Shenzhen’s actual foreign direct investment rose 19% year-on-year to US$5.8 billion in the first half of this year, government statistics show. This was an acceleration from the 11.8% recorded in the whole of last year. The latest number accounts for 6% of the country’s total.
However, what exactly constitutes foreign investment is a little murky. Is this capital from real multinationals, or Chinese companies listed in Hong Kong?
According to state media, Shenzhen has established more than 100,000 foreign-invested enterprises to date, with investments totaling US$328 billion, of which US$128 billion has been utilized. It has attracted 295 Fortune 500 companies.
In February, Shenzhen issued new regulations designed to attract more multinationals to the city. Since then, 18 have been recognized. A few of the better known include: Wal-Mart, China Resources Vanguard, and Maoye Commercial Building in the wholesale and retail industry; Shenzhen Mcwell, Eka Technology, and Salcom Technology in the electronic information industry; and Mingyuan Cloud Technology and Futu Network in the software and information service industry. Wal-Mart has been in the city since 1996, so it is not clear how the US retailing and wholesaling giant is on this list. As a keen observer will notice, the rest are actually Chinese companies.
An agreement has been signed amid much fanfare between Guangdong, Hong Kong and Macau that will boost the opportunities for accountants to do more cross-border work. The details remain vague, but it appears this is about market access.
The key question that remains to be answered is whether Hong Kong and Macau-based auditors of offshore companies listed in the United States will be able to do due diligence on the accounts of these companies’ related entities on the mainland. That seems unlikely for the near future, although central government sources have said they are working on improving mainland accounting disclosures. Hong Kong regulators have been able to access mainland accounts of some companies listed in Hong Kong since late last year, and it has been hoped, since then, that further progress will be made. Soon.
Hengqin, the special economic zone opposite Macau’s Cotai casino district, has been turned into a bold new experiment. Macau will essentially take over the daily management of the zone from Zhuhai, but will have to consult the provincial government on major policies.
The zone will be jointly managed by a committee, but Macau will be in the driver’s seat: This is clear from the fact that Macau will appoint the Executive Deputy Director of the zone’s management committee. Although Macau’s CE and Guangdong’s governor will be co-heads, the EDD will run the show on a daily basis. The language of the announcement makes it seem like this is a JV, but really this is Macau’s project.
There is much talk about diversification, with hi-tech industries, including manufacturing, and financial services being given lots of ink. But tourism is still the key. The plan makes no mention of the gaming concessionaires, and the tourism section calls it “cultural tourism”. But make no mistake, what this means in practice is that SMEs will get subsidies to pursue tech ideas, most of which will flop, and the banks will be able to build up some wealth management products in Hengqin, but the only projects that will actually make money will be in tourism, and so they will get the lion’s share of attention and resources.
This will take time, however: No one should expect a press release on the casinos being given a role in Hengqin before the concessions are renewed next year. The deadline for getting the management committee fully functional is only 2024. The goal for integration to be fully realised is only 2035.
Continue reading Hengqin plan is game-changer for Macau
Shenzhen has decided to widen the administrative boundary of its Shekou Qianhai special economic zone, promising to speed up long-promised reforms in financial services and use the zone as a test bed for further opening the country to international capital flows. Yet what this really is, is a property play.
Here is the SCMP story on the initial announcement, which is full of commentary about how this announcement is a massive win for Hong Kong and should be seized upon by Hong Kong businesses, which currently only account for around 10% of all investment in the zone.
This follow-up story gushes further, adding assurances that lots of experimental stuff will be happening in Qianhai, and that one-third of the newly-vacated land will be set aside for Hong Kong investment.
However, a few days later, another SCMP report hit the nail on the head: the biggest beneficiaries of the new plan are the state-owned property developers with the largest land banks in the area: China Merchants, Grand Joy, and Shenzhen Metro.
It also notes that property prices now have to deal with cooling measures being implemented across the country, which has resulted in a “cap” being placed on the Qianhai market that is 7% beneath the level reached at the most recent land auctions.
That is just for residential. Office vacancy rates in Qianhai have been climbing steadily since 2014, and now stand at around 23%. This is nearly three times higher than in Hong Kong, which has been hammered in recent years by a combination of protests and Covid-19. And yet officials say the reason they are expanding Qianhai is because it lacks room to grow?
Shenzhen’s city government has apparently decided to not intervene in the blowup that has been taking place between Chinese cross-border e-commerce firms and Amazon, the American giant.
According to sources quoted by SCMP, the city has been turning down requests to back thousands of vendors’ legal actions against the US company. The same official told the merchants that the government cannot help their cause if they cannot prove that no rules of the US e-commerce platform were violated, these sources said. The government, however, will assist the affected merchants by introducing them to legal counsel.
What the report does not mention is that the city government has been massively supporting all of these companies while they were busy building up their businesses on Amazon, providing subsidies, cheaper office and warehousing space, and export rebates. It does note, however, that once the storm broke over how these companies had been flooding Amazon with fake user reviews, the city government decided to grant them a subsidy of 2 million yuan for each independent online store.
Shenzhen is home to more than 40,000 firms involved in cross-border e-commerce, accounting for about 35 per cent of the entire sector across mainland China.
A most interesting press release came out from Huawei Technologies, courtesy of SCMP, today: “We will eventually retake our throne in the smartphone market, while continuing to improve our chip-making capabilities.”
This is quite a change of tone from the company, which has recently been emphasizing that it is in “survival mode”. It is likely to have been spurred by significant government support. Indeed, as mentioned last week, it is highly likely that Huawei is at the center of the Guangdong government’s new Five-Year Plan for semiconductors. It is the region’s only aspiring world-class tech company that has a strong foundation in both hardware and software, and the organisational capability to even begin to know how to grow an advanced semiconductor industry.
It will be interesting to see how the US government responds. Republican Senator Marco Rubio, who appears to be positioning himself for a presidential campaign with a tough stance on China, is already on the warpath against Tik Tok after the Chinese government’s recent acquisition of a stake and board seat. But more importantly, the Commerce Department is currently reviewing its Entity List, which is what started Huawei’s downfall back in May 2019. Will it take a closer look at the Guangdong Five-Year Plan and consider whether it needs to examine Huawei’s supply chain more carefully? It should become clear in the coming months.
If the Central Committee for Financial and Economic Affairs, which met yesterday under the chairmanship of President Xi Jinping, had held its meeting three weeks ago, much of the guessing-game played by foreign investors since then could have been avoided. It is now clear what is going on: China is transforming its “Socialism With Chinese Characteristics” economic development model, with the primary aim of reducing inequality.
This is how it happens sometimes in China: policies are launched that wipe trillions from stock market valuations, and only a couple of weeks later are they explained, often by an oblique reference.
The official document released after the big meeting is worth reading in its entirety. Here is the version supplied by CCTV. Reading between the lines, it appears to make three key points. First, to get rich is still glorious. Second, to get obscenely rich is not so much. Third, wealth is protected by the law, but obscenely rich people had better start thinking about how they can give it back. “Common prosperity” is now the primary goal for all.
Or, put another way (by the SCMP): The meeting vowed to “strengthen the regulation and adjustment of high income, protect legal income, reasonably adjust excessive income, and encourage high-income groups and enterprises to give back to society more.”
It also urged the country to “properly deal with the relationship between efficiency and fairness”.
Readers might be forgiven for thinking this is just political banter, of the sort regularly espoused by left-leaning groups around the world. But this is the committee, chaired by the president, responsible for setting economic policy in China. This is going to happen.
Continue reading Full steam ahead for Common Prosperity
Hong Kong has woken up to the fact that the Greater Bay Area isn’t a concept designed exclusively for its benefit, after analysts pointed out Shenzhen’s plans for a duty-free shopping zone in its downtown area. The same is happening in Macau, where massive shopping centers are being built in neighboring Hengqin.
Unlike Macau, which appears ready to annex Hengqin, Hong Kong cannot get ahead of this trend. The easy days as an “offshore” shopping destination that fueled its tourism industry since the recovery from the last pandemic (SARS in 2003) are unlikely to return after Covid-19 is brought to an end. Hainan is already providing a snapshot of what happens when onshore duty-free shopping is embraced: it, er, migrates back across the border.
This is good. Hong Kong’s duty-free status is a drug that has long needed to be kicked. It has brought in mostly low-end jobs, enriched landlords more than workers, and taken Hong Kong’s focus away from being “Asia’s World City.” Forces pushing for innovation and globalisation of Hong Kong’s economy might stand a better chance again.
However, in many other respects, it would seem that Hong Kong is moving in the other direction, becoming more of a mainland-like city. Shenzhen’s duty-free plan is just a reminder that it is a competitive market that awaits Hong Kong, with or without a GBA masterplan.
Foreign investors could be forgiven bewilderment at the range of explanations being put forward for the current wave of crackdowns on private businesses in China. Fortunately, most analysis appears to be coalescing into two schools of thought. They contend that what is happening is either the manifestation of Machiavellian intrigue at the top of the Party, or a simpler case of well-crafted bureaucratic actions poorly communicated.
Superior analyses combine the two approaches to suggest that the crackdowns might actually be necessary and could indeed be better presented, but they would not be happening unless they also strengthened the hand of President Xi Jinping against opponents of his agenda – and his drive for a third term.
Better yet would be to step back from the fray and consider bigger, longer-term forces shaping the current bureaucratic and political imperatives.
Continue reading Conservative snowball gathers speed
Local media in Guangdong have been poring over the province’s latest Five-Year Plan for industrial upgrading, which has unveiled the goal of becoming a “semiconductor manufacturing powerhouse”, according to Trivium, a Beijing-based consultancy.
This covers every aspect of the supply chain, naturally:
- Key semiconductor materials
- Design software for high-end chips
- Advanced fabrication technologies
- Advanced packaging and testing
- High-end chip manufacturing equipment
The challenge for the province, and indeed for the entire Greater Bay Area, is how to do this when its historical strengths have not been deployed in anything remotely like what is now being expected of it.
Continue reading Dreams for GBA chip industry seem unrealistic