FZW talks to Dr Douglas Zhihua Zeng about upcoming developments in free zones and China’s Belt & Road initiative

In the future, will the main impetus for creating SEZs and developing existing ones come from governments, or from the private sector?

Looking back the history, there have been successful SEZs that were initiated either by governments or the private sector, though the patterns are somewhat different from region to region. In some regions, such as Latin America, governments had played a very active role at the initial stage but later on the private sector became key players. In East Asia, governments have always been the key drivers for SEZ development, except a few countries such as the Philippines.

I think for a zone to be successful, both the government and private sector have to work together and fulfill their appropriate responsibilities. Even for a private sector developed zone, a proper business environment with a sound legal and regulatory environment, basic infrastructures and efficient public services is needed. For a government-led zone, private sector can help with its management, operations, investment promotion, etc., where the private sector may have better advantages. In a broad sense, this can be regarded as a “PPP” (public-private partnership) model.

Looking into the future, the PPP model will be the main trend for SEZ development, though in the process, government may still play a stronger role in low-income countries given the serious “market failures”, while in more advanced countries, the private sector will increasingly take a leading role.

To what extent are zones such as the Shanghai Free-Trade Zone likely to fundamentally change the way foreign companies invest in China?

Shanghai Free-Trade Zone (FTZ) is the first Hong Kong-like free trade area in mainland China. It is meant to serve as a pilot for China’s industrial upgrading and economic transformation through creating a more liberalised market environment. Some of the key features of the Shanghai FTZ include the “negative list” (first time in China) approach for foreign investments, simplified procedures for business registration and licensing and removal of a number of financial requirements for setting up a company, etc.

It greatly encourages the service sectors by opening up the media, e-commerce, legal services, transportation & logistics services, and some financial services, etc. It is also attempted to pilot some financial reforms, such as market-based interest rates, free convertibility of Yuan, and offshore renminbi bond market, as well as lifting restrictions on external securities investments, and so on. All these reforms are very important for helping China to move towards a more service and consumption-based economy.

In July 2016, China further relaxed restrictions on foreign investment in the mainland’s four free-trade zones (FTZs) in Shanghai, Guangdong, Tianjin and Fujian, allowing freer market access in various manufacturing and service sectors, including the steel, auto batteries and shipping industries. All these measures make the FTZs more and more attractive for foreign investments.

With no doubt, the FTZs will help to catalyze the next round of economic reforms in China. Despite somewhat slower paces in some areas, these reforms tested in the FTZs will help China to greatly improve its business environment and make foreign investments much more productive and efficient.

Many countries see an opportunity to use their geographic position in China’s Belt and Road project to develop sector-focused (e.g. logistics, energy) free zones.  What will be the determining factors in these zones’ long-term success?

The Silk Road Economic Belt and the 21st-century Maritime Silk Road, also known as The Belt and Road (B&R); One Belt, One Road (OBOR) or the Belt and Road Initiative, is a development strategy and framework proposed by China in 2013. It is intended to promote regional and cross-continental connectivity between China and Eurasia. Connectivity covers five major areas of interest: policy coordination, infrastructure construction (including railways and highways), unimpeded trade, financial integration and people-to-people ties. Among these, infrastructure construction is the dominant feature of the New Silk Road.

The initiative encompasses around 60 countries. Indeed, some of these countries could greatly benefit from this initiative by setting up sector-focused zones to serve the potential development needs of this huge area. However, in order for these zones to be successful, they must follow the basic principles, i.e., they must be based on the real market demand and commercially viable, and are adapted to the host country’s specific situations, and built on local comparative advantages; there need to be a conducive business environment, including sound legal and regulatory framework, good infrastructures, suitable labour force, and strong and long-term government commitment; and the zones also need to ensure environmental and social sustainability and deliver positive externalities, including catalyzing economic reforms, facilitating learning, upgrading, and structural transformation.

To what extent do you see low-carbon zones as potentially as transformational now for China as SEZs were in the 1980s and 1990s?

China has paid a high cost for its rapid industrialisation process. The World Bank estimates that the environmental cost in China is about 6-8% of GDP. While the government is promoting the transformation of China’s growth model from investment and exports driven to consumption and service driven, the low-carbon zones will inevitably play an increasingly important role in this transformation. A low-carbon pilot programme now underway in 13 Chinese provinces and cities.

Not surprisingly, among the 13 low-carbon pilot projects, Shenzhen, which initiated China’s economic reforms as the first SEZ in China, is again leading the way in this new initiative. Its carbon-trading scheme, which began in 2013, was China’s first and a precursor to a national programme that is due to begin next year. Shenzhen also aims to have 80 percent of its new buildings green-certified by 2020, making it the most ambitious municipality in that sector among the pilot sites. It has also made great achievements in promoting electric vehicles and public transportation system.

It’s hard to compare the impact of low-carbon zones with those SEZs in the 1980s and 1990s, but together with the free trade zones, the low-carbon zones will definitely help to cut the CO2 emissions and make the nation’s burgeoning cities more livable and economy greener.

Where do you see the major trend-lines for SEZs going globally?    

If we call the early stage export processing zones (EPZs) as “SEZ 1.0”, and the multifunctional industrial zones as “SEZ 2.0”, then we are now heading towards eco-industrial zones or eco-cities or innovation hubs, which can be called “SEZ 3.0”.  Such zones will be featured with green infrastructures, energy circularity, environment-friendly and resource efficient technologies, and increasingly focus on high-valued added sectors, such as industry 4.0 (where 3-D printing and other intelligent technologies are commonly used), and knowledge-intensive services, such as education, R&D, finance, business and technology consulting, etc., with more of a global focus.

On the other hand, with broadening trade liberalisation, the competitiveness of future zones will more and more rely on a conducive business eco-system, a vibrant and skilled labour force, and a livable and dynamic environment, and less on fiscal incentives as in the past.