Understanding China’s Overseas Economic Zones

Source: Deborah Brautigam

Chinese expansion and foreign investment in developing countries has garnered great attention due to China’s growing sphere of influence in the developing world. The lack of transparency and poor data on Chinese overseas investments and China’s official policies of government support has hindered thorough analysis of the motivations behind its foreign investments, particularly in its creation of overseas economic zones. In the last several years these zones, designed to attract investment from Chinese manufacturers, have emerged in at least fifteen countries in Africa, Latin America, and Asia. The zones could serve three central purposes for the Chinese government: to strengthen resource security, to enhance political relationships, and to boost economic activity for national firms. Interestingly, despite clearly having foreign impact, these economic zones are not financed by the Chinese foreign aid budget, but are subsidized by other government budget lines. A recent paper by Deborah Brautigam and Tang Xiaoyang investigates the first wave of nineteen economic zones (approved in 2006 and 2007) to understand this aspect of China’s economic diplomacy. Six of these zones were to be established in Africa, three in Russia and two in Vietnam, while the others were intended to be in Asia and Latin America.

The paper finds that the main motivation of the government to create the zones has been to foster conditions under which Chinese companies can more easily invest overseas. For example, the media has depicted China’s activities in Africa as being fueled by a desperate search for natural resources. The authors point out that these zones reflect a different motive. They do not seem to be linked to China’s efforts to boost its resource security. Instead, the zones provide China a multitude of benefits other than resources, including enhancing its soft power and spurring economic growth. Officials have promoted the zones as a way of sharing the country’s expertise and development success. They are also clearly intended to help China’s own domestic restructuring – the effort to move economic activities up the value chain at home, while allowing “mature” industries to move offshore.

While the benefits of the zones to China are multifaceted, those wielded to its soft power could be significant. By providing support to Chinese companies as they build zones that replicate some of China’s development success, the Chinese government aims to increase appreciation for its own development model. Building infrastructure, investing in local manufacturing, and creating local employment all help offset fears in other countries that competition from China’s export juggernaut will make it impossible for other poor countries to get a foothold on the ladder of economic development. Although the future is unclear, it is certain that as China continues to further expand its global involvement, experiments like the economic zones will continue to be tried out, linking China’s economic future more closely to that of the host countries.