“Be daring,” was President Xi Jinping’s guidance to Shenzhen when he visited the city in October to celebrate the 40th anniversary of China’s first Special Economic Zone. And to enable Shenzhen to fulfil this goal, Xi unveiled a new list of reforms that give the city considerably more autonomy. It seems certain that the extraordinary story of Shenzhen’s development is far from complete.
But what does this mean for Hong Kong?
Will the two cities continue to play complementary roles as part of the Greater Bay Area? Or will Hong Kong’s importance as a global hub diminish as Shenzhen becomes ever more open and international?
Fishing village to tech superstar
Although the history of Shenzhen’s transformation is familiar, the numbers involved never fail to impress. From a tiny village in the 1950s, it became a small city before its growth was turbocharged by the launch of the Shenzhen Special Economic Zone in 1980. Today, it is a city of 12 million people, a global hub for innovation and technology, and its GDP has edged just ahead of Hong Kong’s, at 2.7 trillion RMB in 2019.
Dr Tse Kwok Leung, Head of Policy and Economic Research at the Bank of China, explained that Hong Kong has been involved all along as both cities grew and evolved.
“In the early years – up to the 1990s – Hong Kong played the role of a bridge, which was key to Shenzhen’s development,” he said. During this period, many Hong Kong companies moved their manufacturing to the Mainland.
Then, after the Asian Financial Crisis, many Shenzhen-based enterprises were enjoying rapid growth. Hong Kong was key in providing the financing for these mostly private companies.
“Also, at that time, Shenzhen paid a lot of attention to Hong Kong’s business systems and environment,” Tse added. “It learned from Hong Kong, especially about business regulations.”
Then, around 10 years ago, Hong Kong also become a platform for Shenzhen enterprises to expand overseas, especially the technology giants like Tencent and Huawei. “Almost all of the big Shenzhen companies set up operations in Hong Kong to handle their international business,” Tse said. “Hong Kong’s role in Shenzhen’s development is always changing.”
One of the businesses that has enjoyed the advantages of cross-border operations is Forms Syntron Information (HK), which has hubs in both Shenzhen and Hong Kong. Alex Chan, CEO of Forms HK, which helps both virtual and traditional banks develop their fintech services, explained the benefits of this set up. Firstly, he said, Hong Kong has a shortage of fintech professionals.
“Historically, Hong Kong does not have that talent supply, and we don’t have the talent pipeline either,” he explained.
Forms HK’s access to developers in the Mainland means that they can better help their Hong Kong banking clients to improve their services. “If they were relying on Hong Kong resources alone, they could not do that.”
The second benefit of Forms’ cross-border set-up is the huge potential market of the GBA’s 70 million population. “We are expecting cross-border banking, financial services and wealth management to really take shape in the future,” Chan said.
However, there are still some hurdles, such as the immigration and visa renewal procedures required for Mainland staff working in the Hong Kong office.
“If they could move freely, as one single market, that would be much more effective for us,” he added.
Speaking more generally, Chan hopes to see more opening up in the GBA. For example, it is still difficult for a Hong Kong person to open a bank account on the Mainland, and vice-versa. “So we are looking forward to more detailed policies to be released, in particular for the fintech sector.”
The GBA ‘engine’
In his speech, Xi referred to Shenzhen as the “engine” of the Greater Bay Area, with a particular focus on innovation and technology, the city’s key sectors. But the new reforms also give Shenzhen freedom to make regulations in areas including finance and capital markets – traditionally Hong Kong’s specialty.
These changes mean that Shenzhen is in a more “head-to-head competition” with Hong Kong than in the past, explained Dr Xia Le, Chief Economist and Head of Research, Digital Economic Research Centre of Ping An Technology.
“I don’t think that Shenzhen will overtake Hong Kong, but it can try to compete with Hong Kong on a number of fronts, for example with finance,” he added.
As Xia explained, Hong Kong has a number of key attributes that have given the city the edge in the financial sector.
“Hong Kong is very internationalized, with very good legal precedents and legal structure. It also has people who know China very well,” he said. “In terms of international financing that is based in Hong Kong – I don’t think that will change too much in the next few years. But for niche markets, things could change more quickly, and Shenzhen could develop an advantage over Hong Kong.”
The decision by the Central Government to give Shenzhen a bigger role in the financial area is a recent change. Previously, Hong Kong served as the financial hub for the region. But events of the past year, including the social unrest and Covid-19, have led to a shift in policy.
“Another reason for the focus on Shenzhen is that Hong Kong has been facing an increasingly tough international environment, with the U.S. trying to punish Hong Kong, including its financial institutions,” Xia explained.
The uncertain environment – both globally and within Hong Kong – means than having alternative options for finance in the GBA may be a good insurance policy.
Hong Kong’s changing role
But does Shenzhen’s continued growth and growing autonomy mean that it has “eclipsed” Hong Kong? It depends on how you look at it. As Tse from Bank of China noted, Hong Kong cannot compete with Mainland cities in terms of size.
“Our role is not as the growth engine,” he said. “Our role is as an international platform, which facilitates the free flow of capital. This is very useful and very important for companies in the Greater Bay Area to do international business.”
Billy Wong, Deputy Director of Research at the Hong Kong Trade Development Council, said that Hong Kong’s international connectivity means it will continue to play an important role in the GBA’s development. Increasing connectivity is one of the GBA’s major functions, in terms of its role in the Belt and Road Initiative and the nation’s opening up.
Hong Kong’s “connectivity” is also seen as one of its key strengths by businesses, according to a recent study by PwC, commissioned by HKTDC Research. “This is both in terms of HK’s strong business connections with overseas, as well as efficient transport and logistics connections to the world,” he said.
Wong also noted that foreign companies operating in Hong Kong are very interested in the GBA development.
“Many of these overseas companies first came to Hong Kong as the starting point before penetrating into the PRD region, though they may see Hong Kong and the PRD as two different markets, as they have different operating environments and consumer characteristics,” he said.
These companies hope to see further integration of GBA cities, for example, facilitation of cross-border flows of people and products.
Another survey, among start-ups, found that while many were either already operating in the GBA, or were interested in expanding there, barriers remained including the different systems and uncertain market conditions.
“To address these problems, GBA cities should move further in term of integration, including not just physical connectivity, but also institutional facilitation, so that although there may be differences, relevant policies be more transparent to Hong Kong start-ups.”
Post-Covid path to prosperity
For Hong Kong, another benefit of close ties with Shenzhen and the GBA markets in the short term is the Mainland’s return to economic growth. Other major markets – such as the U.S. and Europe – are still struggling to get the Covid-19 pandemic under control.
“Cooperation between Hong Kong and other cities in the GBA will be enhanced in the next few years,” said Xia from Ping An. Speaking on the phone from Shanghai, he remarked that life seemed to have returned to normal.
“If China can keep the Covid situation under control, it has a real chance to continue its prosperity,” he said. “And, hopefully, this economic prosperity can spill over and help Hong Kong’s economy to recover.”
Tse from Bank of China is also confident about the Mainland’s recovery, saying that a growth rate of around 2% this year was possible. “Then next year it is widely expected that the economic growth will have a very strong rebound, if the pandemic is over and life and economic activity return to normal.”
In the longer term, China’s “dual circulation” model, which encourages greater self-sufficiency in technology and increased domestic consumption, should also create new demand. HKTDC’s Wong noted that the market for high quality goods in the Mainland will continue to grow.
“Today’s consumers are more willing than before to spend their money on practical, good quality products and services.” he said. “Consumers in the nine mainland GBA cities are increasingly interested in upgrading their personal image, pursuing smart living, and keeping healthy.”
But with Shenzhen already at an advanced stage of development, and with many long-established market-leading companies, is it too late for Hong Kong businesses to spread their wings over the border? “Not at all,” said Chan from Forms HK, who sees plenty of opportunities in the fintech sector and beyond.
“We always encourage people – all of our peers and start-ups, and when we do careers talks at universities – to explore the markets outside Hong Kong, and the most logical first stop is Shenzhen,” he said.
Shenzhen: Facts and Figures
Population in 2018
Population in 1955
2.7 trillion RMB
GDP in 2019
Proportion of GDP spent on R&D in 2018, among the highest in the world
Electric buses: Shenzhen’s whole bus fleet is electric, as are most of its taxis
Height of the Ping An Finance Centre, the fourth tallest building in the world
Shenzhen companies (Huawei and Ping An) in Brand Finance’s 2020 top ten most valuable brands
High-net-worth individuals in 2019, according to Wealth-X
Xi’s Speech: Key Takeaways
In his speech in Shenzhen on 14 October, President Xi Jinping said that the city’s growth over the past 40 years had been a miracle in the history of the world’s development, and he called for “another miracle” in its next stage of reform. Key points from his speech include:
- China will unswervingly expand opening-up in an all-round way, and promote the building of an open world economy
- Shenzhen is moving to the next stage of reform to become a world-class innovation powerhouse and model of economic reform for the nation
- Shenzhen can make reforms or undertake new ventures in 40 areas including financial markets, the business environment, technology and innovation, and international cooperation
- Foreign countries are welcome to play an increased role in the development of China’s SEZs
- Strict law enforcement, judicial impartiality and universal law-abiding will be ensured
- Sustainable development and environmental protection will be encouraged
- Comprehensive implementation of One Country, Two Systems
- More efforts will be made to synergize economic rules and mechanisms in the three regions of the GBA
- Shenzhen will be an important engine to drive development of the GBA and promote the integration of Hong Kong and Macao
- The GBA platform should be used to attract more young people from Hong Kong and Macao to study, work and live in the Mainland
Exploring Shenzhen’s Evolution
The Chamber has organized numerous missions to Shenzhen and the other Mainland GBA cities in the past few years. In April last year, for example, members visited Longgang in eastern Shenzhen. Longgang is a growing hub for advanced technology and manufacturing, but the district’s transformation also includes modern mixed-use developments, as well as sports, arts and educational facilities – all with an environmental focus.
“There was so much to see, and so much interest from members, that we organized a return visit to Longgang just a couple of months later,” said Petrina Tam, Chairman of the China Committee. “It is really useful for members to meet businesspeople and officials on the ground, and to see the developments in person.”
With Covid-19 cases remaining very low in both the Mainland and Hong Kong, the Chamber hopes to be able to resume these missions soon.
“The continuing evolution of Shenzhen, and the ambitious plans for the GBA initiative, mean that there will continue to be new opportunities for Hong Kong businesses and entrepreneurs,” Tam said. “We are looking forward to being able to plan our next visit.”
New Agreement to Enhance Cooperation
Chief Executive Carrie Lam and the Governor of Guangdong Province Ma Xingrui signed the “2020 Work Plan of the Framework Agreement on Hong Kong/Guangdong Cooperation” on 30 October.
The Plan covers a diverse range of issues in eight major areas, namely:
1. Cross-boundary infrastructure development and customs clearance facilitation;
2. Joint development of an international innovation and technology hub;
3. Fostering co-operation in modern service industries (including co-operation in the financial services sector and professional services, as well as cultural and tourism co-operation);
4. Taking forward co-operation in education, talents and youth matters;
5. Developing an internationalised business environment;
6. Joint development of a quality living circle;
7. Joint participation in the Belt and Road Initiative; and
8. Taking forward the development of key co-operation platforms.