ASIA : Tide Turning Against China’s ‘Special Zones’ : Five areas set aside to lead the way to prosperity now may face the loss of tax breaks for foreign investors and domestic companies.

Until a few months ago, this bustling island city was held up as a role model for the rest of the country.

But now Xiamen is under attack, accused by politicians in Beijing and interior provinces of hoarding China’s newfound wealth instead of sharing it with the hinterlands.

Founded in the 14th Century as a Ming Dynasty seaport, Xiamen was one of the five “special economic zones” designated by senior leader Deng Xiaoping to lead China to prosperity. Under Deng’s plan, hatched after he took power in 1979, the five zones were given special attention by the central government and encouraged to get rich before the rest of China.

“A few regions that have the right conditions will develop first,” Deng explained on a 1992 trip to the south. “The developed regions will then carry the developing regions until they finally reach common prosperity.”

Huge sums from China’s central treasury were poured into Xiamen and the four other privileged locales--Shenzhen, Zhuhai, Shantou and Hainan island--all located on China’s southern coast.

In one respect, the Deng plan worked: The five special areas far outstripped the rest of China in growth, in some cases gaining standards of living that rivaled those in the booming cities of Taiwan and Southeast Asia.

But while the fortunes of the special economic zones grew, so did the resentment of the long-neglected interior. That anger finally exploded into a national debate this summer when one leading economist called publicly for the five zones to be disbanded. Hu Angang, a Yale-trained economist, argued that the regional favoritism was creating a potentially volatile disparity between rich and poor areas.

To support his argument, Hu noted that per capita incomes in Zhuhai were as much as 30 times those of Guizhou, China’s poorest province. “There should be nothing special about the special economic zones,” Hu huffed.

Officials in the five zones attempted to fight back, accusing him and other critics of going against the wishes of Deng. But by the time of the Communist Party plenary meeting in Beijing in late September, the issue had come to a boil.

*

Economic zone administrators knew they had lost the debate when Communist Party General Secretary Jiang Zemin stood up to deliver a concluding speech. He listed narrowing regional income gaps as a major priority of the party. The five special economic zones, he said, “should be run better. [They] should bring into fuller play their role of demonstration, radiation and promotion in reform and development.”

Besides being a slap at the special zones, Jiang’s speech was another indication that the Deng era is coming to a close. At 91 years old and in poor health, Deng is no longer physically able to defend his pet project.

After hearing the speech, officials in Xiamen realized they would soon be playing under new rules. Su Shuili, Xiamen’s dynamic deputy mayor who previously managed a business, argued that instead of cutting off the special tax breaks and other privileges to the special zones, the government should “expand these same privileges to the inland areas.”

“Once we apply preferential treatment to the interior provinces,” Su said, “it means that China will open wider.”

*

But the most likely initial outcome of this debate will be the elimination of tax breaks in the zones that allow foreign investors long holidays from levies and permit domestic companies to pay half the rate of their counterparts in the interior.

“The tax rate should be the same as the interior and other parts of China,” State Planning Commission Deputy Secretary Bai Hejin said last week.

The sudden political storm has given some foreign investors the jitters.

“Ten years ago the Chinese put economics before politics,” said Arnold Jaffe, an executive with Fownes Brothers Co., a leather-glove manufacturing company that operates a plant in Xiamen with 1,000 employees. “Now, they put politics before economics. Decrees come from out of nowhere with no rhyme or reason.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

China Boom Towns

China’s “special economic zones” are thriving, thanks to a huge infusion of government funding. But other sections of the country have protested that the program, designed to eventually spur prosperity nationwide, has only deepened the divide between rich and poor. Here are facts about the five zones:

Occupy 0.35% of Chinese territory

Account for 0.8% of China’s population

Receive 14% of foreign investment in the nation

Provide 12% of the country’s exports

Source: Los Angeles Times