How to Build China's City of the Future

More high-profile special zones have failed than have succeeded.

Pudong did things right.

Source: VCG/Getty Images

On April 1, real estate prices in rural Xiongxan County, roughly 80 miles south of Beijing, spiked as much as 37 percent; highways jammed as speculators rushed to the obscure district. That morning, the Chinese government had announced that at the direction of President Xi Jinping, 800 miles surrounding Xiongxan would be developed into a city meant to serve as a model for China's development over the "next millennium."

Expectations are high: The government has placed the Xiongan New Area on equal footing with China's two great successes in government-directed urban development, Shenzhen and Shanghai's Pudong New Area, calling it an area of "national significance." Xi is following in the footsteps of Deng Xiaopeng, who presided over the rise of Shenzhen and laid the groundwork for Pudong. Whether the ambitious plan succeeds, though, depends on whether Xi learns not just from Deng's successes, but from the many failures that followed.

Conditions in China have changed drastically from Deng’s time. Over 55 percent of China's population now lives in cities; in 1978, less than 18 percent did. Back then, the most pressing question for urban planners was how to encourage rural Chinese -- in effect, excess labor ideal for factory jobs -- to move to the city. The answer was to create Special Economic Zones (SEZs) with distinct geographical borders, where foreign investment would be encouraged and protected via tax breaks, legal safeguards and other incentives.

The idea of creating trade zones to encourage foreign commerce is centuries old, of course. But the first SEZs were unique in seeking foreign investors and allowing them to operate in a wide range of sectors. The new districts were meant to test policies that would eventually spread throughout the country, where the Communist Party’s more restrictive rules still held sway. In 1978, China sanctioned four of the SEZs, including Shenzhen.

Despite latter-day mythologizing about turning rice paddies into factories, the early history of SEZs was troubled. In 1981, 72 percent of foreign investment in Shenzhen went into real estate, not factories.

QuickTake Choking China

It was only after several fine-tunings -- including pruning the bureaucracy and reforming labor laws to eliminate lifetime guarantees of employment -- that foreign manufacturers and other investors began to take a serious interest in Shenzhen and it bloomed into China's manufacturing and innovation hub. Shanghai's Pudong New Area, established in 1993, supplemented the Shenzhen model by consciously seeking to attract financial services. Today, its soaring, futuristic skyline is visual shorthand for China's promising future.

Many Chinese provinces and municipalities have since established their own trade zones. None have succeeded quite like Shenzhen and Pudong, and indeed, far more have failed due to bad geography and other problems. For example, Shantou, one of the original four SEZs established with Shenzhen, could never compete with the latter’s proximity to Hong Kong's port and ready-to-deploy capital. (Shantou’s reputation for corruption didn't help.)

Other trade zones fail because they can't make a compelling case for factories and labor to move to them. While the decade-old Dalian Changxin Island Zone in northern China is blessed with proximity to a busy port, rising incomes and living standards in the countryside have made factory life far from home a tougher sell than before. Meanwhile, manufacturers aren't likely to set up shop in a new zone unless they're sure that labor will follow.

Early indications suggest Xiongan should be able to avoid most of these problems. It's located in the midst of Jing-Jin-Ji, the name given to the giant megalopolis of 130 million people the government hopes to create by merging Beijing and surrounding cities and connecting them with a hub-and-spoke rail system. (China's state-owned rail car manufacturer announced last month that its first high-speed commuter trains were rolling off the production line.) Among other benefits, the location will integrate Xiongan into what was already shaping up to be the world's biggest-ever labor market. Wary employers should thus have good reasons -- beyond tax breaks -- to set up shop in the formerly remote area.

And Chinese leaders aren’t waiting to populate the new city; the government is expected to relocate large sections of Beijing's bureaucracy to Xiongan. Inevitably, the many Beijing-area companies that depend on close access to government officials will follow, further concentrating an educated, affluent workforce in the city.

That leaves the question of whether Xiongan can avoid the pollution, traffic, and social inequality that plague so many Chinese cities. The fact that it’s meant to be devoted to high-end industries that generate less pollution should help. The speculators certainly seem to have faith. With good planning, and a bit of luck, they might turn out to be right.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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