Will technology or commerce win out as Shenzhen and Shanghai compete to be the model for China’s economic reforms?

Date: Wednesday, September 18, 2019
Source: South China Morning Post

  • Opportunities await Shanghai and Shenzhen after the Chinese government unveiled blueprints for the long-term developments of the two cities
  • Analysts warn that success will only follow if the plans are implemented in full

A competition is under way between Shanghai and Shenzhen to claim the mantle as the role model and pacesetter for the next phase of the country’s economic reforms and growth.

The Chinese government has unveiled blueprints for the long-term development of Shanghai and Shenzhen – respectively the commercial hub and “Silicon Valley” of China – granting each leeway to experiment with liberalisation policies and giving them a leg up on hundreds of special economic zones and free-trade zones around the country.

“The blueprints for the two cities are aimed at creating a twin engine for a slowing national economy as the leadership shows their resolve in opening up the Chinese market,” said Yin Ran, a Shanghai-based angel investor focusing on manufacturing industries.

The Shanghai-Shenzhen rivalry is particularly poignant for Hong Kong, as confidence in the special administrative region has been shaken by 15 consecutive weeks of unprecedented civic unrest and street violence, whose roots can be traced to the unease among a portion of the city’s population under China’s sovereignty.

Since an estimated 1 million people marched on Hong Kong’s streets on June 9 to protest against a controversial extradition bill, daily street rallies have descended into violent clashes between police and radical protesters.

Even though Hong Kong’s Chief Executive Carrie Lam Cheng Yuet-ngor has withdrawn the unpopular bill, mayhem has persisted on the streets almost every day, keeping visitors away from the city and causing hotel occupancy, retail sales and property prices to plunge.

Opportunities await for Shanghai and Shenzhen as Hong Kong undergoes the worst political crisis in decades.

Shanghai, whose economy is a third bigger than Hong Kong, became the testing ground in June for technology companies to raise capital through the Nasdaq-like Star board, and attracted Tesla to set up a US$5 billion Gigafactory after scrapping a foreign ownership limit on car plants.

Shenzhen wasn’t to be outdone. The city of 13 million people and hometown of Chinese technology giants Tencent Holdings, Huawei Technologies and drone maker DJI, is expected to surpass Hong Kong this year in economic output.

A former fishing village that was turned four decades ago into the first of China’s 220 special economic zones, Shenzhen was picked to become what the Chinese government calls a “socialist model city”, a code name for an experimental urban centre where policies from tax reforms to property ownership and even currency liberalisation can take place.

In particular, the Chinese government is pushing for an “innovation-focused development strategy”, where champions like Tencent, Huawei and DJI can show how their respective successes in internet-related applications, 5G telecommunications and advanced manufacturing can be the role models for start-ups to emulate.

“The two cities will have to have their own clear-cut roles to play if they want to become global gateway cities,” said Professor Zhou Zhenhua, president of Shanghai Academy of Global Cities, a local think tank. “It’s better for them to play a complimentary role to each other and avoid direct competition.”

The decisions to catapult Shanghai and Shenzhen into international limelight have coincided with economic woes facing the world’s second-largest economy. China’s economic expansion slowed to 6.2 per cent in the second quarter of this year, the lowest since records began in March 1992.

The escalating tensions in the US-China trade war have prompted Beijing to further loosen its control on foreign investment to attract overseas capital. It has been one of the three major growth drivers for the mainland economy over the past two decades, alongside fixed-asset investment and exports.

In August, the central government approved an addition of 119.5 sq km (1,286.3 sq ft) at Lingang into the Shanghai free-trade zone, doubling its size to about 240 sq km (2,583 sq ft).

Beijing reiterated that the inclusion of Lingang would be more than just a geographic expansion, with policy breakthroughs in the pipeline.

By renewing efforts to turn the six-year-old free-trade zone into a boomtown, Shanghai envisions attracting top-class manufacturers and brands to set up their production lines and outlets in an area that will eventually evolve to mirror Hong Kong.

Lingang, which is connected to Yangshan deep water port, is expected to become a Hong Kong-style free-trade port where customs authorities would loosen oversight on cargo flows inside the zone.

Lingang covers an area of 800 sq km (309 sq mi), which is more than 70 per cent of Hong Kong’s area of 1,100 sq km (423 sq mi).

Analysts agreed Lingang was Shanghai’s answer to Hong Kong and that it could evolve into a free-trade port within two decades once it implements zero tariff policies and liberalises the yuan under the capital account.

Zhou Guoping, a deputy director of the Development Centre, which is affiliated to the Shanghai government, said that the whole of Lingang would eventually be included in the free-trade zone. The initial focus, however, would be on making the 119.5 sq km zone a flourishing marketplace.

“Lingang is designed to be an area where companies have the capability to lead the development of their industries globally,” Zhou said. “We do have a grand plan to develop it and will implement the plan step by step.”

Aside from manufacturing, the Shanghai government said it would also support companies in the fields of biotechnology, artificial intelligence and civil aviation.

It is highly expected that goods inside Lingang will be exempt from paying import duties and that the General Administration of Customs is taking the lead in mapping out detailed policies.

Currently, companies inside the zone enjoy a preferential corporate income tax of 15 per cent, compared with a flat rate of 25 per cent on the mainland.

Chen Bo, a professor at Huazhong University of Science and Technology and an adviser to local governments, including Shanghai, said the city has been given an opportunity to become an international trading hub on par with Hong Kong, Singapore and Dubai.

But he said it was likely that the full convertibility of the yuan and other bold reforms in the finance sector would be implemented in Shenzhen, rather than Shanghai, which had a stated goal of becoming a global financial centre by 2020.

“The financial services sector in Shenzhen will have its day in the sun because it neighbours Hong Kong, an established international financial centre,” Chen said. “More financial liberalisation with depth and width will be carried out in Shenzhen.”

While Shanghai and Shenzhen battle for supremacy on the mainland, they will also vie with Hong Kong to attract capital and talent.

Over the next two decades, Chen suggested that the government should let Shanghai, a city of 24 million people that covers 6,300 sq km (2,432 sq mi), focus on building itself into an international trading centre by making the most of the vast hinterland of the Yangtze River Delta, while Shenzhen’s new role should be in developing financial services and technologies.

The Yangtze economic belt is perhaps China’s most important economic engine, and exports and imports have been booming there over the past three decades. This has made Shanghai the world’s largest container port for nine years in a row since it leapfrogged Singapore to take the title in 2010.

But the city’s transformation into a global financial centre did not go as planned despite 10 years of effort.

The international board at the Shanghai Stock Exchange, which is supposed to attract major foreign companies to raise yuan-denominated capital, has yet to be established even though the project was kicked off more than 10 years ago.

Chen said that after it integrates with Hong Kong under the Greater Bay Area plan, Shenzhen – a city of 13 million – has the potential to become another financial hub for global businesses.

But its smaller population and lack of an economic engine similar to the Yangtze River Delta make it difficult to compete against Shanghai for manufacturing businesses such as Tesla.

“It is necessary for China to accelerate the pace of opening up to shake off the gloomy sentiment surrounding the US-China trade war, economic slowdown and unrest in Hong Kong,” said Gao Shen, an independent analyst specialising in the manufacturing sector.

“It is time to promulgate clear-cut policies and measures now to make the two cities effective gateways for foreign investors to access the mainland market.”

 

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