The Capital of China : Foreign Investment Helps Boom Town of Shenzhen Thrive

The South China dream machine runs in high gear in this bustling, money-chasing, noisy and often tawdry boom town that lures the ambitious with visions of once-forbidden riches.

For the past decade they have come pouring in--everyone from simple farm youths to guileful offspring of high Beijing officials. Their raw energy, plus hefty doses of domestic and foreign capital, have transformed what was a drowsy village of 20,000 peasants into a city of skyscrapers, factories, construction sites, beauty parlors, discotheques, karaoke singing bars and 1 million mostly impatient people.

Set up in 1980 as a special zone to draw foreign capital by cutting bureaucracy and permitting capitalist techniques, Shenzhen is the place where things get done faster than anywhere else in China. Bordering Hong Kong, the city is the heart of China’s quasi-capitalist Guangdong province, which has averaged 12.4% real annual growth the past five years--a rate unmatched by any country in the world. Many experts view the province as crucial to China’s overall development.

Officials here smoke Marlboros and drink coffee from “Sands Hotel Las Vegas” mugs while predicting a high-technology boom based on foreign capital and China’s best brains. Local and Hong Kong businessmen walk around town talking on mobile telephones. McDonald’s put its first Chinese outlet here, and Kentucky Fried Chicken has its only South China shop here. Pizza Hut and 7-Eleven are on the way.

Shenzhen’s philosophy is: “If it can move the economy forward, do it,” said Peng Jinzhang, head of the Tokyo office of the China Development Institute (CDI), a private local think tank with strong government connections.

Although the special economic zone is only 126 square miles, it had attracted $5.3 billion worth of foreign investment commitments--an eye-popping 14.4% of China’s total--by the end of 1990. With the foreign help, Shenzhen exported $2.2 billion worth of goods last year.

It also has attracted attention from all of the Chinese hinterland. Most of China’s provinces and many cities and government corporations have set up offices in Shenzhen.

“If I want to buy anything in China, I can do it with a local phone call,” said Li Yuanyang, vice director of CDI’s headquarters here.

“In Beijing, many complain about corruption and distribution of wealth,” said Peng, who served in Shenzhen in 1988 and 1989. “Such debates occur in Shenzhen and Guangdong too, but everyone is focused on growth, and society is stabilized. . . . Although the education level in Shenzhen is high, there have been few cries for political reform.”

“The lesson of Shenzhen is that as reform and openness progress, you can have stability,” he added.

Shenzhen increasingly resembles its model--the very capitalist British colony of Hong Kong. After 1997, when Hong Kong reverts to Chinese sovereignty, there may not be much difference between the two.

“Shenzhen will be a part of Hong Kong,” declared Vincent H. C. Cheng, senior manager of group research for the Hong Kong and Shanghai Bank. “There will be a border controlling people, but in the movement of goods and investment, and even in regulations, they will become part of Hong Kong.”

Such integration, Cheng said, can “relieve our bottlenecks” and “give us more resources to grow.”

For now, the special economic zone is furiously playing catch-up. It retains something of a frontier atmosphere, both physically and spiritually, that contrasts with the genteel veneer that softens Hong Kong’s rough edges. Shenzhen construction sites spread huge quantities of dust on the streets. Taxi drivers jump queues. Prostitutes lounge in hotel lobbies.

“Shenzhen is full of a bunch of cowboys”--unsophisticated adventurers from all over China, complained a foreign resident of Canton, the provincial capital, who spoke on condition of anonymity.

“In Shenzhen, as soon as a person gains a technological ability, he leaves to set up his own factory,” said Hiromori Nemoto, sales manager in Hong Kong for Bandai Toys, a Japanese firm that contracts manufacturing in the zone.

The relative wealth and freedom of Shenzhen is a powerful drawing card for well-educated intellectuals and scientists. Policy makers believe that they can build on Shenzhen’s strengths and China’s size to transform this adolescent city into a high-tech center by the 21st Century.

Shenzhen’s phenomenal 47% average real annual growth rate during the 1980s came partly because “such a big country concentrated its strength on a small place,” commented CDI’s Li. Shenzhen can use the same strategy to leap into high technology during the coming decade, despite China’s overall backwardness in industrial techniques, he said.

“In some high-technology areas, China is at top world levels,” Li noted. “High-level people from all over the country are willing to come here. . . . Some Hong Kong companies have set up research branches in Shenzhen to use cheap labor resources and highly educated people to develop new products.”

One high-technology joint venture in Shenzhen involves software development for IBM, commented David K. P. Li, chief executive of Hong Kong’s Bank of East Asia, which helped finance the project. The venture employs more than 200 people with post-graduate qualifications, Li said.

The Hong Kong banker also noted that last year Citibank’s regional headquarters in the colony transferred some of its electronic data processing support services for wholesale banking to a “back room” in Shenzhen.

Shenzhen’s leaders believe that such a transition to high technology and services is necessary because the special zone is beginning to feel a pinch from rising wages.

“In the past 10 years, Shenzhen developed rapidly into a modern city by cooperating with Hong Kong. . . . Shenzhen made the products, Hong Kong sold them,” Li Yuanyang commented. “But in the next 10 years, this pattern may have to change.”

Cheap labor is what initially lured Hong Kong and other investors here to produce such labor-intensive goods as toys, textiles and electric appliances. With wages now nearly twice as high as in the rest of Guangdong province, Shenzhen has little choice but to move up the technological ladder to spur future growth, Li Yuanyang said.

In Canton, Guangdong’s capital, government planners echo the message. “We are now thinking of having high-tech industries move into the Pearl River Delta (the entire region closest to Hong Kong) and move labor-intensive industries to the west part of Guangdong,” said Li Binghui of the province’s Systems Restructuring Office.

Although the province lacks significant heavy industry, there are plenty of opportunities for technical upgrading, said Li Chunhong, director of macroeconomy adjustment for the Guangdong government.

This doesn’t have to mean “high tech,” he said. Just “higher tech” than now.

For example, he noted, “One factory is now manufacturing a cradle equipped with sensors that detect a baby crying. It automatically starts playing music while setting off a bell (to alert the mother). Some foreign companies have asked to license production of this cradle.”

Shenzhen is fully capable of this type of upgrading, he said.

Already, it “has begun to restrict investments by foreign enterprises that rely upon intensive labor or bring in pollution,” Li Yuanyang said. But the welcome mat is still out for high-tech foreign investors, he said.

Li Yuanyang predicted that continued foreign investments and technical upgrading will quadruple the size of Shenzhen’s economy by the turn of the century and bring per-capita income to about $2,000--or slightly less than the level of Malaysia today.

While there are no plans to place Shenzhen under Hong Kong’s administration, local authorities are planning a further opening of the special zone to virtually integrate it with Hong Kong economically.

“When Hong Kong is returned to China in 1997, the Shenzhen government has a plan to open the first boundary line between Hong Kong and Shenzhen and to run the second line between Shenzhen and the hinterland,” Li Yuanyang said. “The first line will control people, not materials, and the second line will control materials, not people. . . . Hong Kong and Shenzhen will cooperate at a higher level of technology.

“Shenzhen will provide the high-level educated talent, and Hong Kong will provide the funds . . . and its power in world markets.”

Li Yuanyang confessed, however, that Shenzhen’s “anything goes” approach to economics is running into difficulties with the Beijing government.

“At first, the leaders of the local government supported a ‘small government-big society’ approach,” he explained. But recently, the central government has imposed greater controls, including tighter restrictions on people moving into Shenzhen, he said.

“This is the main issue in China--a conflict between the market system and the centrally planned system,” he said. “Shenzhen is a small part of China, but in the large part, they practice central planning. We haven’t yet solved the problem of how to mix these two methods.

“So we feel it is very difficult to escape bureaucracy.”

The Economic Pulse of Asia

China’s Guangdong province has an annual growth rate unmatched by any country, even economic giants such as Japan and China which have much heftier gross national products. MAJOR ASIAN GROSS NATIONAL PRODUCTS, 1990

Japan: $2,997 billion

China: $364 billion

South Korea: $238 billion

Taiwan: $161 billion

Indonesia: $95 billion

Thailand: $81 billion

Hong Kong: $70 billion

Philippines: $44 billion

Malaysia: $41 billion

Guangdong Province: $31 billion

Source: International Monetary Fund, Nomura Research Institute

REAL GROWTH RATES

1986 1987 1988 1989 1990 Average Guangdong 11.3 17.0 15.6 7.0 11.3 12.4 Malaysia 1.2 5.3 8.7 8.8 10.0 6.8 Thailand 4.9 9.5 13.2 12.2 10.0 10.0 South Korea 12.9 13.0 12.4 6.8 9.0 10.8 Singapore 1.8 9.4 11.1 9.2 8.3 8.0 Japan 2.6 4.3 6.2 4.7 5.6 4.7 Taiwan 12.6 11.9 7.8 7.3 5.3 9.0 China 8.3 11.0 10.8 3.6 5.0 7.7 Hong Kong 11.9 13.9 7.9 2.3 2.4 7.7

Source: Nomura Research Institute (compiled from official government statistics in each country and region)