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China showers policy incentives on Shenzhen as Xi Jinping pushes to create model city

China showers policy incentives on Shenzhen as Xi Jinping pushes to create model city
Published in 21 October, 2020
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Beijing is giving Shenzhen a “gift package” for the city’s 40th birthday – granting it autonomy to make decisions on a wide range of local policies, from land use to hiring global talent, in a broad effort to give the boom town a major role in China’s economic and technological rivalry with the United States.

While the new five-year plan for Shenzhen, which was issued by the Chinese Communist Party and the State Council on Sunday, falls short of allowing for the free flow of information or money, the blueprint includes a significant relaxation of rules on land, people, technology and money in the city.

The plan doubles down on hopes that Shenzhen will become a global leader in technology and finance and a showcase window for President Xi Jinping’s vision of an ideal Chinese society.

The document, which mentions the word “explore” 28 times, reflects Xi’s intention to make Shenzhen a testing ground for policies that support what Beijing is trying to do, but which the government is not yet ready to roll out on a nationwide basis after four decades of experimenting with an illiberal political structure and a relatively free market.

Selecting Shenzhen for these policy explorations was a natural choice, given that the story of the city’s evolution from a small fishing village into a vibrant metropolis is often cited by Beijing as evidence of its effective governance.

A key reform initiative involves land, an increasingly scarce resource for Shenzhen. The city, with an administrative area just one third that of Shanghai and one eighth that of Beijing, will have the autonomy to convert and utilise farmland for industrial and residential purposes on its own authority, without needing approval from the Guangdong provincial government nor the central government in Beijing.

The land in Shenzhen earmarked for residential dwellings accounts for only 22.6 per cent of the total land supply for development, making it one of the most unaffordable cities in China given an official population of more than 12.5 million people, according to the city’s housing development plan for 2020 published in April.

Beijing did not give Shenzhen “additional land” by allowing it to merge neighbouring towns into its realm, but it did give the city the green light to create a freer land market.

The first land auction in the People’s Republic took place in Shenzhen in 1987 at a time when the sale of land was still prohibited under China’s constitution. But such auctions were later rolled out across the country and became a decisive factor in China’s urbanisation and economic development.

On top of land, the central government’s reform plan also tasked Shenzhen with taking a leading role in

“internationalising” use of the yuan

and in opening up the financial sector, making it the vanguard for the country on the financial front. This week, Shenzhen became the first city in the nation to issue its sovereign digital currency to a small group of public users on a lottery basis.

Beijing’s plan also called for Shenzhen to speed up the process of “commercialising” scientific breakthroughs. While research funds in China are currently allotted by the state, Beijing wants Shenzhen to find a way for research funds to be allocated by the market, including private investors, copying the process long used in Silicon Valley.

Shenzhen was also told to set up a “data” exchange so that vital information can be traded and priced. The details of how such an exchange would operate were not mentioned, but it could have profound implications if it becomes a hub for buying and selling data on a range of applications, from the economy to developing artificial intelligence programs.

Other promised reforms for Shenzhen include making it easier for Shenzhen-based companies to hire and retain foreign talent.

However, despite Beijing’s clear intentions to renew the “miracle” of Shenzhen’s development over the last four decades, the domestic and foreign environments for Shenzhen are completely different from those when China’s former paramount leader, Deng Xiaoping, decided to set up the special economic zone.

The US is becoming increasingly hostile toward China, in particular targeting Huawei and ZTE, the two Chinese telecom giants based in Shenzhen. It remains to be seen whether there will be an enthusiastic response from foreign investors, including those from neighbouring Hong Kong, to Xi’s new plan for the city.

Shenzhen’s Communist Party secretary, Wang Weizhong, told state-run China Central Television that reforms have become more difficult because the city’s per capita GDP has reached US$30,000, creating strong vested interests after four decades of economic growth.

But for Xi, who is expected to deliver a speech in Shenzhen on Wednesday, the city is an unqualified success.

“After Beijing supported Shenzhen in building a pilot [economic] demonstration area last year, reform for the city has become the key, if not the leading, force in helping lift the Greater Bay Area on par with other developed bay areas in the world,” said Liao Qun, chief economist at China CITIC Bank International.

Source: SCMP