Can Shenzhen Keep Its Cachet?

As rival cities gain, the export hub scrambles to adapt

Life has just gotten a little bit easier for Max Loong, managing director of Hong Kong-based Giant Wireless Technology Ltd. As of Jan. 27, the border crossing between Hong Kong and the Chinese city of Shenzhen is open 24 hours a day. To Loong, who makes the crossing several times a week, that means fewer long waits at the immigration desk. Giant has a factory making phones and telecom equipment in Shenzhen, where labor is one-third cheaper. It also has 100 engineers. Now, he is considering moving his office staff across the border.

Such confidence-boosters are important these days to Shenzhen. In the 22 years since Beijing designated the city China's first special economic zone, Hong Kong manufacturers such as Loong have accounted for 60% of the $23 billion in foreign direct investment Shenzhen has sucked in. They've been crucial to Shenzhen's rise from a quiet village to a metropolis of 7 million people boasting a per-capita income of $3,000, the highest in China. But now, as Beijing expands reforms, Shenzhen's tax and easy-investment policies no longer are special. It faces intense competition from Chinese cities with lower costs or more skilled workers. Even Loong is hedging his bets: By yearend, he plans to double, to 30, his engineering team in Shanghai, where "the availability of talented people is much better."

Not that Shenzhen is in immediate peril. It still draws nearly $4 billion in foreign investment annually and accounts for 13.5% of China's exports. But if Shenzhen can't find a way to redefine itself, officials worry, it will soon be just another southern Chinese city. They also fret that runaway costs could damage the economy, as in neighboring Hong Kong. Last year, Premier Zhu Rongji berated city fathers for not doing enough to address looming challenges. So officials are mounting an ambitious campaign to burnish the city's competitive edge. They want to collaborate with Hong Kong on mass-transit links and establish Shenzhen as a prime production and research hub for telecom, software, biotech, and microelectronics. To invigorate the service sector, leaders want to privatize power, transport, and tourism companies and open banking and insurance to foreigners--ahead of China's World Trade Organization commitments. "We are aiming for two pillars: high tech and a modern service industry," says Shenzhen Mayor Yu Youjun. To get there, "we intend to lead the country in new reforms."

Shenzhen's efforts are starting to pay off. IBM, Epson, and Samsung already have big Shenzhen engineering teams. The city's flexibility--and proximity to Hong Kong--persuaded Oracle Corp. (ORCL ) to choose it over Shanghai last year for a 100-engineer software-development center for mobile phones. Service-industry investors also are responding to the city's overtures. Shenzhen is taking international bids for stakes in its gas and water utilities. Morgan Stanley (MWD ), Goldman Sachs (GS ), and HSBC (HBC ) have bought stock in Ping An Insurance Co., China's Shenzhen-based No. 2 insurer. And though talks have bogged down, the city is determined to sell 20% of Shenzhen Development Bank Co. to U.S. investment firm Newbridge Capital. The goal is to sell 20 companies in all. "The only way to inject new vitality into our state sector is to absorb international management and capital," says Yu.

Looser regulations also are helping. International retail chains, for example, can now own 100% of the Shenzhen procurement centers they set up to buy Chinese goods for their stores worldwide. Elsewhere in China, foreign ownership of such operations is limited to 65%. Wal-Mart Stores Inc. (WMT ) employs 150 at its Shenzhen center, which it expects to buy $12 billion in goods this year, says spokesman Tom Williams.

Shenzhen's biggest edge is still the fact that Hong Kong is minutes away. Besides the 24-hour border crossing, the two cities are trying to strengthen that bond by coordinating freight security at their airports, pooling tourism-promotion efforts, and building a 5,100-meter-long bridge. Hong Kong hospitals and universities are looking to establish a presence in Shenzhen. "We must further integrate our economies," says Li Luoli, president of the Shenzhen-based China Development Institute.

But many hurdles stand in the way of this vision. One is that leaders of Hong Kong and other South China cities still view each other as rivals and see little need to collaborate. "Hong Kong is not used to thinking of itself as a part of an integrated Pearl River Delta region," says University of Hong Kong business professor Michael J. Enright. "Nor do individuals in Guangdong. Each jurisdiction develops its own strategy in a vacuum."

In addition, Shenzhen has its own problems. Its securities industry has been hurt by low liquidity and a Beijing-imposed freeze on new listings at the city's stock exchange. Despite new parks and greenbelts, runaway development has left parts of Shenzhen with some of China's worst pollution. And the city's millions of migrant workers and the lack of social services to care for them have fueled rising crime.

The biggest threat, though, is the rising allure of the Yangtze River Delta. The Shanghai area is China's new high-tech base, luring big investments from the likes of Toshiba (TOSBF ), Intel (INTC ), Microsoft (MSFT ), and NEC (NIPNY ). Taiwan's top makers of chips, PCS, and mobile phones also prefer Shanghai. Shenzhen's "only chance for the future is to upgrade its industries by attracting multinationals," says Liao Guoji, a Guangdong foreign trade official. "It's not easy."

Shenzhen officials counter that they have plenty of tech investment. Taiwan's Hon Hai Precision Industry Co. (HNHPF ), a maker of semiconductor gear, computer displays, and cell phones, is still expanding its 40,000-worker campus. Local telecom-equipment makers Huawei Technologies Co. and ZTE Corp. are national powers. But with Shanghai coming on strong, "Shenzhen is feeling real pressure and challenge," says Shenzhen University economist Su Dongbin. Shenzhen needs only look at slumping Hong Kong for proof that successful formulas don't work forever.

By Dexter Roberts in Shenzhen, with Bruce Einhorn and Frederik Balfour in Hong Kong

— With assistance by Bruce Einhorn, and Frederik Balfour

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