China's 15 bonded zones, which are losing their luster with the country's opening up process, are expected to gain fresh policy support.

A senior tax official, who declined to be named, said the government is considering implementing a more efficient tax rebate policy to bonded zones.

He said rebates will be granted upon the entry of domestic goods into bonded areas, rather than the current practice of providing refunds after those goods leave China.

"Three bonded zones will be selected as trial areas," he said, but refused to name them.

Exporters, including many foreign-funded ones who enjoy tax rebates, have complained about the slow rebate process in bonded zones because of the current stipulations.

They now prefer investing in other kinds of special economic areas such as export processing zones and economic and technical development zones.

The possible policy change indicates that the country is moving to address the weakening competitiveness of bonded areas, according to an expert from the Development and Research Center under the State Council.

Zhang Xiaoji, from the center's department of foreign-related economy, said the favorable policies offered by the bonded zones are losing their significance.

Preferential policies offered by all kinds of special economic areas vary, Zhang said, while favorable conditions in bonded zones have been affected by China's accession to the World Trade Organization (WTO).

Zhang elaborated that its policy of making imported processing materials bonded will lose its attractiveness with tariffs going down.

Its privilege to automatically offer invested companies qualifications for foreign trade will also lose significance, with the Chinese government gradually loosening its control over qualifications for foreign trade, Zhang said.

Zhou Ping, a manager with the Hanri Trading Co, a joint venture located in the Dalian Bonded Zone, said it is encouraging that the government is studying how to change the rebate process of bonded zones.

"But it is not enough to solve the problem of bonded zones," he said.

Growth of China's bonded areas has been hindered mainly by poor logistics support, he said, saying that it demands at least four days for his goods to be transported to bonded areas from the nearby port.

Poor logistics have led to low efficiency in customs clearance and other procedures, which raises costs for enterprises operating there, he said.

What Zhang is proposing is a bold reform of bonded zones in a report recently finished by the department, which has been submitted to the State Council.

"We suggested that the government change parts of the bonded zones into free ports and the rest into export processing zones," Zhang said.

Zhang said the free port notion proposed by the report would combine one bonded area with one nearby port.

The combination will ensure a smooth flow of goods between the zone and port, and eliminate many formalities.

Tariffs will not be levied on goods flowing from port to zone until they go into the domestic market from the bonded zone, which will give a boost to entrepot trade to the port.

But Zhang said that to build shipping centers but not saving the bonded zones is a major driver behind the department's suggestion.

"We feel it is time for China to build its own free ports as the shipping industry prospers in East Asia," he said.

Nearby free ports include Hong Kong, Singapore, Pusan and Kobe, which see huge entrepot trade in recent years.

But only three to four of the current 15 bonded zones will be selected, Zhang said.

"China does not need so many free ports and only few of them are eligible for the change," he said.

A free port should include deep-water terminals, a first-rate shipping exchange environment and a large logistics center.

Many bonded zones, include those located in Shanghai, Shenzhen, Qingdao, Tianjin, Dalian and Xiamen, are courting the agreement.

An official from the Qingdao Bonded Zone, said the zone has worked out a plan on cooperation with the Qingdao port.

The handling capacity of containers of Qingdao port ranks third in the country after Shanghai and Shenzhen.

(China Daily January 19, 2004)