The policy change will affect tens of thousands of companies - both foreign and domestic, that have set up factories and offices in these zones in 44 cities and enjoyed preferential tax policies.

``Foreign companies all have been prepared psychologically for this,'' finance minister Xiang Huaicheng said at a press conference here yesterday.

``When they made investments, we told them to prepare for equal competition one day. Of course, when that day comes, they will suffer losses and will complain. That is normal,'' he said.

The move, he said, is aimed at standardising the fiscal system while creating a sound environment for fair competition among firms.

The five special economic zones - Shenzhen, Shantou, Zhuhai, Xiamen and Hainan province will not be affected.

The 44, are those zones approved by Beijing, but there are hundreds ofother self-styled investment zones set up by local governments. The term of about ten of the 44 zones would expire this year and would not be extended, Xiang said.

Companies in these zones at present pay 15 to 24 per cent company tax, depending on their products, against 33 per cent rate paid by firms outside the zones.

When the zones are abolished, the firms will have to pay the same tax rates as elsewhere in the country.

As for the remaining zones, the preferential policies they enjoy will be phased out over a four-year period, with the zones allowed to retain 75 per cent of their revenue in the first year, instead of 100 per cent now.

This will fall to 50 per cent in 2001 and then to 25 per cent in 2001. The preferential policies will end in 2003.

``After the period expires, the tax rates of the companies in the zone will be the same as those elsewhere,'' Xiang said.

Economists see several factors behind the decision. One is a serious shortfall of tax revenue for central government.

Since1949, state firms have been the main source of tax revenue, but their ability to pay has been eroded by dwindling market share and heavy losses.

The zones have attracted not only manufacturing investment but also thousands of trading firms that set up solely to enjoy tax advantages but not to produce anything.

Another factor is that China has a glut of almost all goods and does not need the level of manufacturing investment of the mid-1990s.

A third factor is the anger of state firms against the preferential terms enjoyed by their competitors in the zones, which they see as an unfair advantage.

Beijing, now believes these zones have outlived their usefulness and China can attract the investment it needs without them.