Resolving Imbalances through More Development: Xinjiang’s New Pilot Free Trade Zone

A pilot Free Trade Zone (FTZ) commenced its operations in Xinjiang in the first week of November last year, following the approval of China’s State Council in October. The first FTZ in the country’s northwest region, it covers an area of nearly 180 square kilometres encompassing parts of Urumqi, Kashgar, and Khorgos. Under this scheme, Urumqi has been designated as a trade and logistics hub, while Kashgar and Khorgos will focus on labour-intensive industries (garment and food-processing) and cross-border trade as well as digital-economy advancements respectively.

This pilot FTZ can also be considered as a scaling up, given that two Special Economic Zones were also established in Kashgar and Khorgos in 2010 under the Western Region Development Programme. Khorgos, a county-level city, lies on the border with Kazakhstan, and in 2011, the Kazakh Government decided to set up an economic zone on their side of the border, thereby combining forces to leverage geographical advantages for mutual benefit. The city also lies along the 1,833-kilometre-long gas pipeline from Turkmenistan and Kazakhstan into China. The Kazakh zone was developed jointly by the government of another Chinese province, Jiangsu, and Kazakhstan Temir Zholy (KTZ), the national railway company of Kazakhstan. Part of the Belt and Road Initiative (BRI), a major portion of the infrastructure development included a dry port with rail cargo connectivity linking Central Asia with China.

The establishment of the pilot FTZ is aimed at further strengthening the BRI in Central Asia, expanding engagements with Europe, and continuing with the economic opening up of China’s northwest. The Chinese Party-state has endeavored to increase the use of the Yuan in cross-border payments and the economic opening up of Xinjiang attempts to help this objective along. In late January this year, Chinese state media also showcased the inauguration of two production lines for motorcycles in the FTZ, with the first bulk order received from Kazakhstan, along with promise for more in the immediate future.

Economic Experiment of Pilot Free Trade Zones

The Xinjiang FTZ is the 22^nd of its kind in China – the first one opened in Shanghai over a decade ago in 2013. In the backdrop of the external uncertainties arising out of the Global Financial Crisis and domestic challenges including overcapacities in heavy industries, high local debt levels, unemployment and environmental degradation, the Chinese Party-state identified three dimensions for its economic policies – stabilizing growth, transforming the structure of the economy and advancing reform. FTZs offer ways to further deepen economic reforms. In contrast to typical Special Economic Zones – which China pioneered in the early years of its Reform and Opening Up strategy post-1978 – FTZs are aimed at institutional innovation, expanding integration (especially in the services sector), advancing reform and encouraging technological research and development for industrial transformation through policy innovation and experiments.

The State Council is the overall authority with regard FTZs, with the Ministry of Commerce playing the coordinating role, while provincial or municipal governments are responsible for implementation and development of the respective FTZs. In addition to a common framework on institutional innovation, all FTZs have regional specializations based on each province’s competitive positioning, peculiarities of local conditions and advantages due to proximity to trade routes or international borders. These FTZs are also designed as destinations for more foreign investments, thereby further integrating China into the world economy. Altogether, FTZs now cover 54 cities across 22 provinces in the country.

Xinjiang in the High-Quality Development Calculus

Since 2019, the China has consciously developed FTZs in regions that border other countries – in the northeast (Heilongjiang province bordering Russia), southwest (Yunnan province bordering Laos, Myanmar and Vietnam) and south (Guangxi province, which too, borders Vietnam). So, the Xinjiang FTZ is not without precedent. In addition to developing these underdeveloped regions, they seek to deepen trade relations with bordering countries and expand the BRI. The pace of establishing FTZs has also increased in the backdrop of the Party-state’s measures to work around the US-China trade war and stem the relocation of investments to other parts of the world.

CPC General Secretary Xi Jinping has consistently emphasized the promotion of ‘high-quality development’, referring to ‘innovative, coordinated, green, open and inclusive development’ – ostensibly to improve people’s well-being, ensure China is prepared against external economic risks, and to move away from rapid growth to ‘better growth’. The Party-state’s belief in finding economic solutions to socio-political problems emanates from its mindset that development imbalances can only be resolved through more development. The establishment of FTZs provides an apt illustration.

The Xinjiang FTZ completed 100 days of its operation on 8 February 2024. The provincial administration claimed that more 2,000 business entities had been established in its three sub-zones – Kashgar, Urumqi and Khorgos – in this duration, leveraging their locational advantages, to house production facilities and trade services. Urumqi has given emphasis to cotton yarn production, and pharmaceuticals; Kashgar has prioritized cross-border e-commerce and road-rail intermodal transportation; and Khorgos, has emphasized lithium batteries and other electronics component industries. Engineering machinery and traditional Chinese medicine are among the areas of interest for business enterprises expressing their interest in making investments within the FTZ. Efforts are also on to create cultural and tourism service platforms in the FTZ – using modern technology, such as big data, blockchain, artificial intelligence, etc. – to explore overseas markets and burnish China’s cultural capital. The provincial government in Xinjiang has placed high hopes in the FTZ for facilitating further opening up of the region, and facilitating trade and investment. This ambition is laid out in their work report at the 14^th regional people’s congress at the end of January 2024. Compared to FTZs in other border regions established earlier, Xinjiang’s strategic location is its biggest advantage from the point of view of trade and connectivity – it borders eight countries and has the most land ports in China. Road and rail connectivity through Central Asia, further helps China connect with European markets.

Conclusion

The pilot FTZ in Xinjiang can be situated within the continued diversification of economic strategies in Xinjiang, even as the Party-state remains steadfast on the province’s traditional strengths such as manufacturing of solar panels and the growth of cotton. However, Xinjiang’s economy has also been affected by heavy scrutiny from the West for their complicity in the repression of Uyghurs and other ethnic minorities. Therefore, alongside the objectives of infrastructural development, growth of industries and employment generation, the FTZ is, no doubt, another measure to bolster the image of the province in the face of negative international press.

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