A bronze bull statue stands near a busy street that is bustling with people and surrounded by high-rise buildings housing 2962 financial institutions. This is not a description of New York’s Wall Street but of Binhai’s Financial Street in Tianjin, China. In June 2006, the state council designated Binhai New Area as an experimental zone for comprehensive reform in key sectors of finance and logistics through the use of regulatory reform, special tax incentives, and innovative land use policy. Its Financial Street in particular serves as a financial counterpart for the expansive Tianjin Economic Technological Development Area (TEDA) with the goal of bringing innovation to the financial services industry and bringing depth and sophistication to China’s capital markets.

The gleaming Binhai New Area is a far cry from China’s first special economic zones (SEZs) established in the 1980s. By creating enclaves where investors could operate more freely and where the government could learn how to adjust to a change in economic philosophy, China sparked a period of unprecedented growth that continues today. While the bulk of China’s history with SEZs has been a continuation of the original objective to develop pockets that are attractive for manufacturing investors, the Binhai New Area is a key part of a more recent trend to use SEZs to advance specific economic initiatives.

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The history of China’s SEZ efforts is illustrative of the fact that SEZ evolution in Asia is a reflection of economic evolution. SEZs have been used as a reactive way to make up for shortcomings, particularly in the early stages of economic growth. As economies grow, governments more often use SEZs as a proactive means to push industrial development in new directions. This cycle has been repeated numerous times with each wave of development in Asia – first the Asian Tigers, then the Little Tigers of south-east Asia, then China, and now India and Vietnam. These cycles have produced approximately 3000 SEZs either operating or under construction in Asia today.

India is often said to be at the same stage of growth as China was a decade ago. Reflecting on the importance of SEZs in the growth of its northern neighbour, India set out a new SEZ policy in 2005 to promote investment in manufacturing and services sectors by making up for general shortcomings in infrastructure and the regulatory environment. Enterprises within SEZs are now able to skirt some of India’s most burdensome red tape while private SEZ developers are incentivised to undertake infrastructure investments.

Vietnam faces similar challenges with infrastructure out of 139 zones, only 33 have wastewater treatment facilities. To hopefully make up for these gaps, Vietnam has deviated from the Chinese model by allowing for greater private sector participation in developing zones.

Economic maturing

While these developing countries are using SEZs to build their low-cost manufacturing bases, many countries have already crossed this threshold and moved on to the next stage. Taiwan’s economic miracle in the 1970s and 1980s was driven by its prowess as a low-cost manufacturer. As the economy matured and it faced challenges from lower cost competitors, Taiwan established the Hsinchu Science and Technology Industrial Park where local innovators were able to flourish. Much of Taiwan’s transformation into a major technology player owes to the zone in Hsinchu, which was the birthplace of companies such as Taiwan Semiconductor and United Microelectronics – now two of the largest semiconductor companies in the world.

Likewise, Malaysia launched the Multimedia Super Corridor (MSC) in 1995 using a combination of quality infrastructure, facilities and incentives to promote the country’s growth as an information and communications technology leader. Thailand, on the other hand, chose to place a special emphasis on distributing economic growth on a geographic basis. The entire country functions as an economic zone in that incentives are available throughout the nation in four general zones. These zones are determined by the relative level of development of the area, with the least developed provinces offering the most incentives to investors.

As Asia’s industries developed and economies grew, new shortcomings and challenges arose to spur further evolutions in SEZ offerings. Countries such as India and China are finding that their logistics industries are creating bottlenecks for growth and have thus developed logistics parks to increase capacity.

China, recognising its need to improve the maturity and depth of its financial markets, thus set up Binhai New Area to promote the growth of venture capital, foreign exchange administration and offshore banking.

Almost all countries have had to tackle problems with urban congestion and some have used SEZs as a means to spread growth out of population centres. Incheon Free Economic Zone outside Seoul was Korea’s first free zone when it was launched in 2003 as a city-sized, self-contained development complete with manufacturing, office, recreational and residential areas to attract employers and employees alike.

Many of these SEZ efforts are often tagged as experimental. This has created a laboratory effect where one country’s successful experimentation can become a model for others to emulate. This cross pollination has driven the evolutionary process of SEZs in Asia. As each country tailors those models to their own needs, new models have been born that are then proliferated across borders again.

Neighbour watching

Whereas China was a model for India’s SEZ programme, India also modified it to leverage the private sector to make up for the government’s more limited resources. Pakistan in turn is now considering a SEZ programme similar to India’s. China itself has been studying the initiatives of countries such as Malaysia, Singapore and Taiwan as it has been using SEZs to push its economy up the value chain.

Today’s Binhai New Area is thus informed by the successes and failures of the past, but is also at the forefront of China’s economic goals for the future. Ultimately, its ability to become a Chinese version of Wall Street will determine whether it becomes the beginning to another chapter in the evolution of Asia’s SEZs. n

James Ku is a manager at Tractus-Asia Ltd, a consulting firm specialising in foreign investment strategy and economic development.

KEY FACTS:

  • India set out a new SEZ policy in 2005 to promote investment in the manufacturing and services sectors
  • In Vietnam, only 33 out of 139 zones have wastewater treatment facilities
  • The free zone in Hsinchu, Taiwan, was the birthplace of Taiwan Semiconductor and United Microelectronics
  • In 1995, Malaysia launched the Multimedia Super Corridor to promote the country’s growth as an information and communications technology leader