Since its birth in 1979 Shenzhen has emerged as China's spearhead of economic reforms and opening to the outside world. Special tax incentives and other inducements for foreign investors have turned this fishing village into a modern commercial city.
Yet the creation of other special economic zones in China and the central government's desire to promote growth in inland areas are giving investors a wider choice of mainland locations. In this more competitive environment, will Shenzhen be able to compete with the powerhouses of Shanghai and nearby Hong Kong? And given its high land and wage costs will it be able to hold out as a regional centre against aspiring cities such as Guangzhou and Zhuhai?
Throughout the 1980s the Shenzhen Special Economic Zone (SEZ), created in 1980 and covering one sixth of the city's total area of 2,020sq km, attracted billions of US dollars in foreign investment and a central government injection around US$2bn. For an entire decade Shenzhen was the country's only experimental ground for market reform, in the process unleashing the entrepreneurial spirit inherent in the Chinese nation.
But with the central government shifting its focus to Shanghai's Pudong development project as well as inland cities along the Yangtze river, Shenzhen's special position in the national economy is coming under threat. "Shenzhen has certainly contributed much to the fast economic development in China", says Yvonne Van der Heijden, a Dutch correspondent based in Beijing. "It was the right move for the Chinese leaders in the 1980s. But it cannot play the same role after 1997."
Due to Shenzhen's proximity to Hong Kong, the city was able to attract overseas investment from the beginning of its conversion. Investors from Hong Kong and Taiwan poured into Shenzen to take advantage of a good infrastructure, tax incentives and low-cost land and labour. To date over 90 per cent of foreign investment has come via Hong Kong.
The city has attracted a range of investments including processing and assembly, simple manufacturing and services such as catering and hotels. All this activity enabled the city's industrial output to grow rapidly from a small base on greenfield sites. Shenzhen's GDP soared at an annual rate of 47 per cent between 1981 and 1990, to reach Yn17.5bn in 1991.
Although Shenzhen produces a variety of advanced products such as computer software and biochemical products, it is still associated with being Hong Kong's workshop. As a major producer of garments, toys, watches and appliances for re-export through Hong Kong, Shenzhen now needs to revamp its image in order to attract overseas investment in more high-tech industries. This is crucial if it is to sustain the second phase of growth. Mr Douglas Polunin, an investment manger at Pictet International of Switzerland, has reservations about the quality of manufacturing businesses in Shenzhen. "Most of them are labour intensive and rely too much on Hong Kong for export. In contrast, the companies) have visited in Shanghai are more sophisticated and usually take up a bigger share of the national market."
Changes in central government investment policies are also turning against Shenzhen. In April 1990 the government decided to widen the market economy experiment by announcing that the Pudong New Area in East Shanghai would be the focus of investment and development in the 1990s. Had it not been for the substantial fall in foreign investment following the crackdown in June 1989, the Chinese authorities are unlikely to have moved so swiftly in widening the 'open door' policy.
Officials from the Ministry of Foreign Trade and Economic Cooperation (Moftec) also confirm that in its efforts to attract more foreign investment, China will increase its emphasis on the 'quality' of projects. Certain industrial sectors rather than geographic locations will be favoured. Investments in agriculture, basic industries and the service sectors will receive "favourable treatment" of the kind granted to the open coastal cities and all the SEZs. Similar incentives will be granted to 19 border cities and 28 cities along the Yangtze river to encourage a shift in investment from the coast to inland.
Overseas investors are showing enthusiasm for the cities along the river such as Shanghai, Wuhan and Chongqing, which already have a solid industrial base. Such a movement in capital away from Shenzhen could have far-reaching economic and social consequences for the city.
Another hindrance to Shenzhen's future development is the poorly educated and low-skilled workforce. Its population of 3.7 million, over a third of whom are unregistered, includes local farmers and a cross-section of people from across the country. About one million farmers-turned-workers are uneducated and over half of the entire workforce have received only primary schooling. China Daily also reported that of the 17 million workers employed in Guangdong's large and medium-sized firms, only 16 per cent are described as 'skilled hands' and 68 per cent are under the age of 30.
Despite this, Guangdong's urban per capita income of Yn3,130 a year in 1992 was 74 per cent higher than the national average. Shenzhen's labour costs are particularly high. "A skilled worker in Shenzhen now costs between US$1,000-1,500, compared to just US$500 three years ago,' says David Ho of Baker & Mckenzie in Hong Kong. _
For this reason, Hong Kong employers are having to reassess pay levels at regular intervals. Some are having to pay their workers in Hong Kong dollars to retain workers who have lost confidence in the yuan. In another case a factory assembling colour television sets discovered a rival firm across the road offering 20 per cent higher wages. The only way to stop its workers from leaving was to match its competitor's wage levels.
At the same time, reforms in state-run enterprises in recent years have led to a relaxation in wage restrictions, thus in turn putting pressure on non-state-run companies like the many in Shenzhen to commit more radical wage growth.
Rising turnover amongst workers is also being fuelled by residency restrictions brought in to suppress a population influx from other parts of China and to protect opportunities for rural residents in this former agricultural area. Shenzhen's restrictions comprise the imposition of charges on transferring the legal residency of a worker and on issuing a temporary residency permit. In 1992 the transferring cost was Yn10,000 per head and the permit Yn300 a year. But there are no uniform national regulations governing these changes, giving rise to confusion.
Much of Hong Kong's enthusiasm for Shenzhen has come in the form of investment in real estate. Fuelled by economic growth, land prices have escalated, a trend which is making non-property investors think twice about the region. A survey conducted by the Japanese-China Investment Promotion Organisation shows that Japanese investors, the most important source of capital in the region after Hong Kong and Taiwan, are becoming increasingly reluctant about investing in the south.
John Beyer, director of the China-Britain Trade Group says that high land costs and a lack of skills largely explain the paucity of British investment in Shenzhen. "Most British investment projects are gathered in Shanghai and the neighbouring region", he says.
Shenzhen's real estate market is also vulnerable to the recent central government measures to cool this overheated sector. In July 1993 when Mr Zhu Rongji was appointed governor of the People s Bank of China, his first attacks were on the "chaotic real estate market" in which all bank loans would have to be screened and reassessed. As a result Shenzhen sold only 32 out of 45 hectares of land earmarked for sale by the city government in 1992.
Although Shenzhen was the first Chinese city to open a securities exchange ? albeit unofficially ? Shanghai has been designated as the country's financial capital and principal financial securities market. This shift in power reflects the ascendance of Shanghai's leaders to the highest echelons of power in Beijing, contrasting with the pro-Guangdong central leadership of the 1980s.
Market practitioners have also shown their preference for Shanghai. Before 1993 Shenzhen achieved twice the stock market turnover of Shanghai and attracted most domestic and foreign interest. But the riots in August 1992, caused by the mismanagement of lotteries for purchasing new issues, marked something of a turning point. Of the nine mainland companies listed and due to be listed as H shares in Hong Kong in 1993, none has expressed interest in listing their A shares (those open to domestic investors) in Shenzhen. The majority, including the Guangzhou Shipyard located only 60 miles north of Shenzhen, have already chosen Shanghai in preference.
If Shenzhen is unlikely to become a national financial centre, it is equally hard to imagine it becoming the commercial centre of the south. Here, Hong Kong has all the advantages of being an established centre with stronger communications and infrastructure and a depth of talented and experienced people. And if there is room for a southern financial centre to co-exist with Hong Kong, some think the mantle might go to Guangzhou, the capital of Guangdong province.
For all this pessimism, Shenzhen still has things going in its favour. It is imbued with an entrepreneurial spirit that won't disappear and a decade of foreign influence will add to the city's labour and management skills. In terms of land, five sixths of the city awaits development. "It's true that more and more investment is going to inland cities, but as investment as a whole is growing, Shenzhen will also get its share", says Beyer. "Shenzhen was the right place as an experimental around and will continue to play an important role in the Pearl River Delta."
Guangdong province has been riding high on the economic boom of the 1980s and now has an ambitious plan to increase output more than 30-fold and generate half of China's exports by 2010. Total investment required for the plan is estimated to be US$650m, including US$190m in foreign capital.
Shenzhen's successful conversion from a rural area to a modern city will serve as an example in Guangdong's modernisation drive. By the end of the century the city will be built into an export-oriented multi-functional international city which takes primary industry as its basis, tertiary industry as its back-bone, and develops modernised agriculture and advanced science and technology, so .says executive vice mayor Mr Mang Zhang Fu.
Market analysts predict that Shenzhen will continue its rapid GDP growth at an annual rate of 15-20 per cent, with the return of Hong Kong to China in 1997 adding impetus to regional growth.
Other cities and towns will improve their competitiveness, particularly those opened up for overseas investment and granted special treatment which used to be the preserve of Shenzhen. But the city that has emerged from nothing will not cede ground without a fight and having been given such a head start. Shenzhen is well placed to continue its important role in the country's fastest-growing region. *
Shenzhen Special Economic Zone
The city's SEZ, with an area of 328 sq km and a population of 1.2 million, was set up in 1979. Since 1980, industrial districts or science and technology parks have been set up in seven districts. The central government is considering expanding the SEZ border northward-to include Baoan county as well ? making the SEZ's total area seven times its current size. The SEZ attracts 85 per cent of the city's industrial output and 95 per cent of contracted foreign investment.
Since 1991 the government has taken measures to improve the investment environment ? expanding the securities market, setting up a duty-free raw materials market and two bonded districts bordering Hong Kong. Overseas investors are now allowed to develop large tracts of land for both industrial and residential purposes. Investment projects in services will also be encouraged.
Hong Kong Trade Development Council