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28 July, 2021updated 12 Oct 2021 04:39

How Shenzhen moved out of Hong Kong’s shadow

A small fishing town a few decades ago, Shenzhen is now a globally significant metropolis, a hub for FDI and considered by many to be China's answer to Silicon Valley.

By Cara Lyttle

shenzhen-investment-china

Shenzhen has gone from fishing village to skyscraper-dotted metropolis in the space of a few decades. (Photo by Daniel Berehulak/Getty Images)

In the 1960s, Shenzhen was a small fishing village on China’s south-eastern coast with a population in the tens of thousands. On its border stood the mighty Hong Kong, then an outpost of the British Commonwealth. Fast-forward 50 years and the once-tiny settlement has outgrown its neighbouring special administrative region, with a population of 17.5 million, compared with Hong Kong’s 7.5 million.

This isn’t the only area in which Shenzhen can compete with, and even surpass, Hong Kong. The city has positioned itself as a start-up hub for various industries including electronics, pharmaceuticals, biotech, financial services and manufacturing, and it hosts the headquarters of domestic giants such as BYD, Huawei and Tencent. In terms of foreign investment, nearly 300 overseas Fortune 500 companies have operations in Shenzhen. Few cities in the world have experienced such a spectacular rise, either physically or economically.

What is behind Shenzhen’s FDI appeal?

Shenzhen’s success is largely down to the vision of former Chinese leader Deng Xiaoping, and his efforts to turn China into a global economic powerhouse. The country’s first special economic zone (SEZ), in which foreign direct investment (FDI) and private enterprise was permitted, was established in Shenzhen in 1980, and the effects were immediate. From 1979 to 2019, Shenzhen’s gross domestic product (GDP) increased annually by and average of of 21.6%, hitting 2.69trn yen ($415.3bn) by the end of that period, and then rising further to 2.77trn yen in 2020 in spite of the Covid-19 pandemic.

Shenzhen’s GDP growth had historically trailed behind that of Hong Kong, but managed to overtake it in 2017. The gap between the two looks set to grow in the coming years, with predicated nominal GDP growth forecasts for Shenzhen expected to hit $7.42bn in 2024, more than double the prediction for Hong Kong (see table below).

On top of being one of the main beneficiaries of Deng Xiaoping's grand modernisation plans, Shenzhen's rise can also be attributed to its geographic position. It is the only city in China with seaports, airports and land ports. It is considered an anchor location of the Greater Bay Area, accounting for almost 40% of Guangdong province’s exports in 2020 (Guangdong province is the largest in China). Shenzhen is also strategically located adjacent to Macau and Hong Kong, where 77.4% of its utilised FDI was sourced from in 2019.

The city's key industries for FDI are software and IT services, business services and electronics, and a host of international companies, among them Walmart, Accenture, WeWork and Hon Hai Precision Industry (Foxconn), have chosen to establish operations in the city. Germany-based technology conglomerate Siemens recently opened a new office as well as an innovation centre in Shenzhen to focus on smart energy, advanced gas turbines and green hydrogen.

Shenzhen has youth and education on its side

Another key draw to Shenzhen is its demographics. According to China's National Bureau of Statistics, Shenzhen is the ‘youngest’ city in the country. The proportion of people aged between 15 and 50 is 63.9% of the population, higher than both Shanghai and Beijing.

In terms of education, Shenzhen is again moving ahead of its near neighbour. From 2012, Hong Kong annually produced more people with further education than Shenzhen, consistently exceeding 1.5 million, a level only reached by Shenzhen in 2019. Hong Kong's figures are expected to stall, according to forecasts by GlobalData, with Shenzhen moving ahead of the special administrative region by 2023. This gap regarding education is expected to continue to widen, with Shenzhen forecast to have 17.1% more people with further education qualifications than Hong Kong in 2025.

Labour force participation in Shenzhen has been rising since 2010, and notably escalated in 2012 when it overtook Hong Kong. Since 2016, Hong Kong's labour force participation has remained stagnant, with some post-2022 forecasts showing a marginal decline. In contrast, Shenzhen is expected to continue to grow year on year, reaching a labour force participation rate of 82.6% in 2025. While this rise is a good signal for Shenzhen, it does provide a challenge when it comes to accommodating the city's population.

Shenzhen's exponential growth has seen the city struggle to accommodate the basic needs of its population. It is facing a huge shortage of housing, with many migrant workers living in factory dormitories and with no means to obtain permanent housing. When comparing mortgages as a percentage of income, Shenzhen has now become more expensive than Hong Kong, itself renowned for astronomical house prices. The population growth rate in Shenzhen has slowed, but it remains to be seen whether the housing crisis will drive migrant workers in the city to neighbouring cities with lower living costs.

Shenzhen has set the gold standard but at what cost?

After four decades of economic prosperity, Shenzhen now faces the challenge of being a template for other Chinese cities looking to emulate its success. Shenzhen has been the beneficiary of huge innovations and has been afforded a higher degree of political freedom than other Chinese cities. In an article on China’s economy for CNBC, Perry Wong, managing director of research at think thank the Milken Institute, stated: “You cannot make a duplication of Shenzhen.”

China’s President, Xi Jinping, referred to Shenzhen as "a miracle" and during a conference to mark the 40th anniversary of Shenzhen SEZ, he said the city should “plan and nourish new industries with foresight and develop a digital economy”. He also called on the city to "to take active moves to further promote the construction of the Greater Bay Area" and bring a "deeper integration among young people in Guangdong, Hong Kong and Macau to strengthen their sense of belonging to the motherland".

Shenzhen is not only under pressure to continue improving local relations but also to provide innovative solutions to address wider, more global issues. Cao Zhongxiong, director of the New Economy Research Centre at the China Development Institute, told the South China Morning Post in late 2020 amid the Covid-19 pandemic: “In this critical moment when international supply chains have blockaded China, how can Shenzhen come up with its own innovation supply chain? This is a task for Shenzhen.”

The Shenzhen of the 21st century is capable of responding to such challenges, however. China’s largest chipmaker, Semiconductor Manufacturing International Corporation, amid a global semiconductor shortage and rising tensions with the US, announced in March 2021 that it is building a new $2.4bn factory in Shenzhen. The facility is expected to open in 2022 and will produce 40,000 30cm wafers every month, which will go a long way to enabling China to be self-sufficient when it comes to semiconductors.

Shenzhen eases regulations to draw in FDI

While Shenzhen's successes have stacked up, it has also had to absorb some blows. In November 2020, toolmaker Black and Decker announced it was closing its Shenzhen factory and laying off 1,000 workers after 25 years of operations. Several other international companies have pulled the plug on their Chinese facilities to avoid heavy tariffs.

To address this issue, Shenzhen has recently eased its rules to facilitate cross-border trade. In April 2021, Shenzhen's reformed Qualified Domestic Enterprise Investment programme was announced, allowing both domestic and foreign entities to apply with its quota being raised from $5bn to $10bn. In February 2021, the Shenzhen Qualified Foreign Limited Partnership regulation was also updated to expand the asset classes allowed under this form of investment. The updated investment schemes aim to widen the net when it comes to attracting FDI to Shenzhen and allow more flexibility for investors to manage their assets.

Despite such challenges, Shenzhen's "miracle" shows no sign of ending. Such is its tech prowess that it is considered within China to be the country's most effective equivalent to Silicon Valley in the US. The manner in which it has grown both physically and economically, outstripping nearby Hong Kong and many other large Chinese cities, has been breathtaking, meaning its allure to investors is unlikely to wane any time soon.

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