Four Things to Know About Economic Zones Along the Belt and Road

In 2006, China’s Ministry of Commerce started to help Chinese companies build overseas industrial parks, or “economic and trade cooperation zones,” in a bid to provide convenient platforms for Chinese entrepreneurs to explore overseas markets while circumventing anti-dumping restrictions often imposed by Western countries.

Eight such economic zones, including at the Sihanoukville Port in Cambodia, the Haier-Ruba in Pakistan and the Rayong Industrial Park in Thailand, were the first to be approved by the Chinese government.

A decade later, these industrial parks have been taking shape, attracting Chinese companies to move in and engage in a variety of businesses. More such industrial parks have been constructed in other countries.

How many overseas industrial parks have been built?

Many of the countries along the Belt and Road routes are at earlier stages of industrialization, and they have shown a strong willingness to introduce foreign investment, according to China’s Ministry of Commerce.

Sun Jiwen, spokesperson of the Ministry of Commerce, said at a news briefing in April that, so far, a total of 77 economic cooperation zones have been under construction in 36 countries. Fifty six zones are located in 20 countries along the Belt and Road routes.

Chinese companies have invested $18.55 billion in these industrial parks along the Belt and Road routes, while more than 1,000 Chinese companies have settled in to conduct businesses in such areas as textiles, home appliances, steel, construction materials, chemical industry, automobiles, machinery.

These companies have generated a total of $50.69 billion in industrial output, with $1.07 billion of tax revenue to host countries, and created 177,000 jobs for local people, Ministry of Commerce data shows.

These industrial parks are called “shiny pearls” along the Belt and Road routes, spokesperson Sun said.

Why build overseas economic cooperation zones?

Some Chinese companies like telecom giants Huawei and ZTE have been setting up offices all over the world to explore the foreign markets on their own for years. But smaller companies may lack the resources and know-how to move their manufacturing capacity outside of China.

The industrial parks are built for the Chinese companies to move in in groups to reduce the cost and risks of doing business in a foreign country. Also, the host countries, eager to attract more foreign investment, often provide preferential tax policies and favorable services for the Chinese companies.

In the Sihanoukville Special Economic Zone in southwestern Cambodia, for example, the local government set up a service center that covers customs, labor and inspection functions, where companies can conveniently register for business and investment, and do customs clearance.

Going around trade barriers of Western countries is also an incentive for Chinese companies. Many Chinese companies will face anti-dumping investigations when directly exporting their products from China to European countries and the U.S. But products exported from other countries, such as Cambodia, will not have the problem. What’s more, the products may enjoy preferential trade policies or additional tariff cuts, according to trade experts.

What do the economic zones bring to the host countries?

For the host countries, these economic zones have come with more Chinese businesses and investments, which create more jobs, bring tax revenues and increase their exports. The Chinese companies have also helped upgrade some of their industries, as many countries are still lacking in certain industrial sectors.

Take Cambodia’s Sihanoukville special economic zone for example, by June 2016, more than 100 companies had moved into the park, including those involved in textiles, electronics and wood processing businesses. The park not only attracted 94 Chinese companies, but also three Cambodian companies and 12 companies of other foreign countries.

Issues of concern

The industrial parks are often huge projects that cost a large amount of investment in the early stages. But, because Chinese companies have difficulty raising money from local banks, they still need the services from Chinese commercial banks and policy financial institutions such as the China Development Bank.

Experts are also pointing out that some industrial parks seek to attract all kinds of companies in, but not necessarily focus on strong industries that complement each other.

Some industrial parks haven't gotten fully up and ready, like getting their power and road facilities going, which makes Chinese companies reluctant to move in.

Contact reporter Wu Gang (gangwu@caixin.com)