ZONE DEFENSE: DALIAN ADMINISTRATORS TELL USITC

UNCLAS SECTION 01 OF 03 SHENYANG 000195

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON CH ETRD WEET PGOV PREL
SUBJECT: ZONE DEFENSE: DALIAN ADMINISTRATORS TELL USITC
WHAT WE ALREADY KNOW

REF: USITC/SHENYANG EMAIL 9/2008


1. (SBU) Summary: U.S. International Trade Commission (USITC)
officers visited various development zones and companies
(chiefly foreign-invested) in the port city of Dalian,
Liaoning Province with the purpose of discerning the
differences between the various zones and the benefits they
provide to companies located in these zones. The visit
suggested that Dalian's unique location, highly educated
population, and developed infrastructure continue to be more
important factors behind the decision to invest than any
special benefits but that zone administration remains an
important consideration. This cable reports on the views of
the zone administrators, who were predictably cautious. A
separate cable reports on the somewhat more frank discussions
with representatives of companies (Intel, Epoch
International, Neusoft, and Genpact) in each zone. End
Summary.


2. (U) October 26-27 ConGenOffs accompanied USITC officers
Alexander Hammer, International Economist at the office of
Economics, Country and Regional Analysis Division and Michael
Anderson, Chief of the Advanced Technology and Machinery to
Dalian to find out more about the differences between
economic zones in China. By Hammer's count, China has 208
national-level development zones and anywhere from 1,300 to
20,000 sub-national-level zones. (REFTEL) Dalian, Northeast
China's premier port, is replete with such zones.

Dalian Development Authority (DDA)
--------------


3. (SBU) Hammer and Anderson met with Director of the Europe
and America Office of the Economic and Trade Bureau of the
DDA Chen Yuguang. Chen noted that in this, its 25th
anniversary year, the DDA has grown from three square
kilometers to over four hundred square kilometers having a
population of 600,000. Ten thousand enterprises are located
in the DDA, of which 3,000 are foreign-invested and 47 are
"Fortune 500" companies. The enterprises are concentrated in
the petrochemical, pharmaceutical, shipbuilding, auto parts,
new materials, and IT and IC industries. In an effort to
attract biopharmaceuticals and the LED industry, DDA
administration officials often travel to Europe and the
United States to interact with Small- and Medium-sized
enterprise (SME) associations.


4. (SBU) According to Chen, the Value-Added Tax (VAT) rate
for the DDA is the standard 17 percent and the corporate
income-tax rate is 25 percent. (The DDA and the city of
Dalian also levy their own fees as well.) About 75 percent
of VAT revenues are remitted to the Central Government, while
the rest goes to the city and the DDA. Some 60-70 percent of
the income-tax revenue is funneled to the Central Government,
while the rest is split between Dalian and the DDA. A
certain portion of these tax revenues is refunded to the
corporations, and the percent refunded directly correlates to
how much a company contributes to the tax base; i.e., a
company with more revenue contributes more taxes and will
therefore get a higher percentage refunded. The DDA and the
city of Dalian use the remaining tax revenues to encourage
the development of new industries in the DDA. Chen would not
give more specifics on the preferential policies offered by
the DDA. He suggested, however, that specific industries or
"special projects" having major investment potential would
receive special treatment and other tax incentives, noting
that Intel's recent wafer fabrication operation was one such
"special project." After speaking at length on various tax
incentives offered by the DDA, Chen expressed concern about
whether the questions posed to him were related to any recent
anti-dumping actions.

Dalian Free Trade Zone (FTZ)
--------------


5. (U) At the 64-square-kilometer Dalian FTZ, Investment
Promotion Bureau officials told the delegation that their
zone was established in 1992 for the purpose of export
processing, logistics, and bonded warehousing. Over 2,000
enterprises are now registered in the FTZ, the majority of
which are foreign-invested. The FTZ is part of a specialized
port area and a bonded port that features two crude oil
terminals, a liquefied natural gas terminal, an iron ore
terminal and a grain terminal. According to officials, by

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June 2011, the port will include one of only four specialized
automobile terminals in China--the Jinzhou auto city--and
will be devoted to automobile manufacturing and logistics
warehousing.


6. (U) Because the FTZ is considered to be outside of Chinese
customs territory, all transactions within the zone are
exempted from VAT or consumption tax. The corporate income
tax rate in the FTZ is 25 percent. Seventy-five percent of
this tax revenue is divided between the central, provincial,
and municipal governments. The other 25 percent goes directly
to the FTZ administration. Among the benefits the FTZ offers
are subsidized interest rates on bank loans for FTZ companies
and rent-free warehouses for a new entrant's first several
years of operation. Bureau officials stressed that most
companies choose to operate in the FTZ due to its proximity
and easy access to several key markets, including China,
South Korea, and Japan, and not primarily because of these
preferential policies.

Dalian Port Corporation (DPC)
--------------


7. (U) The DPC, a state-owned enterprise with total assets of
RMB 30 billion, operates the Port of Dalian, the largest port
in Northeast China and one of the top five in the country.
Like the FTZ, the DPC has crude oil, grain, automobile and
general cargo terminals, but the scale of operations is an
order of magnitude larger. The main port facilities are much
older than those in the FTZ, and it does not offer the same
preferential policies. An estimated 75 percent of the
Northeast's foreign trade and 90 percent of its import/export
containers go through the DPC, which is also operates China's
largest crude oil terminal (annual throughput capacity is 57
million tons). The DPC also operates China's largest
dedicated iron-ore terminal, having an annual throughput
capacity of 24 million tons, and China's largest dedicated
car terminal, with annual throughput capacity of 780,000
units.

Dalian High-Tech Zone (HTZ) and Dalian Software Park
-------------- --------------


8. (SBU) At the HTZ, the delegation met with Executive Vice
Director Wang Xianjin. Established in 1991 and covering 35.6
square kilometers, the HTZ is divided into nine separate
parks, each of which has its own specific focus. Some of the
parks are privately-owned, such as the Dalian Software Park,
and several are still only in the planning stages, such as
the Hekou Software Park. Three thousand companies are located
in the HTZ, some 80 percent of which are foreign-invested.
The majority of these are U.S. companies. One tenth of the
enterprises are devoted to manufacturing, while the rest are
devoted to services and R&D. Although many of the older
companies are focused on business processing outsourcing
(BPO),such as call centers, many of the newer companies are
focused on KPO (knowledge processing outsourcing) and ITO (IT
outsourcing).


9. (SBU) Wang claimed that his administration had studied
carefully the outsourcing experience of Bangalore when
developing the HTZ. Although he conceded that Bangalore has
more IT training institutions and its work force has better
English-language skills, the Dalian HTZ has invested heavily
in infrastructure development to ensure the quality of its
power supply, light transportation, and living facilities.
When the HTZ was first established, the government supplied
the administration with a development support-budget of only
RMB 10,000, which has grown to its current RMB 2.5-billion
level, funded by taxes from companies in the HTZ. In
addition to the natural advantages of Dalian, such as low
labor costs and a ready supply of educated workers, Wang said
the HTZ offers special incentives but offered no details,
even when pressed.


10. (U) Dalian Software Park is 'privately-owned' (it was
started with government seed money) and located inside the
HTZ. Over 450 companies are located in the park, about 42
percent of which are foreign-invested, and 37 of which are
"Fortune 500" companies. When companies first move into the
Park, many start out in the administration-run, low-rent
"incubator building," before moving into their own building.
U.S. companies located in the Software Park include
Accenture, IBM, Oracle, and Cisco.

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WICKMAN