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China's economic development zones, which have attracted huge foreign investment for over 20 years, are facing a new challenge.

 

A draft corporate income tax law, which suggests a unified income tax rate of 25 percent for domestic and foreign-funded enterprises to create an environment of fair competition, is expected to be adopted at the ongoing parliamentary session.

 

Foreign-funded companies in economic development zones have long enjoyed preferential tax rates. The law will reduce the significance of economic development zones as they will be stripped of this competitive advantage.

 

If the law is adopted, only certain industries, including high-technology projects, energy conservation and environmentally-friendly industries, will enjoy tax breaks.

 

All this leaves China's economic development zones with plenty of thinking to do on how to maintain high levels of investment.

 

"We have realized that our current operations overly rely on short-term methods and are too unstable to continue to attract foreign investment," said Wang Kai, director of the research institute of Tianjin Economic-Technological Development Area (TEBA), near Beijing.

 

TEBA has extended its projects from low-profit processing industries to automobiles, telecommunications and biological products, Wang said.

 

The area has attracted 4,316 foreign-funded enterprises involving a total investment of US$34.577 billion since it was established in 1984.

 

"Although the law will affect the economic development zones relying too much on the tax waivers, it does prove the determination of the Chinese government to standardize domestic economic order and promote the investment environment," Wang said.

 

The economic development zones are the products of China's policy of reform and opening-up and they mushroomed in the hope of forming powerful economic engines for the whole local economy.

 

China has established 147 national economic development zones since 1984, of which 54 zones used one quarter of the nation's gross foreign investment. So far, China has used US$685.4 billion from more than 590,000 foreign-funded enterprises.

 

But the development of the zones began to spawn problems.

 

"The advantages of the economic development zones have been fading with the promotion of the whole investment climate nationwide," professor Xu Fu of Nankai University, in Tianjin.

 

"Many zones specialise in low-profit processing industries, which have limited their development," Xu said.

 

"The extensive management of the economy needs to be switched to intensive management," Xu said.

 

"The law will promote development zones to accelerate economic restructuring," said Song Jinbiao, an official from the Shanghai Foreign Economic Relation and Trade Commission.

 

Song's view has been echoed by Li Zhiqun, director of the Foreign Investment Department of the Ministry of Commerce.

 

"The unified income tax policy places emphasis on the preferential regulations for certain industries, which offers an opportunity for the economic development zones to carry out structural reforms," Li said.

 

"The government plans to hold a meeting on the new strategies for economic development zones some time this year," Li said.

 

Shenzhen Special Economic Zone (SEZ), the earliest established economic development zone in China, has been striving to make the high-tech industry the region's mainstay industry.

 

Shenzhen SEZ has attracted thousands of high-tech enterprises, including almost one fifth of the world's top 500 enterprises.

 

(Xinhua News Agency March 15, 2007)