The Transformation of Shenzhen

Thirty years ago, Shenzhen was a small fishing village on the south coast of China. When I first sighted Shenzhen in 1978 from a lookout post in Hong Kong’s New Territories (the closest I could get to China in those days!) it was a hilly area with acres of paddy fields tended to by stooping men and women wearing those distinctive straw conical hats.  Soon after this, Shenzhen was singled out to be the first of five Special Economic Zones due to its proximity to Hong Kong and, within twenty years, it had become the manufacturing hub of the world with five million factory workers and over $30 billion in foreign investment. However, this wasn’t enough. Over the last five years, Shenzhen has transformed itself yet again from a low-cost manufacturing based economy to a leading high-tech centre of innovation and financial services. Today, approximately 60% of its manufacturing value is in high-tech products and the number of international patent applications lodged in Shenzhen has ranked it the highest (45.4% of the national total) among Chinese cities for eight consecutive years.

Shenzhen is situated just north of Hong Kong. It has a population of approximately 14 million and an area of 1953km². It is the fourth largest city in China in terms of GDP and the first in terms of GDP per capita (RMB 17,000). Its GDP per square kilometer ranks amongst the middle and largest cities in China, at USD85.43million. Shenzhen is a migrant city with only 2.7 million of the population holding permanent residency. In addition, Shenzhen has strong demographics - the average age of a person living in Shenzhen is 30 years old, less than the national average.

Shenzhen was China’s first Special Economic Zone (SEZ) and arguably its most successful. SEZs are authorized by the central government to adopt special policies and approach issues regarding foreign economic and trade issues with greater flexibility. Presently, Shenzhen’s focus is on six main emerging sectors including: New energy/green tech, medical/pharmaceutical, new materials, internet industries, Next Generation communications and innovative industries. In 2011, the total output value of these six emerging industries rose by 38.1%, double the GDP growth rate.

The local financial sector is dominated by banking, securities and insurance. Its multi-tier capital markets establishes its competitiveness in China’s national financial landscape. In 2011, Shenzhen’s local financial industries total assets reach RMB4.3 trillion and the number of financial institutions reached 254 which ranked Shenzhen as a national leader in terms of both quantity and density.

The evolution of the Shenzhen economy has occurred for three main reasons, (i) costs (ii) scarcity and (iii) government focus. In the 1980s, many Hong Kong factories relocated to Shenzhen for low-cost and efficient mainland manufacturing. As cost increased and industries faced both labor and land shortages, factories relocated to cheaper mainland provinces such as Sichuan, Hubei and Hunan. Shenzhen was forced to expand from the manufacturing base that had previously been its key strength and the backbone of its economy. The strong and dedicated focus of the Shenzhen local government has established Shenzhen as a city of innovation, R&D and an international technological centre. Shenzhen is establishing itself as a skilled labor hub, attracting high-tech and knowledge based industries.  Some companies in Shenzhen commit up to 50% of their staff to research and development in IT and emerging industry sectors. For example, China’s largest telecommunications networking, equipment and services provider, Huawei, has its headquarters located in Shenzhen; 46% of Huawei employees are engaged in research and development related areas.

Shenzhen is an international-based economy – it has been China’s largest exporter for 19 consecutive years and is currently China’s second largest importer. Its total import and export volume for 2011 was USD 414.1billion, with Hong Kong, ASEAN, USA, EU and Japan being its five largest trading partners by region.  Furthermore, Shenzhen is a major recipient of FDI in China, with over 46,000 projects involving FDI being approved by the end of 2011. Home to 180 of the global Fortune 500 corporations, Shenzhen’s role and attractiveness as an international city is underpinned by its world-class transport and logistics industry. Shenzhen has the fourth largest international airport in China, the fourth largest container terminal and is the home to over 9,000 logistics enterprises.

Already the home of one of China’s two stock exchanges, Shenzhen is enhancing its credentials as a financial services hub by developing its own Qianhai Special Co-operation Zone, an eight year, RMB580million development over 15km², twelve times the size of Hong Kong’s central business district. The zone will offer low tax rates and investment incentives including a flat 15% corporate tax rate and income tax exemption for financial professionals, accountants, lawyers, doctors and innovative industries. AIMS Financial Group based in Sydney is the first Australian company to be chosen to have a presence there.

As an economic powerhouse among major Chinese cities, and one of the fastest growing cities in the world, the future role of Shenzhen in China’s national development and the global economy should not be under-estimated by those attracted to the glittering cities of Shanghai and Beijing.  With its strong foundations and credentials, plus its firm commitment to moving higher up the manufacturing value chain, Shenzhen will play a crucial role in establishing China’s new role as an innovator in global manufacturing industries and financial services.