November 2004

This year, China has made the first step to turn its bonded zones into free port areas by adding land of a port to a Free Trade Zone and establishing a logistics park. In the Free Trade Zone, the rules and regulations remain the same, however new regulations in the logistics park apply. WaiGaoQiao's bonded logistics park in Shanghai was selected in 2003 as the pilot project for the logistic parks or 'Zone-Port Interactive Areas (ZPIA)' and the first phase was completed in April 2004. This makes WaiGaoQiao the first of China's 15 bonded zones to move towards transforming bonded zones into free trade ports after the WTO concessions. In August this year, seven additional bonded zones have been approved to set up ZPIA's. The total area covered by the ZPIA's upon completion will reach 9,17 square kilometers.

The Advantages of Zone-port interactive areas

A ZPIA is a combination of the bonded land from the Free Trade Zone and the nearby international port. The bonded logistics zones are set up near or within the port area. Enterprises can therefore offer better logistics services than currently possible. The cargo can be cleared at the port for both import and export, which shortens the process to within one day. A reviewed tax rebate mechanism creates one of the attractions for foreign companies to use the logistics services offered in the ZPIA. When goods are delivered into the logistics park, the cargo is considered exported and the supplier or agent can immediately apply for the VAT refund. Until now, the application outside of the logistics park is such that the documents can only be submitted after the shipment has physically left China.In order to apply for the VAT refund, the supplier needs to provide the Customs Clearance form stamped by the Customs Bureau. Outside of the Logistics Park, the supplier can only receive this once the goods have left China. In the logistics park the supplier receives it once the goods have entered the park, allowing him the opportunity to receive the refund much faster. This also enables better price negotiations for the international buyers with the suppliers. Containers are also permitted to be deconsolidated, consolidated and kitted with other cargo. International cargo, e.g. from Taiwan, Korea, Japan or other countries, can also be shipped to the warehouse in the ZPIA and included into consolidation with the domestic Chinese goods. This allows Shanghai's port to become a step closer to a international port.

Consolidated Exports

Apart from the ZPIA in WaiGaoQiao, an international buyer in China cannot consolidate their goods in China. The cargo can only be consolidated once arrived in any international port, for example Hong Kong and a change to the Certificate of Origin or more commonly referred to as Form A, could only be done in the new location.

With pressure to consolidate goods in China due to the expenses and time delay by going through ports like Hong Kong, international companies have discovered different ways to consolidate their goods.

A supplier would buy 'the domestic goods' from another supplier of the international buyer and then consolidate it on behalf of the international company. Another method is to ask an import / export agent to buy the goods from the different suppliers, consolidate the goods outside of any type of zone and then sell them to the buyer overseas. Both options require established relationships with the supplier or the Import / Export agent. Good negotiation skills are important as every supplier wants to sell their goods as "exported" goods so that they can apply for the VAT refund and not as domestic goods.

The reason for going through a supplier of an Import / Export Agent is because in order to consolidate goods, you need the Bill of Lading and the stamped Customs Clearance form. However the authorities can only provide one such form when a container is exported overseas and therefore they cannot provide a form for all the suppliers. This means that each suppliers cannot apply for the VAT refund.

Now with the first ZPIA in operation, the overseas buyer has the advantage of buying the goods directly from the supplier, subcontract the warehousing to a logistics company in the ZPIA who will consolidate the cargo on their behalf and the suppliers receive their VAT refund as soon as the goods enter the Logistics Park. Also, containers from each supplier can be warehoused at the logistics park and consolidated shipments can be arranged with the logistics company over an extended period as required. This is something that has been impossible in the bonded zone until now due to the fact that the actual VAT refund is only received by the supplier once the goods have left China.

WaiGaoQiao Bonded Zone's Logistics Park

Shanghai's WaiGaoQiao Bonded Zone is China's first and largest Bonded Zone. Shanghai's port is the fourth largest container port after Hong Kong, Singapore and Pusan. The WGQ Bonded Zone's logistics park is located within the Free Trade Zone of WGQ, next to WGQ Terminal. As the first 'free port' in China, its area will cover 1,2 square kilometers upon completion.

The development of the logistics park has been structured into 3 phases. Phase one has been completed and is already operating since July this year, it covers 47,000 square meters. Phase Two is expected to be operating by end of this year and will cover an additional 48,000 square meters, and Phase Three facilities are planned to start operating from July 2005 and will add an additional 250,000 square meter to the zone.

So far 6 logistics companies are offering their services in the Logistics Park, 4 Domestic and 2 International. Some of the big logistics companies have not entered into the logistics park as they are waiting for a period of 6 months to one year for the park to be fully operational. They are also waiting for the initial problems to be resolved before moving in. For the first time ever seven government bureaus have had to cooperate together to make all the advantages occur and chaos and delays in documentation have resulted, particularly in the first 4 months of operation. However, these problems have become less and less, resulting in an efficient logistics park.

Further developments of the ZIPA's

In August the state council approved a further seven bonded zones that had applied to start with their ZIPA projects. From North to South they are: Dalian, Tianjin, Qingdao, Zhangjiagang, Ningbo, Xiamen and Shenzhen. All seven applicants have also expressed the intention of being developed into free trade ports.

The bonded zones, or Free Trade Zones (FTZ) have started to suffer land shortages and due to the changes in the law for the required location and registered capital for Wholly Foreign Owned Enterprises this year, these zones have become less attractive for international investors. There is also talk of a possible change to uniform the tax rates, which will mean that the FTZs will loose their attraction for preferential tax rates.

Dalian, Shenzhen and Tianjin are expected to be the first bonded zones to have the ZPIA up and running either end of 2004 or in the first quarter of 2005. In September this year, Mr. Zhang Shikun, Director of the Management Committee of the Dalian Bonded Zone announced that the ZPIA will be named Dalian International Logistics Park and will combine the current Dalian Bonded Zone with the Dayaowan Port and cover an area of 1,5 square kilometers. Dalian is China's eighth's largest port City and Dayowan is one of Dalian's four major terminals. Shenzhen's ZPIA will be located at the north of the Yantian Free Trade Zone at the Yantian Port, and will cover 0.96 square kilometers. The Yantian Free Trade Zone has issued a statement in October claiming that over 30 international enterprises have already inquired about the new ZPIA and 6 of them have already decided on operating business within the logistics park. Tianjin Bonded International Logistics Park will be located in the Tianjin port and Tianjin Free Trade Zone and will cover approximately 1.5 square kilometer. Xiamen ZPIA will be located in the Dongdu Port Zone, South of the Dongdu Port and North of the Xiangyu Bonded Zone. The total area for the Xiamen project will cover 0.7 square kilometers between the Shugang Railway and the Haitian Dock and Xiamen is one of the eight largest container ports in China. Constructions are also already under way in Qingdao, with the aim to finish the Qingdao Qianwan International Port Logistics Development Project in the second quarter of 2005. The Qinghai Qianwan Bonded Logistics Park in Qingdao will combine the Qingdao Bonded Zone and the Qianwan port area, covering a total of 1 square kilometer. Qianwan is the biggest international container transit in the North of China.In Ningbo the Ningbo Container Dock and the Ningbo Bonded Logistic Park will establish the ZPIA and an estimated area of 0.95 square kilometer will be covered. The Zhangjiagang Bonded Logistics Park is expected to be cover 1,5 square kilometer.

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All information in this report is verified to the best of our ability and is assumed to be correct at time of release; however, Klako Group does not accept responsibility for any losses arising from reliance on the information provided within.