Shenzhen: Emergence of a Megalopolis

Shenzhen CityFollowing decades of progress Shenzhen is revealing itself as a major player in the ongoing development of China’s economy. Often referred to as the ‘Silicon Valley’ of Southern China, Shenzhen is a high-technology production hub that rose to prominence under Deng Xiaoping’s Special Economic Zone designations in 1980. To date, the key to Shenzhen’s success has been the city’s strong logistics industry and its proximity to Hong Kong. So strong are the city’s business ties to its neighbour that the National Development and Reform Commission grouped Shenzhen and Hong Kong together into a ‘super-metropolitan area’ in its Plan for the Reform and Development of the Pearl River Delta (2008-2020), and there has been discussion of creating a ‘joint international shipping hub.’ Dezan Shira & Associates take a look at the factors that are driving Shenzhen’s growth.

Shenzhen’s logistics industry, which provides the glue that binds it to Hong Kong, has particular strengths in the areas of air and water transport. The city’s main airport is the second largest in the region and its port ranks among the top ports nationally in terms of container throughput. The city’s 12th Five-year Plan (FYP) explicitly states the goal of transforming the city into a global logistics hub. The Shenzhen government ambitiously aims to overtake Shanghai’s port facilities in the coming years by promoting transportation integration on the Pearl River Delta and furthering links with other inland cities such as Yunnan, Guizhou, Sichuan and the municipality of Chongqing. The plan expects the added value of the logistics industry to account for more than 10 percent of the city’s GDP in 2015.

Shenzhen is also a financial hub, largely because it is home to the Shenzhen Stock Exchange, and the national 12th FYP stated plans to develop Shenzhen as a national finance centre by 2015. By that year, the added value of the financial industry is expected to account for about 15 percent of the city’s GDP. To accomplish this goal the city plans to build three financial centres, namely, Caiwuwei in Luohu District, the Central Business District (CBD) in Futian and the Qianhai-Houhai area in Nanshan District. These centres will focus mainly on the capital market, wealth management and business investment of the city.

Just as Shenzhen played an integral role in China’s economic experimentation in previous decades as a special economic zone, the central government today still sees the city as a national role model. One key example of this is how the central government is leveraging Shenzhen’s close business ties to Hong Kong, Asia’s reigning financial hub, to experiment with new economic policies in the newly approved Qianhai Zone.

A Hong Kong-Shenzhen joint venture supported by the State Council, Qianhai Zone was approved in June 2012 as an experimental business zone for better interaction between Mainland China and Hong Kong in the financial, logistics, and IT services sectors. It covers less than 20 square kilometres on the western side of Shenzhen, and is expected to achieve a GDP of RMB 150 billion by 2020.

Among its many goals, Qianhai Area’s financial zone will serve as an experimental opening-up for China’s financial sector as a whole, including preferential policies such as:

  • Allowing the Qianhai area to explore the expansion of offshore RMB fund flow-back channels, and establish an innovative, experimental zone for cross-border RMB business
  • Supporting the granting of RMB loans by banking institutions established in Qianhai for offshore projects
  • Under the CEPA framework, conducting studies on the granting of RMB loans by Hong Kong-based banking institutions for enterprises and projects established in Qianhai
  • Supporting qualified enterprises and financial institutions registered in Qianhai to issue RMB bonds in Hong Kong within the quotas approved by the State Council to support the development of Qianhai
  • Supporting the innovative development of foreign-invested equity investment funds, and actively exploring new modes of foreign exchange settlement of capital funds, investment and fund management
  • Supporting the establishment of international or national management headquarters or business operation headquarters by Hong Kong and other onshore and offshore financial institutions.

Furthermore, qualifying enterprises will be entitled to a reduced corporate income tax rate of 15 percent and, to increase investor confidence in the area, the government has stated plans to explore the establishment of branches of Hong Kong arbitration institutions in Qianhai.

Qianhai Zone has also been called “an area for spearheading industrial restructuring in the Pearl River Delta region”. In the near future the incentives provided in the zone will likely extend to the other areas under remodeling in Guangdong Province to extract the ‘next wave’ of FDI, such as Hengqing Island near Zhuhai and Nansha Port near Guangzhou, before some are implemented in zones across the nation (read more here).

Spotlight on Shenzhen Government Innovation

The electrically powered BYD E6 is set to replace all taxis in Shenzhen

In the Pearl River Delta (PRD) Local Focus section of the European Chamber’s European Business in China Position Paper 2012/2013, one of the Key Recommendations titled ‘Brand the PRD as a Fully Integrated Region with Transformed Economic Growth’, declares concern for the fact that many European investors overlook cities in Guangdong in favour of Beijing, Hong Kong and Shanghai. The assessment notes that the government is keen to change the perception of the PRD being “internationally recognised as a hub for low-end production”, and that, “To facilitate a change in focus and to attract high-tech and service companies, it is necessary to provide facilities and incentives to channel the transformation.” Its recommendation is for provincial and municipal governments to work on “developing competitive incentive policies and establishing a benchmark with other first-tier cities.”

Many cities lay claim to innovative local government policies; below we look at some of the recent evidence that lends credence to Shenzhen’s claims in this area. In recent years, the Shenzhen government has taken the lead on a number of new initiatives, including equity investment incentives, e-commerce promotion and the introduction of electric vehicles.

Equity Investment Incentives

As private equity (PE) investment has emerged as one of the most important capital-raising avenues for small and medium-sized enterprises, Shenzhen has been one of several local governments of coastal cities to offer further incentives to equity investment enterprises. Shenzhen has established a PE Development Fund (PEDF) and recently clarified the operation procedures for PE funds that intend to apply for the financial support extracted from the PEDF. Incentives offered to PE funds include reward for local financial contributions, office purchase subsidy, office rent subsidy, one-time settlement rewards, and one-time rewards for investment withdrawal.

E-Commerce Promotion

Shenzhen was approved by China’s NDRC and the Ministry of Commerce (MOFCOM) to be the first e-commerce model city in September 2009. In addition to changes in the registration of e-commerce companies, Shenzhen has made other efforts to promote its e-commerce development. One example is the building of e-commerce industrial parks, such as Futian International E-commerce Industrial Park, which was opened in 2009 and currently has more than 150 internet and e-commerce companies. Currently, approval is not given to foreign-invested companies in the e-commerce sector.

Introduction of Electric Vehicles

Shenzhen has begun integrating electric vehicles into its public transport, as seen in the recent commercial introduction of local auto maker BYD’s vehicles which are appearing on the city streets. An initial fleet of some 300 e-taxis are plying the roads, as of December 2011. Named the E6, the vehicle offers enough space for five passengers and has a range of some 160 kilometres. Plans are currently being put into place to convert all of Shenzhen’s public vehicular transport to electric – including buses and all taxis – over the next five years.

BYD has also entered into agreements with Daimler to further continue R&D in the electric vehicle part of the business, with a factory in Los Angeles set to open in 2012 to manufacture and sell the E6 to the U.S. market.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. For further details or to contact the firm, please email, or visit