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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 
 
SHENYANG 00000195  002 OF 003 
 
 
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. 
 
SHENYANG 00000195  003 OF 003 
 
 
 
WICKMAN