1997, the relationship between Hong Kong and Shanghai will no longer be international in nanue.
foreign investors wary of China's commitrnent to a more open system of economic
relations and that system's capacity for success under a communist regime.
Still, with the rapid expansion of market forces and deciine of the state economy,
it could be a problem for China to maintain the balance?" With the vigorous
development of SEZs, especially in the PDZ (PNA) developed regions in the heart of
Shanghai, what people see through these "windows" is the superiority of capitalisrn over
socialism. In Shenzhen, Shantou, Zhuhai and Xiamen, 5 1 percent of the total industrial
output value is fiom foreign capitai enter prise^.^^ In 1991, the output of state industries
grew 8 percent, collective output grew 18 percent, and private entrepreneurs' output grew
24 percent, and foreign capital enterprises' output grew 56 percent.326 M e n people see
such facts, the propaganda in the mass media will be ineffective. The PDZ (PNA) is
likely to M e r erode the communist ideology, which is an important foundation of the
centre government's power. With the rise of market forces, the state central planning is
weakened. Against this background, it is difficult to predict whether China's
compromise will endure. If the present trend of market force growth should continue, it
could take over most of national economy.)" If the entire Chinese economy should turn
32-3 On the one hand, goods produced by state-owned enterprises are stockpiied in warehouse because no one wants them. The debrs incurred by these enterprises are estimated at U. S. 30-50 billion, Many are thinking of selling them to foreign investors (See The Christian Science Monitor, December 5, 199 1, at 8)-
In contrast to this dismay picture of public or state-owned enterprises, the private sector economy is developing vigorously. From 1978 to 1988 the share of total industria1 output produced by non-state firms ahos t doubled, from 22 percent to 43 percent. In the economy as a whole, by the end of the 80s. Iess than 40 percent of China's national income originated in the state sector.
325 See Zhang, Y. 1990. The Ten Years' Great Chmges of China's Spechl Economic Zones. RMRB (People's Daiiy, Overseas Chinese language edition). Aug. 27, 1990, at 1.
326 See McGregory, J. (1992). Reality is Overtaking ideology in China. Wali Street Journal, March 2, 1992, at 9.
into a market economy, the rules and policies of SEZs would not be justified. Also, if
Chinese communist leaders find that their political system is in danger of being
overthrown, they may find the situation intolerable- The outcome of such a situation is at
present impossible to predict. Therefore, the ovemding concern fiom an international
perspective still remains China's potential for instability as a result of its politicai and
ideological differences with the western, capitalist countries.
327 The booming private businesses are exerting such great impact today that the state-owned enterprises have recently decided to diversi@ the ownership- Modelling Deng Xiaoping's policy of "one nation, two systems", they advocate "one factory, two system".
CONCLUSION
The effective growth of foreign investment in the Pudong Development Zone
(Pudong New Area) has been primarîly a result of this area's proximiv to Shanghai and
other cities in China, and it has been positively related to favorable local policy and, at
the sarne time, only weakly responsive to differentials in dornestic market potential and
labor costs between PDZ (PNA) and other potential sites in China. Geopphical location
and unique planning activities are much more important in explaining SEZs' performance
than is aclaiowledged in the literature, with its "neoclassical" theoretical emphasis on
labor costs, incentive policies and market.328 A second factor is that the growth of
foreign investment in PDZ @NA) had brought little technology transfer, no substantial
net exports, nor significant dornestic linkages. This conclusion considers the
consequences of promoting foreign investment, in particular, the effects on labor;
articulates some investment policies applicable elsewhere; contemplates the role of a
zone policy and speculates on the prospects for China's SEZs.
PDZ (PNA) has been an important opportunity for foreign investors and has
helped to increase confidence in China's open-door policy. in the earlier stage of China's
reform era, foreign investors' uncertainty was extremely because of the lack of
information and contact. The creahon of the SEZs with favorable and open investment
policies was crucial for reducing that uncertainty. The SEZs, Mering fiom the rest of
328 See Wu,Weipeing, "The promotion of foreign investment and technology transfer in Shenzhen" Pioneering Economic Refonn in China's Special Economic Zones, (Ashgate, Aldersho t. Brookfield USA. Singapore. Sydney, 1999), at 120-130,
the country at the time, resembled environments foreign investors were famrliar with in
their native countries or in other developing countries with more or less open investment
regimes. In this way, China's policy to establish the SEZs should be highly vaiued.
Nevertheless, the SEZ policy has had some disadvantages in terms of cost to the host
country. These disadvantages include the exploitation of cheap labor, aggravation of
regional disparity, and deployment of dornestic resources rather disproportionately at the
expense of other Chinese cities. It also should be noted that SEZs' impressive growth
record could be attributed strongly to growth at the national level. As China gradually
opens its investment ree@me, as would be required with its admission to the WT0, SEZs'
status will no longer be special.
S a , an outstanding disadvantage for potential foreign investors is the question of
risk- Possible nationalization of foreign enterprises by the goverment, loss of funds as a
result of politicai upheavals, or disruptions in supplies of goods, services and workforce
are remain a negative outcome an international standpoint. Some of these risks are
related to political instability, as has been seen in the Philippines, India, Indonesia, South
Africa, most Middle Eastern countries and many Afncan countries. To a certain degree,
some Latin American countries such as Mexico, Chile and Panama have also had reduced
levels of foreign investment inflows during tirnes of political instability. In China, a
possible advantage fkom an international perspective is that the economic reforrn program
introduced by Deng has penetrated every corner of the country and appears to have
reached a point of no return.
For China as a whole, foreign investment, particularly E?DI, will remain a major
source of capital for the SEZs, especially when alternative sources of capital are hard to
come by. One other source may be portfolio investment, which demands a well-
functioning stock market system as the medium. However, China may be a long way
from having such a system; and political stability often is an even more sensitive issue for
portf'olio investment. So far, two of China's stock exchanges, Shenzhen and Shanghai,
have struggled to get foreigners to buy the special B shares that are not offered to the
Chinese.
Another option wodd be domestic public and private savings. This source seems
more promising, since tlie Chinese Save about 38 percent of their gross domestic product,
a percentage higher than dmost any of their Asian neighbors, which are already well-
Lcnown for high savings rates.32g But one important fûnction of foreign investment is
facilitating the integration of China into the world economy by providing either direct
input such as capital and technology through joint venture efforts or cornpetitive pressure
and operational demonstration for state enterprises.
For China to be strong, it needs more foreign investment in infrastructure
development and service industries in China's SEZs, since these two sectors are now
open to foreign participation afier being closed for rnost of the 1980s. This 'need' for
further investment could be viewed internationally as a source of stability and a
continued comrnitment to more open economic relations with the 'outside'. Despite
Pudong's successful record in promoting foreign investment, only about a quarter of the
funds for infrastructure have come from foreign sources. To rnake such investment
attractive, PDZ (PNA) should be somewhat flexible about ownership rights for urban
infrastructure. Such an approach would be a great boon to the financial burden of the
329 See Shaw, Stephen M. and Jonathan R. Woetzel, 1992, "A Fresh Look at China," The McKinsey Quarterly 3 (June):37.
municipal govenunent and provide new sources of funding for public utility
constr~ction.3~~
Producer services are another area with strong potential for foreign participation.
Officiais in PDZ (PNA) have already realized the necessity of developing a producer-
services sector to sustain the manufacturing sector. Since the second half of the 1990s
there has been steady growth in the irnport of consulting services from Hong Kong and
overseas, as Chinese f m s have begun taking more initiatives in design innovation. Red
estate development and urban infrastructure building also have generated needs for
architectural engineering and consulting services. An advantage for the PDZ (PNA), and
China as a whole would be if, taking advantage of its proximiw to foreign investment,
PDZ (PNA) could hecome a center of producer services in China through judicious
policy initiatives.
PDZ (PNA) must still overcome some liabfities in its investment environment to
provide more advantageous conditions for investment. Though PDZ @NA) has become
a modern area, there are problems with its urban infkastnicture similar to those in other
Chinese cities. The shortage of energy has been a major problem in PDZ (PNA).
Bottlenecks in transportation and communications have hindered the production
efficiency of many FIES. PDZ (PNA) suffers from deficiencies it has Little control over,
but that China as a whole must overcorne: insuficieut domestic supplies, cumbersome
bureaucracy compounded by corruption, and unconformable practices for dispute
settlement. All of these mipht prove problematic for international business investrnent.
Another factor is that the dispute settlement has been influenced by the strong cultural
- - -- -
"O See Foreign Broadcast Information Service: China, (FBIS-CHI-94082.28 Apnl 1994), at 8 1.
130
bias in China against judicial actions.331 Many FIES find it difficult and time-consuming
to resolve commercial disputes. And while Pudong's lack of large state industries or
establishments is appeahg to many investors, because of the negative image state
enterprises have in terrns of work ethics, a possible disadvantage, or counterbalance to
this, would be the makeup of Pudong's workforce. People fiom different parts of China
corne to work there, brin,oing with them different local cultures and work habits, and they
do not always get along well with each other.
If PDZ @NA) wants to attract more investment to hi&-tech industries, as it failed
to do during the 1980s, it will need to adopt a regulatory framework closer to
international standards, to protect intellectual property rights. This may not be as
difficult for PDZ (PNA) now that China has been pressured to do so nationwide if they
are to join the WTO. In addition, PD2 (PNA) wLIl need a stronger technology policy to
raise its industrial capabilities. To its benefit, compared to many other similar zones in
Asia, it has a sizable pool of skilled manpower and research institutions, and most of its
institutions have worked un de^ a centralized system of fund aiiocation and product
dissemination. The task ahead is to foster linkages between these institutions and
enterprises, and to speed ul; commercializing innovations.
The success story of Singapore in transforming itself into an export powerhouse
in the electronics industry c m serve as a role mode1 for China's S E Z S . ~ ~ ~ Despite rising
33' See Zhang, Xiangyu, "A survey o f Chinese Legal System of Foreign Invesrment", ASILS Inernationnl Law Journal, 9:37-60, (1985).
332 Similary to Pudong as weii as China as a whole, Singapore started up as a production site for labor- intensive assembly of low-end e lec~onics products in the 1960s and 1970s, responding to the wave of industrial relocation. For a full discussion, see Lim, L i d a Y.C. "Technology Policy and Expon Development: The Case of the Electronics hdustry in Singapore aud Malaysia," Paper presented at the
wage levels and a decreasing supply of unskilled labor, Singapore has attracted more
foreign investment in electronics and other hi&-value-added products and processes.
Such investment is increasing capital intensive. One could argue that market forces such
as technological changes within industries, shifts in the global corporate strategies and
changes in comparative costs between countries are responsible for this outcome. But it
is the govemment's technolo-7 policy, which has focused on capital, labor, and
infrastructure and support services, inchding a network of research institutes and centers
fimded by the govenunent to support activities of private cornpanies that has made
Singapore a highly world-cornpetitive location for the electronics i x ~ d u s t r ~ . ~ ~ ~ This could
be a very promising outcome for PDZ (PNA).
To compete effectively with coastal open cities that have substantial industrial
bases, PDZ (PNA) dso will need to widen and deepen its industrial structure.
International experience shows that a city is most vulnerable economically when its
economy is dominated by a few industries with a relatively narrow specialization. When
these industries decline because of either a secular trend or diminished competitiveness,
that quickly affects the entire urban economy. There are ample examples in North
America and Western Europe, mostly in cities dependent on the production of basic
metals, ships, transport equiprnent and textiles.334 PDZ (PNA) may be able to avoid such
Fust Conference of the United Nations University, Insutute for New Technologies, Maasnicht, the Netherlands, 1993.
333 Variations among industries in the rare of technical changes are substantial. For instance, the garments and footwear industries have production processes where automation is nearly impossible, and as a result the industries are constantly in pursuit of low-cost sites. Couniries like South Korea, which has struggled to compensate for nsing labor costs with higher productivity, could not prevent the flight of these industries to other, Iower-cost countries.
334 See Wu,Weipeing, "Proximity and Complementarily in Hong Kong -Shenzhen Indusirïalization," Asim Survey 37,8 (August, 1997), at 77 1-793.
a fate, since it has aLready branched into some higher-end manufacturing activities, in
addition to its mainstays of consumer electronics and textiles, and producer services. An
industrial targeting policy is already under discussion in PDZ (PNA) and, once
implemented, will push out many labor-intensive assembly operations.
That the SEZs of China have served as a role mode1 is clear. At the same time, it
is necessary to point out that the SEZs in China in general, and in PDZ (PNA) in
particular, benefit Erom the particdar circumstances of the regime. These circumstances
include: ( 2 ) the presence of a large overseas Chinese business community, prosperous
and eager to make foreign investment has helped mainland China; (2) the geographical
proximity of those countrïes has made it possible for China to invest in developing the
necessary infrastructure; (3) culture homogeneity. Finally, the reclusive nature of
Chinese trade, in the absence of GATï obligations, may even have pennitted rapid
economic growth and expansion of trade. Following Pudong's and other SEZs' Iead,
srnaller zones of â similar nature have mushroomed in all major cities of China since the
Iate 1980s. Most of them are called Hi&-Tec Development Zones, ofien Iocated in
greenfield sites adjacent to major cities and intended to attract foreign investment by
offering concessionary policies. Although none of these newer, smaller zones enjoy the
same kind of autonomy that PDZ (PNA) has, several have grown very fast and becorne
alternative poles of attraction for foreign investment. Shanghai's PDZ (PNA) and
Tianjin's Economic Development Zone are probably the best examples. Each is attached
to a prime urban center with a wide and strong industrial base, nch hinterland, and superb
transport capacity by Chinese standards. Each zone has been home for some large TNCs
from industrialized countries, such as Motorola and Intel, and for some rather
sophisticated production lines. Each zone £bds it possible, with some effort, to source a
wide range of components locdy, and both possess large pools of skilled technicians.
PDZ (PNA) is still considered a testing ground for new measures to deepen
refonn and open m e r to the worId. Several new refonn measures have been
introduced since 1993 in a bid to invigorate its enterprises, particularly state enterprises.
First, PDZ (PNA) has tried to introduce a corporate system step by step in which al l state
enterprises will become either lirnited-liability stock companies or limited-liability
companies. Second, a new ernployee system has been introduced t6 establish a labor
market characterized by fluidity and competition. Third, PDZ (PNA) has started to use
internationally accepted indices of assets, sales, profits and taxes, to assess the
performance of enterprises and rate them according to system, in order to promote
enterprise mergers, the transfer of property rights, and lawful and orderly disposal of
enterprise bankruptcies.
Futures success of PDZ (PNA) depends on China opening further. Pudong's
original role is nearïng its end, and the zone needs to redefine its functions and seek new
roles. It is almost becoming a modern city, and somewhat international, so it will be
unacceptable for PDZ (PNA) to tum into an industrial backyard for Hong Kong and other
nearby regional centers. Above d, it is important that PDZ (PNA) maintain its export
orientation, because h s involved in cornpetitive struggles for overseas markets are
forced to become efficient, and this efficiency will be transmitted back to domestic
suppliers of inputs and gradually to the economy as a whole.
There are some significant implications for PDZ (PNA) because of the proxirnity
to Hong Kong. Pudong's oficials have considered two alternatives: accept the status
quo, or expand the administrative line to integrate with Hong Kong. Many are concerned
that the second option wiU distance PDZ (PNA) m e r fiom the rest of the country,
which presents a large market and source of labor. Such concerns are justified, since the
next fifty years may be merely transitional for Hong Kong. Shanghai, in joint
production, will persist as long as labor and land cost differentials remain sizable. But as
industries grow and mature, production costs rise, and land becomes scarce in PDZ
(PNA), foreign investors will look m e r north for other outlets for expansion. This
would be a major drawback to a Pudong too dependent on foreign money.
The former British Prime Minister John Major acclaimed the economic successes
in China as the miracle of this century. The International Monetary Fund reported in the
spnng of 1993 that after the Chinese economy had become the third largest in the world,
next to the United States and ~ a ~ a n . " " 5 s report was based on a new method of
cornparhg a country's goods and services in terms of purchasing power instead of a
comparison of currencies. By this new measure, China, in 1992, produced US$1.7
trillion in goods and services instead of US$400 billion. China has suxpassed not only
Japan, but also the four 'Zittle Dragons" in Asia (South Korea, Singapore, Hong Kong
and Taiwan) in tems of the speed of economic development. Tt is estimated that given
the present speed of development, China will have an economy larger than that of the
United States of Arnerica by the middle of the next century. This obviously lends support
that increased openness will serve to benefit China as well as meet with international
approval.
335 See Wang, I. 1995. An Introduction to Conremporary Chinese Politics. (W edition), at 280.
135
The key to the economic successes, as the Chinese government has
acknowIedged, is the economic reforms undertaken during this period of thne. Yet such
economic reforms would not have been possible without the corresponding political
reforms. However, given the colossal size and extreme complexity of the political
structure in China, political reform has to be gradua1 and piecemeal in order to maintain
political stability, which in tuni is a pre-condition for continued economic development-
In th is regard, the policy for the establishment of SEZs, and especiaily PDZ (PNA) caters
to the needs for smooth and gradua1 transformation fkom a sociaiist comrnand economy
to a free market economy. PDZ (PNA) seems eminently sound, but it is not the solution
to ail Shanghai and the rest of China's curent investment needs. PDZ (PNA) will not
attract, and cannot support, substantial additional foreign investment und its basic
infiastructure is compIeted. The achievements to date demonstrate that in the Chinese
form of cornmunism, there may exist the flexibility and authority needed to bring about
such an economic transformation without radically changing the political system. The
profound changes that the Chinese government has brought about in the political system
so far without causing social upheaval should serve as a positive sign for foreign interests
seeking to invest M e r in China.
It is important for foreign investors to keep China's political, social and economic
realities in rnind during negotiations for China's accession to the WTO. Many western
countries believe that China's admission to the WTO will automaticdly end communist
governance of the country. However, this expectation cannot occur solely as a result of
China's admission to the WTO. It is well known that China's participation in the GAïT
and its liberalization of the FDI sector and its 'open door policy' cannot be separated fTom
primary goals.
China 's commitrnents should benefit the global economy as well as its own
developrnents. All of the negotiating parties should return to and focus on the econornic
basis of China's participation into the WTO/GATT. It is time to forget the hi& drama of
the Cold War and get on with the serious business of building a world economy in which
all, including China, c m prosper, and all, including China, bear their share of the
re~~onsibil i t~."~ This is the only way to truly advance the interests of China and the
world.
336 See Henry Kissinger, The White House Years. (Boston: little, Brown, 1979).
137
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