Investing in Shenzhen, China’s Main Export Hub

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Aug. 26 – Shenzhen celebrates the thirtieth year of its unique status of being a Special Economic Zone today, a development that ushered the entire redevelopment, reform and opening up of the entire country. Once a small fishing village, it was chosen by Deng Xiaoping to be the first of the special economic zones in China. It was formally established in May, 1980 due to its proximity to Hong Kong, then part of the United Kingdom.

The SEZ was an experiment in market capitalism within Deng’s self-professed “socialism with Chinese characteristics.” Shenzhen was chosen as a location due to its proximity to Hong Kong and the cultural links to the two cities share. It was also far enough away from the rest of the country that if the experiment went wrong or proved politically inappropriate, damage limitation to the rest of China’s still very communist ideology would be minimized.This lead to the city effectively being sealed off from the rest of China.

The airport was sited about an hour’s drive outside the zone, and special permission had to be obtained for Chinese nationals from anywhere else in the country to enter. Meanwhile, it was easy access for Hong Kong residents, and even foreign nationals at the time could obtain a “Shenzhen visa” with validity only applicable for the SEZ. Investment laws and tax incentives were drawn up specifically for Shenzhen only, and the concept proved successful, propelling the further opening up of China and continuous economic reform. Shenzhen has subsequently become one of the largest cities in the Pearl River Delta region, which has developed into one of the economic powerhouses of China.

Just prior to being granted SEZ status, Shenzhen was promoted to prefecture level, directly governed by Guangdong Province, in November 1979. It was given the right of provincial-level economic administration in November 1988, and now reports directly to Beijing. The links to Hong Kong remained strong, and in the lead up to the handover of Hong Kong to China in July, the Intercontinental Hotel at the border of Lo Wu was home to the Provisional Legislative Council and Provisional Executive Council of Hong Kong, who politically couldn’t meet in Hong Kong until the British had left.

Shenzhen has steadily grown in the past 20 years to become a booming metropolitan city. It is located directly opposite Hong Kong, and now has several border crossings with the territory – a far cry from the days of the mid-1960s and 1970s when British and Chinese troops yelled insults (and occasionally shot at each other) from across a heavily fortified border. Today, there are six land crossing points on the boundary between Shenzhen and Hong Kong. From west to east these are Shenzhen Bay Port road crossing; Fu Tian Kou An to Lok Ma Chau rail connection linking Shenzhen Metro Line 4 to the MTR’s East Rail Line Lok Ma Chau Spur Line; Huanggang to Lok Ma Chau road connection; Futian to Man Kam To road connection; Louhu to Lo Wu rail connection linking the MTR East Rail Line to Shenzhen Metro Line 1, Shenzhen Rail Station and Luohu in general; and the Shatoujiao to Sha Tau Kok road connection.

Both of the rail connections require the passengers to cross the Shenzhen River on foot as there is no direct rail connection between the two cities, although the Hong Kong intercity trains to other mainland cities pass through Shenzhen without stopping. It has made the Lo Wu border between Shenzhen and Hong Kong the one of the busiest individual passenger borders in the world with an estimated 160,000 crossings daily.

Shenzhen’s development is all the more astonishing when one considers the city only had a population of about 1 million in 1980, and 10 years prior to that, just 170,000. Its growth over the past two decades has massively improved infrastructure. Shenzhen has an extensive land, sea and air transportation infrastructure network in addition to only being at a 70 kilometer radius to the key cities of Zhuhai, Hong Kong and Macau. There are 2,800 kilometers of roads and 200 kilometers of expressways in Shenzhen. The efficient road network has cut travel time to neighboring cities to an hour. The number of cars in Shenzhen has been increasing by around 200,000 each year, and as a result the city’s authorities are worried that car sales will outpace construction of new roads. There are also more than 150 buses traveling between Shenzhen and Guangzhou daily along with 300 buses that shuttle between Shenzhen and Hong Kong, all along the Guangshen Highway which was opened as China’s first toll road back in 1994.

Shenzhen was also the first city in China to operate high-speed trains along with an extensive railway network. The two major railway lines in China, the Beijing-Guangzhou Line and the Beijing-Kowloon Railway, all converge in the city. Its highway network also connects it to all major cities in the Pearl River Delta. Shenzhen’s metro also opened in 2004, the sixth in China, and has now expanded to the Shenzhen Metro Line 4, with links right through to Shekou to the West. A fifth line is also due for construction that should provide 38 more kilometers of rail and will provide connections to the north and through to the airport.

Shenzhen’s Bao’an International Airport, (originally called Hongqiao) is located 35 kilometers from downtown, and is one of China’s busiest airports with 95 domestic airlines and 14 international airlines. Passenger traffic through the airport in 2009 totaled 20 million, a 25 percent increase over the previous year.

Shenzhen has also benefited from Hong Kong’s reputation and proximity in international shipping to become one of the world’s top ports in its own right. Shenzhen’s western port area lies to the east of Lingdingyang in the Pearl River Estuary and possesses a deep water harbor with excellent natural shelters. It is about 20 sea miles from Hong Kong to the south and 60 sea miles from Guangzhou to the north. By passing Pearl River system, the western port area is connected with the cities and counties in Pearl River Delta networks; by passing On See Dun waterway, it extends all ports both at home and abroad. The eastern port area lies north of Dapeng Bay where the harbor is wide and calm and is regarded as the best natural harbor in South China. Shenzhen became the world’s fourth-busiest port in 2007, and in China, second only to Shanghai, after rising trade increased cargo shipments through the city. Hutchison Whampoa Ltd, China Merchants Holdings (International) Co. and other operators of the port handled 16.2 million standard 20-foot TEU last year. Investors in Shenzhen are also expanding to take advantage of rising volume. Hong Kong-based Hutchison, the world’s biggest port operator are about to open six news berths at Yantian, bringing the total to 15. The company also plans to pay its parent company HK$2.07 billion (US$265 million) for land at Shekou to expand its cargo business. Yantian International Container Terminals, Chiwan Container terminals, Shekou Container Terminals, China Merchants Port and Shenzhen Haixing (Mawan port) are the major port terminals in Shenzhen.

The Shenzhen Bay Port, a border crossing between south of Shenzhen and Hong Kong, has the capacity for two-way daily traffic and passenger flows up to 29,800 vehicles and 30,800 passengers and should increase this to some 60,300 vehicles and 61,300 passengers per day by 2016.

The city is poised to overtake Guangzhou’s stronghold as the provincial and economic capital of the south of China. Shenzhen has the benefit of its proximity to Hong Kong and cheaper labor wages. The city’s major industries are computer software, IT, microelectronics and components, video and audio products, electro-mechanical integration, and light industry and energy. There are also emerging industries such as pharmaceuticals, medical equipment, biotechnology and new materials. Electronics and telecommunications equipment account for over 90 percent of the total output of Shenzhen’s new and high-tech industries.

The SEZ is a major software development base. Shenzhen’s utilized amount of foreign direct investment has been growing reaching US$3.66 billion in 2007. Multinational corporations such as IBM, Intel, Siemens, Samsung and Hitachi have all established production lines in the city, as the onus was laid for it to become one of China’s main IT development centers, an initiative introduced by then premier Zhu Rongji in 2000.

Over 90 percent of FDI is in manufacturing, reflecting the advantages of Shenzhen as an industrial base. Investors from more than 90 countries and regions have invested in Shenzhen including more than 100 multinationals listed on the Fortune 500 list. It is also estimated that as much as 70 percent of foreign overseas investment in the city comes from Hong Kong. These Hong Kong-funded enterprises in Shenzhen represent 80 percent of the overseas firms in the city. Since the implementation of CEPA, trade between both sides has doubled with an average annual growth of 20 percent.

As a manufacturing base for a wide range of industries, Shenzhen uses Hong Kong as a trade platform to expand the global market. On the other hand, foreign companies can supply industrial products to Shenzhen through Hong Kong. China is set to build the largest railway container center in Shenzhen at a cost of US$286.39 million. The railway center will have a total cargo throughput of 2.2-2.5 million TEUs, with direct lines to the country’s major ports: Shanghai, Guangzhou, Shenzhen, Qingdao, Lianyungang and Tianjin, and is scheduled to be operational by 2015. By then predictions are that Shenzhen should overtake Hong Kong within four years to become the world’s third-busiest cargo port. It will also benefit from the currently being constructed Hong Kong–Macau-Zhuhai bridge, which will permit an additional route across the Pearl River (there is already one bridge spanning the estuary that links Shenzhen directly to Zhuhai on the west coast).

Shenzhen has 15 kilometers of port coastline and nine business port areas including Shekou and Yantian in addition to five industrial parks. There are also a number of development zones and six industrial clusters.

Yantian Port
Established in September, 1996 upon approval of the State Council, Yantian Port is a major international transit port in South China. It has efficient customs clearance measures and five major port terminals covering 0.85 square kilometers in the first phase alone. There are 33 shipping companies registered in the city with more than 190 vessels. Forty-six international sea routes connect the port to Europe, Asia and the Pacific regions. Key industries include warehousing, logistics and trade, as well as bonded commodities exchange and exhibition. The port has berths, of which 53 can accommodate vessels above 10,000 tons dwt.

Shekou Port
Shekou lies to the west of Shenzhen and is a special district town specifically servicing the offshore oil drilling industry in the South China Sea. It is a deep water port and handles both cargo, supply vessels and helicopter traffic to the offshore rigs. Consequently many international oil drilling and related services companies are found here, the majority of the drilling businesses in joint ventures with CNOOC. Related industries such as chemical processing and chemical product manufacturing are also located here.

Shenzhen High-Tech Industrial Development Zone
SHTIDZ has an area of 158.5 square kilometers including a high-tech industry zone of around 50.9 square kilometers. Located next to Shenzhen bay, and surrounded by tourist estates and shopping centers, key industries in the zone include scientific R&D, incubation of scientific and technological results, industrialized production, higher education and export processing; also promotes electronics and IT, biological technology, integrated machinery and electric technology. The Shenzhen authorities have carefully identified certain critical components of service outsourcing on which the city intends to focus its capabilities, especially work force development.

Shenzhen Export Processing Zone
SZEPZ is one of the 15 EPZs approved by the State Council in April 2000. It is located in the Longgang Grand Industrial Zone within an area of three square kilometers. Key industries include new and high-tech industries and export-oriented ones.

Shenzhen Grand Industrial Zone
The Shenzhen Grand Industrial Zone sits in 174.4 square kilometers encompassing Pingshan Township and Kangzi Township of Longgang District. In addition to the industries present in the export processing zone, key industries include: information industry and advanced technology; real estate; trade; and the service industry.

Futian Free Trade Zone
Approved by the State Council on May 28, 1991, the Futian Free Trade Zone encompasses and area of 1.35 square kilometers, with 0.33 square kilometers for a residential quarter. It is located to the west of the Huanggang Port and sits adjacent to the Guangzhou-Shenzhen expressway in the north, and the Huanggang subway terminal, which connects to the Hong Kong northwest railway. Key industries include: developing high-tech industries, logistics and warehousing. More than 600 enterprises from 23 countries including some multinational companies are located in the zone.

Shenzhen Shatoujiao Free Trade Zone
The Shenzhen Free Trade Zone is one of the earliest free trade zones in China. Located near the Yantian container terminal, it covers an area of 0.27 square kilometers, of which 0.15 have been allocated for residential purposes. Key industries in the zone include the export processing of computers, toys, jewelry and gold.

Yantian Port Free Trade Zone
The zone is located at the Yantian Port, one of the largest container terminals in China with 46 international routes linking it Europe, Asia and the Pacific Regions. The port is also Shenzhen’s top waterway transportation network. Since beginning operations in 1999, the zone is divided by the Yantian Port Blvd. into two parts: south and the north linked by an insulating via duct. It has a specialized passageway for direct access to the quay operation area. In addition to a well-developed waterway network, there is the 24 kilometer Pinghu-Yantian railway that links it to the Beijing-Guangzhou and Beijing-Kowloon railway. It is also nearby the Yan-Ba Expressway and Huizhou-Yantian Expressway.

Success story
If any city epitomizes the success story that China has become over the past thirty years, it is indeed Shenzhen. From a fishing village to the home of much of the world’s global manufacturing in such a short space of time – from nowhere to one of the most successful cities globally is a truly unique Shenzhen achievement. It is also likely to continue – Premier Wen Jiabao, in Shenzhen last week to oversee preparations for the city birthday party today, stated that Shenzhen’s unique status as a Special Economic Zone will continue. That’s good news for Shenzhen and for manufacturers and businesses based in the city. Shenzhen remains a highly attractive investment destination, with a skilled workforce, easy access to Hong Kong and a wealthy middle class.

Parts of this article were excerpted from the China Briefing Business Guide to South China and the Greater Pearl River Delta.

Dezan Shira & Associates established operations in Shenzhen in 1992 and have a very strong footprint in the city backed with 18 years of local foreign direct investment experience. For assistance with corporate establishment, legal administration, tax planning, due diligence, M&A work, accounting, compliance, and audit please contact the firm at shenzhen@dezshira.com.