The GBA’s innovation hub

Famously it was once a fishing village but its economy is now bigger than Hong Kong’s (see WiC443). Shenzhen’s new billing as China’s innovation capital has put it centre-stage in the plan to supercharge a vast new economy across the Greater Bay Area (see our Talking Point in WiC441 for more on the GBA).

For an insider view of the city and its key role in the GBA, WiC talked to Neo Wang and Rannie Lee – HSBC’s Co-Chief Executives in Guangdong province.

How has Shenzhen changed economically over the years?

Wang: Shenzhen was the first special economic zone under Deng Xiaoping’s pioneering reforms. At the beginning it leveraged inward investments, particularly from Hong Kong and Taiwan, to build a relatively strong base of manufacturing, particularly for the technology, media, and telecom (TMT) sector. Ten years ago, many people would have thought of Shenzhen manufacturers as copycats. But there was a turning point when people started to realise the importance of intellectual property and to invest more in their own research and development. With the support of government policies, Shenzhen managed to transform itself and started to build products that are world-class. Now probably all of us know that it has become China’s hub for hardware manufacturing and innovation.

Lee: Shenzhen is an entrepreneurial city, with its private sector driving its development. As a result, a lot of wealth is being created and the implication is that Shenzhen is no longer a purely manufacturing or producer economy, but also a consumption market. There’s a whole segment of the population that’s shifted from working in factories to working in offices. Their needs and demands have also evolved to a point at which they are looking for more of a middle-class lifestyle. That could be as simple as buying luxury brands, eating imported organic food or sending their kids to study abroad. At HSBC we are seeing the same trend in how they are looking for higher quality, international solutions in everyday financial services and wealth management as well. Of course, with an economy based more on technology and innovation, there also comes a need for a wider range of businesses in the services sectors, which also presents opportunities to local and foreign companies.

What makes Shenzhen a magnet for technology companies?

Wang: I think that has its roots in Shenzhen’s strong base for manufacturing electronic devices over past decades. In fact, the innovation hubs in China are all quite different. Beijing attracts software firms by providing access to a multitude of venture capital and private equity investors. Hangzhou, plus Shanghai, is pretty much driven by the anchor player Alibaba [and hence a primary focus on the e-commerce sector]. Shenzhen stands out by focusing on hardware and advanced manufacturing. And apart from hosting leading tech players like Tencent and DJI, the city is a great incubator of many smaller or medium-sized tech companies around the supply chain.

A tech client once told me that Shenzhen is the only place where he can source all the key components that he needs within a one-hour radius. Nowhere else in the world can offer that. That allows for mass production at a very affordable price, which in turn attracts other start-ups and tech talents to the city. That’s Shenzhen’s core advantage.

Secondly, the city’s investment in research and development, at 4% of its gross domestic product, is double the national average and at a level that is similar to South Korea’s. In the Nanshan district, home to many tech companies, the ratio is even higher with investment reaching 6%.

Also, Shenzhen’s economy is pretty much in the hands of privately-owned enterprises, which have long been exposed to brutal market competition. The city has to maintain its freewheeling spirit. Market forces will continue to drive innovation and private sector firms will likely account for most of its economic growth in future.

Does Shenzhen’s talent policy give it an edge?

Wang: Shenzhen is a new city. It’s always been open to outsiders like me, originally from Jiangsu. Among all the tier-one cities, it has the most flexible household registration system, which is essential for attracting newcomers and migrant workers.

Lee: Apart from being more open than other cities in China from the outset, Shenzhen is actually stepping up its talent policy. Take myself as an example. I am originally from Hong Kong, yet I didn’t have to apply for a work visa or undergo a medical check-up when taking up my current role here. So they’ve actually revised their policy, making it easier for non-locals to work in Shenzhen. This kind of evolution allows the city and its economy to benefit from talent from all over China.

What opportunities will be created by the ‘Outline Development Plan’ for the GBA?

Wang: The vision set out by the plan is both ambitious and sweeping: its goal is to shift this regional economic dynamo up a gear, creating a powerhouse of global significance by strengthening economic partnerships between nine cities in Guangdong province as well as Hong Kong and Macau.

The plan puts Hong Kong in a stronger position to finance and collaborate with Shenzhen’s and Guangzhou’s innovative and internationally-minded high-tech manufacturing and services sectors. Closer partnership with the Pearl River Delta’s innovation economy can be a new catalyst for growth in Hong Kong.

Lee: The GBA’s success will depend on the ability of talented people to work across the ‘Area’. We expect tax incentives for Hong Kong residents, such as those we already see in the Qianhai free trade zone, as well as capital account measures to make it easier for them to open a bank account or set up a mobile wallet in Guangdong. The proposed “Wealth Management Connect” scheme could also allow all GBA residents living and working in Guangdong to have access to Hong Kong’s strengths in investment management and financial services.

Talking of financial innovation, what is so special about Qianhai?

Wang: Qianhai is Shenzhen’s connecting point with Hong Kong. It is where innovations can be tested in areas like cross-border fund flows. Through Qianhai, foreign players can directly invest in whitelisted industries, mainly related to professional services. There are already preferential policies based on CEPA [short for the Mainland and Hong Kong Closer Economic Partnership Arrangement] and we expect more in future. People working in the Qianhai zone can already benefit from lower income tax, for instance, enjoying the same tax rate as Hong Kong.

Lee: For the moment Qianhai is a major construction site. But some companies have already started employing people there, including HSBC, which has established the first securities joint venture to be majority-owned by an international bank in the zone. Soon there will be a train line linking Qianhai and Hong Kong. Currently there are many buildings yet to be completed. But the attraction is there because of the potential tax benefits for companies and individuals. That said, those details need to be worked through.

Aren’t some manufacturing businesses shifting out of Shenzhen?

Wang: We do see businesses moving out of Shenzhen and relocating to nearby cities like Huizhou or Dongguan. But it’s not necessarily a bad thing. It’s just a readjustment of the wider supply chain. Shenzhen is still hosting most of the key functions, like the brand and product management, the corporate headquarters and the R&D, which are the higher-margin, higher-profit parts of the business.

It’s usually the manufacturing that’s moving out. Some of the older factories may be leaving the city, but they aren’t moving miles away, which means that production is nearby and the supply chain stays intact. The relocations also create space for newer industries. So from that angle, I don’t think the Shenzhen government has a major issue with them.

What are the challenges facing Shenzhen?

Lee: One of them is property prices. Remember that, in terms of land area, Shenzhen is only a sixth the size of Shanghai. And it’s a third the size of nearby Guangzhou too, despite having a similar population. That is feeding through into the costs of property. We are starting to see many more smaller flats being developed, around 500-square-feet versus the 1,000-square-feet average of the past. The trend signals an increased cost of living for people here and likewise increased costs for companies doing business here.

Wang: Costs are one of the challenges but Shenzhen is also facing rising competition from other cities. Every city wants a technology sector now, so much so that even tier-two cities are offering juicy preferential policies to attract talent. So to stay in the game, the Shenzhen government has been boosting investment in its education sector and local health system. Putting more money into these areas makes it a more attractive place to live, as far as many of its residents are concerned. And that helps Shenzhen to keep its edge.

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