Breakingviews - Hong Kong’s rival city is vulnerable at the rear

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HONG KONG (Reuters Breakingviews) - Hong Kong’s rival sister city of Shenzhen is vulnerable at the rear. During a visit this week, President Xi Jinping said he will give the technology hub more autonomy. Relaxed capital controls and other policy preferences will help it serve Xi ’s technology self-sufficiency goals. But even as its financial markets liberalise, its distorted property bubble is putting its innovation advantage at risk, allowing other mainland cities to poach talent and investment.

The site of the country’s first special economic zone in 1980, Shenzhen, located across the economic border with Hong Kong, helped lead the opening of the People’s Republic to foreign investment and trade. It has since evolved from a facilitator of manufacturing exports into a technology hub with a $4.9 trillion stock exchange, home to global champions like drone-maker DJI, telecoms equipment maker Huawei and fintech-cum-gaming star Tencent. As Beijing tries to relieve itself of dependence on U.S. hardware and software, Shenzhen has a key role to play.

During a speech marking the Shenzhen SEZ’s 40th anniversary, Xi repeated government promises to give the city more latitude to innovate in key areas including stock market liberalisation, cross-border capital flows and intellectual-property protection. That comes after foreign direct investment growth in Shenzhen fell to 0.2% in 2019 in dollar terms, down from almost 11% in 2018, official data showed.

Yet even as Beijing throws its weight behind the technology hub, property speculators are driving off the young entrepreneurs and startups that made the city into an innovation champion. With prices now at around $10,000 per square meter, the average home now eats up 46 years of annual income, according to data provider Numbeo. That makes Shenzhen less affordable than Hong Kong in wage-weighted terms. As a result some companies are moving to cheaper coastal cities like Suzhou, which have their own technology hubs. A quarter of the city’s offices were empty in June, according to Cushman & Wakefield.

The government appears aware of the issue. Part of the new policy package includes a clause letting Shenzhen convert more nearby agricultural land to housing. But the conundrum is that the more special privileges Shenzhen gets, the more attractive place it is to own real estate.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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