The market sends a message

Signs of strain in Shenzhen’s economy, despite solid foundations


‘Shenzhen speed’ is normally a positive expression, describing how the southern Chinese city gets things done at a rapid rate (the term was coined by Deng Xiaoping, who noted “when they build houses they can finish a whole floor in a few days’ time”). But the latest data on the city’s economy gives the impression that a downturn has been equally accelerated, casting doubt on its reputation as a pacesetter for the nation.

Shenzhen’s growth rate in the first three quarters of 6.6% was substantially down on the same period last year, and a lot slower than the first six months of this year, implying that the economy barely grew at all between July and September.

“Strangely, there was no figure for the third quarter alone,” the Hong Kong Economic Journal also noted.

Shenzhen is never going to grow at the same pace as before because its economy is already so huge (it overtook Hong Kong’s last year, see WiC443). But any news that it has lost steam still seems ominous because it is home to some of the country’s most dynamic companies and newest industries.

However, the consensus in the local media is that the city is primarily a victim of external events. As one of China’s more export-focused economies it is feeling the effects of the tariff row with Washington more than most. American efforts to strangle overseas sales at companies like Huawei – Shenzhen’s biggest overseas brand – won’t have helped either.

But there were also warnings from Sina Finance, a news portal, that this isn’t just a short-term slump and that the city has reached the limits of what was possible in the past. In particular it blamed sky-high property prices (see WiC472) and the surging cost of doing business for squeezing the lifeblood out of Shenzhen’s entrepreneurial spirit. “The city’s industrial structure is extremely distorted… its manufacturing industry is almost completely lost,” it reflected. “The financial and real estate industries are profitable, and incomes for its employees are high. But only a small number of people are benefiting and others aren’t seeing the same improvements in their quality of life.”

Another point being made about the slowdown is that it shows how Shenzhen is more reliant on private sector activity than its peers. Analysts have highlighted the steep plunge in private sector investment, for instance, which grew just 0.3% in the January to September period. That is another signal of business bosses battening down the hatches and waiting for the trade war to pass. But it also supports the view that what has made Shenzhen a success over the longer term – the rise of private sector companies, and less of a role for state-owned enterprises – is biting back as market-oriented firms cut back on their spending.

Privately-owned firms accounted for more than 96% of the businesses registered in Shenzhen as of September last year, says Bob Liu, the head of A-share equity strategy at HSBC Qianhai Securities. And they will play a pivotal role in the city’s future, he explained in a report this month, helped by financing that is more readily available than in other cities across China.

In part that’s down to Shenzhen’s status as the leading location for Chinese venture capital. Changes on the local bourse’s ChiNext board is poised to make it easier for smaller firms to raise capital as well (profitability requirements have been scrapped for firms wanting to issue private placements).

The central government also breathed new life into Shenzhen’s status as a pioneer in August by classifying it as a ‘socialist model city’, tasking it with leading the next phase of restructuring in the nation’s economy. That is going to mean more support for sectors where it has a clear competitive edge, such as IT and high-end manufacturing, as well as giving a boost to companies in sectors now deemed as strategic, such as in artificial intelligence, semiconductors and life sciences.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.