China's $290 Billion Dream to Make Backwater a New Shenzhen

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  • Xi aims to refashion Xiongan into a teeming hub of innovation
  • Locals worry about factory relocations, temporary job losses

The scent of fast money hovers over China’s Xiongan New Area, a special economic zone that’s attracting a stampede of dealmakers.

Among them is Xie Lanyou, who rushed to the area on an overnight train from his home town Chongqing, more than 1,000 miles away.

On Tuesday, the restaurant operator spotted a storefront available for rent in Xiong county, a two-hour drive southwest of Beijing. Minutes later, he pulled out a roll of cash and paid landlord Wang Na a 1,500 yuan ($218) deposit for a lease. Xie then strode across the shop to rip the "for rent" signs from the windows.

Xiongan new area

Photographer: VCG via Getty Images

Such is the boomtown atmosphere in this new economic zone in Hebei province near Beijing and Tianjin, northern China’s two largest cities. Announced on April 1, President Xi Jinping’s long-range vision is to transform a sleepy region known for its orchards and lotus flowers into a glittering new technology and innovation hub teeming with companies, universities and world-class transportation and business infrastructure.

Read More: China Plan to Create New Shenzhen Spurs Speculative Rampage

It’s the kind of audacious spending that speaks to China’s economic ambitions to ease urban congestion in the capital and nudge the economy toward services and high-tech industries. "In five years, Xiongan New Area is going to be the most high-end tech center," said Xie, 42. "This new area is going to drive China’s economy. It’s President Xi Jinping’s project."

The government’s grand ambition is for "a strategy crucial for a millennium to come," the official Xinhua News Agency reported. Morgan Stanley expects the investment in infrastructure and relocation to run about 2 trillion yuan ($290 billion) in the first 15 years.

Read More: New Mega-City Development Seen Boosting Economic Growth

China has had a long history of setting up economic zones to spur investment and growth. Shenzhen, the southern metropolis and tech hub adjacent to Hong Kong, symbolized China’s opening to the world in 1979. Shanghai’s Pudong New Area, established in the early 1990s, is now the nation’s financial center.

Xie Lanyou

Photographer: Xiaoqing Pi/Bloomberg

Others wonder if the state-led mega project in Xiongan is wise given China’s rising debt levels and the government’s stated goals of slower and more sustained economic growth and smarter capital allocation. Total credit reached about 258 percent of economic output last year, up from 158 percent in 2005, according to Bloomberg Intelligence estimates.

"State-directed efforts to create new cities do not have a good track record," said David Dollar, a former U.S. Treasury attache in Beijing and now a senior fellow at the Brookings Institution in Washington. "Shenzhen and Pudong were undeveloped areas sitting right next door to major cities, so those were natural places to have new urban zones. It’s not obvious to me that Xiongan is an obvious place for a new urban agglomeration."

Xiongan spans three counties. The infrastructure build-out will cover 100 square kilometers initially, expand to 200 square kilometers in the mid-term and eventually occupy a space of about 2,000 square kilometers, similar to Shenzhen now, the government says.

Read More: The Little Village That Could: Shenzhen Set to Surpass Hong Kong

Some universities in Beijing and the headquarters of several state-owned enterprises are expected to be moved to Xiongan, a region with less than 1 percent of the capital’s economic output.

The new area is also intended as a demonstration project to explore a new model of optimized development in densely-populated areas, and help restructure the urban layout in the Beijing-Tianjin-Hebei region.

"It would be much more effective to turn the whole country into a new area," said Junheng Li, the founder of JL Warren Capital LLC, a China-focused research firm in New York. "Most likely this will become another failed experiment in gigantism."

Xiongan will have 5.4 million people and boost China’s investment growth by 0.3 percentage point and its gross domestic product by 0.13 percentage point to 0.19 percentage point per year, according to Morgan Stanley’s base-case estimate.

The struggle over China’s efforts to curb reliance on investment-led expansion will be seen in GDP data scheduled for release Monday. First-quarter growth will probably increase to 6.8 percent from the year-earlier period, according to economists surveyed by Bloomberg as of Wednesday. Forecasters say the expansion held up amid robust consumption, rising demand for steel and cement, and increased property investment after housing sales boomed.

Nationwide industrial production likely expanded 6.3 percent in March from a year earlier, retail sales rose 9.7 percent while fixed-asset investment in the first quarter was up 8.8 percent for the year, economists project before reports due Monday at 10 a.m. Beijing time.

Dying Northeast

Elsewhere in Xiongan, another recently-arrived aspiring restaurateur pressed his face against the glass door of a closed shop to see inside, then took out his phone and dialed the number on the advertisement in the window. Zuo Baicheng recently arrived from Heilongjiang province in the northeastern rust belt, where economic prospects are dim.

"My whole family moved here for the business," he said Wednesday, his fourth day in town. "The Northeast is dying."

He said that he plans to open a barbecue place and checked out more than 20 shops, discovering that rents had already jumped. He wasn’t deterred, saying that the food business isn’t risky.

"Business prospects here are great," Zuo said. "With full government support, it’ll take off."

Employment Worries

Others fear Xiongan’s economy is likely to suffer as the local government forces industrial facilities to relocate, triggering job losses. Landlord Wang says some factories near her family’s cable-manufacturing plant were ordered to close after the new area was announced.

A government order on the gate of a housing development site in the Xiongan New Area.

Photographer: Haze Fan/Bloomberg

Wang, 35, was initially excited by the project. She visualized a future for the area with landmark buildings like Pudong’s Oriental Pearl Tower in Shanghai. But when she learned that her factory and other businesses would have to relocate, she became more concerned temporary disruptions may drag on the local economy.

"This place is going to be great in the future, and everyone hopes their hometown will develop and advance," Wang said. "For now, there are inconveniences. But if they improve education and medical facilities, my children, the next generation, will have good times."

Farmer Fears

The plan also makes farmers anxious. Some are nervous that they’ll need to relocate or uncertain about making a living if their land is seized for development.

"I can’t do anything without the land," said Yang Qiuhan, 52, a vegetable farmer in Wangjiafang village. "When I heard the news I was excited. We are people of the special zone! But there are all sorts of rumors. I don’t know which way this is going."

Xie sees no downside. In addition to opening a restaurant selling stir-fried Chongqing dishes, he says he also plans to rent another 600-square meter space in the area for a restaurant and boutique hotel that will eventually become a chain. He plans to settle in Xiongan and move his family from Chongqing if good schools are built in the new area. Even after 2022, when Xi’s term is expected to end, Xie sees the project thriving with the president’s support.

"So long as the path is right, subsequent leaders will follow," Xie said. "Like Deng Xiaoping and Shenzhen, all the leaders followed it. It will be the same with Xiongan and Xi Jinping."