The Implications of Foreign Investment
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THE IMPLICATIONS OF FOREIGN INVESTMENT IN SPECIAL ECONOMIC ZONES AND PUDONG DEVELOPMENT ZONE (PUDONG NEW AREA) OF CEDNA Tian Li A thesis subrnitted to the Faculty of Law in conformisr with the requirements for the degree of the Master of Laws Queen's University Kingston, Ontario, Canada November, 1999 Copyright O Tian Li.,1999 National Library Bibliothèque nationale IlJlI ,.ana& du Canada Acquisitions and Acquisitions et Bibliographie Services services bibliographiques 395 Wellington Street 395. rue Wellington Ottawa ON K1A ON4 Ottawa ON K1A ON4 Canada Canada The author has granted a non- L'auteur a accordé une licence non exclusive licence allowing the . exclusive permettant à la National Library of Canada to Bibliothèque nationale du Canada de reproduce, loan, distribute or sel1 reproduire, prêter, distribuer ou copies of this thesis in rnicrofoxm, vendre des copies de cette thèse sous paper or electronic formats. la fome de microfichelnlm, de reproduction sur papier ou sur format électronique. The author retains ownership of the L'auteur conserve la propriété du copyright in this thesis. Neither the droit d'auteur qui protège cette thèse. thesis nor substantial extracts fiom it Ni la thèse ni des extraits substantiels may be printed or otherwise de celle-ci ne doivent être imprimés reproduced without the author's ou autrement reproduits sans son permission. autorisation. To My Grandmother and Parents ABSTRACT The objective of this thesis is to analyze and evaluate the Special Economic Zones and Pudong Development Zone (Pudong New Area) in China. It deals with international foreign direct investment and the rise of the Chinese economy since the late 1970s, China's open-door policy and how it has attracted foreign investment. It will aIso discuss the advantages and disadvantages to foreign investment from the perspective of Pudong Development Zone (Pudong New Area), and international investors. Foreign investors have corne to China to explore its vast market and rich natural and hurnan resources, bringing capital and technology that China needs for its modemization and development. The description and anaiysis of the 'open-door' policy, its operation and impact, is illustrated by study of Pudong Development Zone (Pudong New Area). China's successful experience with such Zones is an important factor in its claim to qualiQ for membership in the World Trade Organization. The terms of China 's impending accession to the WTO will provide guideposts for such accession by other former cornniand economy countries. 1 wish to express my sincere gratitude to the School of Graduate Studies, Faculty of Law at Queen's University for offering me this opportunity to pursue rny studies in the LLM program and for providing financiai support without which my studies would have been impossible. No words can adequately convey my sincere appreciation for Professor K. Venkata Raman, whose supervision and guidance have been invaluable throughout my work. Much of the content of this thesis has been shaped by his cornments on my earlier drafts. 1 would also like to thank Professor George W. Alexandrowicz and Professor Alexander J. Easson for their invaluable help on this research, especially on how to make effective use of source matenals. My heartfelt and special thanks also to Professor Tung-Pi Chen, whose support, concern and encouragement sustained me through some trying circurnstances. 1 am especially gratefid for Professor Chen's generosity in providing me access to research materials coilected by hirn over the last twenty years. Without these materiais my research would have been much Iess comprehensive, 1 am also grateful to my many friends and former colleagues (government lawyers) in Shanghai, who provided important firsthand research materials. Last but not least, my thanks go to Vyvien Vella, Phyllis Reid, secretaries of the Faculty of Law of Queen's University and to those many others who so generously offered their time and assistance in my research, especially the librarians and staff of the William R. Lederrnan Law Library. BlTs Bilateral Investment Treaties CCH CCW Australia Lirnited CGOC Central Goverment of China CICT Consolidated Industrial and Commercial Tax CPC Communist Party of China DVANLN Developing and Newly Liberalized Nations ECL Econornic Contract Law EPZ Export Processing Zone ETDZ Econornic and Technologicai Development Zone FDI Foreign Direct Investment FECL Foreign Economic Contract Law FIC Foreign Investment Commission FIE Foreign Invested Enterprise FTCs Foreign Trade Corporations FTZ Free Trade Zone GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product GNC Gross National Product JV Joint Venture MFN Most-Favored-Nation MIGA Multilateral Investment Guarantee Agency MNCs Multinational Corporations MOFERT Ministry of Foreign Economic Relations and Trade MOFTEC Ministry of Foreign Trade and Economic Co-operation WC National People's Congress OECD Organization for Economic Cooperation and Development PBOC People's Bank of China PDZ Pudong Development Zone PNA Pudong New Area PRC People's Republic of China RMB Renminbi (Chinese currency) RMRB Ren Min Ri Bao (People's Daily) SE2 Special Economic Zone TRIMs Trade-related Investment Measures UNCTC United Nations Centre of Transnational Corporations VAT Value-added Taxes WTO World Trade Organization TABLE OF CONTENTS Page Dedication Abstract Acknowledgements Abbreviations Table of Contents Introduction Chapter One: International Investment and It's Legal Framework 1. Foreign Direct Investment and International Trade A. Foreign Direct Investment: Worldwide Overview B. Characteristics of Foreign Direct Investment C. Foreign Investment and the Law in China D. Legal Protection of Foreign Investment in China II. The Impact of Foreign Investment A. Foreign Direct Investment form Internationd Perspective B. The Legal Implications of Foreign Investment in SEZs of China C. Advantages of Foreign Investment for China D. Disadvantages of Foreign Lnvestrnent for China Chapter Two: Pudong Development Zone @dong New Area) 1. Special Economic Zones and Their Impact on Its Economic Development A. The Nature of Special Zones B. Special Economic Zones C. Specid Economic Zones in China II. Pudong Development Zone (Pudong New Area) A. Background of Pudong Development Zone (Pudong New Area) B. Characteristics of Pudong Development Zone (Pudong New Area) C. The Difference between Pudong Development Zone (Pudong New Area) and Special Economic Zones of China Chapter Three: hvestment Policy and Related Regulations in Pudong Development Zone (Pudong New Area) 1. Preferential Policies in Pudong Development Zone (Pudong New Area 75 A. Policies of the Central Governrnent of China Regarding the Special Functions of the Pudong Development Zone (Pudong New Aea) 75 B. One-S tep Service in the Examination-and -Approval Process of Investrnent Projects in the Pudong Development Zone (Pudong New Area) 76 C. Tax Incentives to Overseas Investment 77 D. The Preference of the Income Tax of Foreign-Invested Enterprise in the Pudong Development Zone (Pudong New Area) 81 E. The Regulations in the Pudong Development Zone (Pudong New Area) Concerning Approval of Foreign Invested Enterprises 84 F. Preferential Policies of a Specid Economic Zone in the Pudong Development Zone (Pudong New Area) vii G. Other Preferential Policies Offering in Pudong Development Zone (Pudong New Area) H. Banking and Finance 1- The Land Use, the Standard of the Cost of Land and BuildLy In the Pudong Development Zone (Pudong New Area) II. Reasons For Opening Shanghai's Pudong Development Zone (Pudong New Area) A. The Need for the Rejuvenation of Shanghai B. The Need for Eradicating Shanghai's "Expansion Disease" C. Smtegic Vintages of Pudong Development Chapter Four: Implications of Special Economic Zones For the GATTMTTO Proposed Regime 1- Principles of GATT/WTO Regarding Foreign Investment A- Introduction to the GATT/WTO B. Foreign Investment under the GATT/WTO C. China's Relationship with the World Trade System D. China Bid to Join the World Trade Organization (WTO) E. Most-Favored-Nation Treatrnent F. National Treatrnent in General hternational Law G. Foreign Trading Rights and National Treatrnent II. Observations and Discussion Conclusions Bibliography Vita INTRODUCTION Investing in the People's Republic of China (PRC) has become a national trend over the last two decades. Resently, the trend appears to be growing stronger.' Since China's open-door policy and its endeavour to attract foreign investment have drawn attention fom all over the world- Foreign investors have corne to China to explore its vast market and its rich natural and human resources, when bringing in capital and technology that China needs for its modernization. The pudongZ Development Zone (PDZ) pudong New Area (PNA)], located in the eastern part of shanghai,-' China, has received increasing world-wide attention and is clearly the highlight of Deng Xiaoping's4 ' See Daninel J. Brink and Ziao Lin Li, "A Legal and Practical Overview of Direct Investment and Joint Ventures in the "New" China" The John Marshall Law Review. Vo1.28539, (Spring 1995, Nurnber 3), at 567. Pudong is cornposed of the Chinese character pu which means "river" and dong which means "east" The combination of the two characters Pudong stands for "east of the river." The river here refers to the Huangpu River which divides Shanghai into two parts: Pudong (east of the Huangpu River) and Pwu (west of the Huangpu River). Pudong Development Zone or Pudong New Area in Shanghai refers to