China and the history of its Special Economic Zones

Effective economic policies lead to a surge in foreign capital into countries. China is home to many SEZs from decades which have boosted the economic performance of the country, giving rise to its GDP.

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At the cusp of the 1980s, China started a series of reforms that would result in it becoming the fastest growing economy in the world, growing around 10% between 1978-2018, which helped to pull out over 700 million people from poverty.

In November 1978, in the Xiaogang village, Anhui province, the “household contract responsibility system,” was launched. According to this system, public property, i.e. farming land, was given to individual households through long term contracts that entitled them to own the harvest after paying taxes to the state. The successful reception of this system by farmers and the dramatic increase in rural economic activity led to the “Rural Land Contracting Law” in August 2002.

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In December 1978, the Open Door policy was adopted, it was an initiative to attract foreign capital and technology while keeping the socialist ideology of the Communist Party intact. These policies became precursors to Shenzhen, Zhuhai, and Shantou within Guangdong Province being designated as Special Economic Zones (SEZs) in August 1980, followed closely by Xiamen in Fujian Province in October 1980.

China and its economic zones

SEZs were to be amalgamations of various economic activities rather than niche sectorial entities and hence differed from existing export processing zones (EPZs). The primary goal of the new SEZs was to attract foreign investment into China, catalyze the use of technology and increase the county’s exports.

To do this, they were given special tax incentives, set up in areas that had natural advantages or strong factor resources and were generally operated under robust Public-Private partnership models.

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Effective economic policies and the open-door policy led to a surge in foreign capital into the country. Favorable production factors made the SEZs a huge success, resulting in rates of economic growth that were unprecedented in China, and the world.

China and its economic zones

Foreign investment flowed in (46% of FDI came into SEZs) seeking the almost endless supply of economically cheap and efficient labor. China’s GDP growth from 1980 to 1984 soared over 10%, while Shenzhen’s local economy saw a 58% annual growth rate, Zhuhai grew 32%, Shantou 9%, and Xiamen 13%. SEZs contributed to over 22% of China’s GDP, 60% to its exports and employed over 30 million people.

Shenzhen has been extensively studied as an example of economic success; it demonstrates China’s efforts to overcome poverty and underdevelopment. By focusing on private sector-led dynamic, self-sustaining models rather than only relying on government incentives, it achieved technological up-scaling to improve its competitive position.

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With the success of the initial SEZs, the Chinese government looked to expand the initiatives to other parts of the country. By 1984, when the early success of the SEZs had been confirmed, China opened its economy further, by extending similar favorable policies to 14 “coastal open cities” and in the following year to cities in the Pearl River Delta, the Yangtze River Delta, and the Min Delta in Fujian.

In 1988, a fifth, Hainan Special Economic Zone was established, following this, the Pudong New District in Shanghai was established in 1990, further opening areas along the Yangtze River to trade and investment. By 1992, the concept of openness was extended further, to a few cities in China’s border areas and all capitals of provinces and autonomous regions in the interior.

In 1992, when Deng Xiaoping undertook his historic and crucial southern tour reaffirming China’s open policy, the initial dogma of the SEZs had been accomplished: the “special” economic zones by that time were no longer so special.