Blazing a trail

It is a cliche to speak of Shenzhen, China's first special economic zone established in 1980, either as Deng Xiaoping's most laudable achievement or the blueprint for a rapidly developing China. Nonetheless, in view of recent developments in 'Hong Kong's factory,' these platitudes must be revisited.

In March this year, Shenzhen's mayor Yu Youjun declared that the city had been granted central government approval to "accumulate experience for other cities" and accelerate the implementation of China's WTO commitments. The mayor explained that these measures would boost the city's efforts to capture a greater percentage of the foreign investment presently flowing into China.

At the time, Yu side-stepped any direct questions as to which parts of the city's economy would be opened, but he pledged to soften restrictions faced by foreign investors in some 20 sectors, earmarking securities, consulting, accounting, financial services and tourism as candidate testing grounds for liberalisation.

He later called for wholly foreign-owned procurement centres to be allowed within Shenzhen, a business of growing importance to foreign investors. However, it was the promise to open better performing state-owned enterprises (SOEs) to overseas investment, and indications that he had developed a plan to reduce Shenzhen's stake in SOEs that provoked the most speculation.

The Ministry of Foreign Trade and Economic Cooperation backed Mayor Yu's commitments when in June 2002 it issued a notice relating to the establishment of foreign- invested logistics enterprises. This was an initial step in opening up China's logistics market to foreign investors, which have long been plagued by an inability to transport and distribute goods without incurring exorbitant costs. It also established Shenzhen as one of eight pilot areas in which the logistics market would be liberalised.

The notice affords foreign companies an opportunity to develop viable distribution channels within China, and reflects Beijing's aim to adhere to the WTO commitment to entirely open its logistics sector to foreign investment by 2005. At present, foreign entities seeking to establish a logistics enterprise can do so only in one of the eight pilot areas, either as a Sino-foreign equity or co-operative joint venture. If a Sino-foreign equity joint venture is to be established, the foreign investor's equity ratio must not exceed 50 per cent.

Wal-Mart relocated its global purchasing centre from Hong Kong to Shenzhen this February. Another major foreigner retailer, Carrefour, also decided to set up a purchasing office in Shenzhen. In a desire to capitalise on the recent liberalisations in Shenzhen, several foreign entities wishing to avoid the 'middle-man' costs incurred in operating an identical business in either Hong Kong or Taiwan may seek to establish procurement centres on the mainland.

A report published by China Online in May this year stated that 20 Fortune 500 companies had already applied to set up foreign- owned procurement centres in Shenzhen, and Ye Min Hui, director of the Shenzhen Economic and Trade Bureau, disclosed that at least 10 of them would be approved this year.

Mayor Yu's most important announcement came in late August when he disclosed that non-tradable stakes in five SOEs were to be sold by tender to foreign investors. This landmark decision was further evidence of the strong desire that exists to reform Shenzhen's state-owned sector. The proposed sale, although alluded to in early announcements, was particularly surprising in that the majority of enterprises for sale turned out to be utility companies. Yu announced that 25 per cent of Shenzhen Energy Group, 45 per cent of Shenzhen Water Group, 24 per cent of Shenzhen Gas Group, 45 per cent of Shenzhen Public Transportation Group and 70 per cent of Shenzhen Food General Corp would be sold by the end of 2002.

Immediately following the announcement, a reported 13 multinationals expressed interest in Shenzhen Energy Group, the company that supplies power to more than 70 per cent of the city. The auction is another example of Yu's determination that Shenzhen should serve as a pilot area for dynamic economic experiments. If the sale is deemed a success, a second round of SOE shares might be offered next year.

Yu has spoken of his desire to institute further reforms, including streamlining Shenzhen's local government and administrative system, all with a mind towards channelling foreign investment into Shenzhen in an increasingly competitive China production market. If Shenzhen continues to commit voluntarily to implementing WTOinspired reforms, it may well distance itself from competitor cities not only within China, but perhaps within greater Asia as well.

This article was written by Peter Bazos of the Hong Kong office of Freshfields Bruckhaus Deringer. For more information, contact Lucille Barale, partner in Hong Kong at lucille.barale@freshfields.com, or Douglas Markel, partner in Beijing, at douglas.markel@freshfields.com.