A China that works

THE LESSONS

The delta shows what the country could achieve by setting entrepreneurs free

Apr 8th 2017

“THE PRD WAS always the first mover in China,” explains William Fung of Li & Fung. Hong Kong’s success, he reckons, owes much to its tendency to ignore Beijing’s diktats. And Shenzhen’s special economic zone did well because it operated as a freewheeling hub. By embracing globalisation and eschewing central planning, the cities of the PRD led the way for the country’s economic opening.

As this special report has argued, the next economic revolution is now under way. New infrastructure, including high-speed rail links and the world’s longest sea bridge, is helping to stitch the region ever more closely together. Whereas some parts of China are dominated by state-owned enterprises, this region’s economy is made up almost entirely of private-sector firms. Slowing growth in world trade threatens all of China Inc, but the PRD’s nimble private firms tend to be more resilient than protected state-owned enterprises elsewhere on the mainland.

Since these firms operate in competitive global markets, they are currently undergoing the unnerving process of Schumpeterian creative destruction. Some are moving away or closing down, but those that remain are growing stronger. They are scrambling to upgrade, investing in automation, robotics and advanced manufacturing techniques. A region once infamous for its copycats is producing some world-class innovators.

The PRD is more open to the world and to the private sector than any other place on the mainland. Zhejiang, the province that is home to globally minded Alibaba, has about 33,000 foreign-invested firms, and Shanghai about 75,000, but Guangdong has over 110,000. In Liaoning, an industrial province in the north-east, SOEs account for about 31% of total industrial revenues, and in Shanghai for more than 36%, but in Guangdong the share is less than 14%. And the delta alone generates nearly half of the mainland’s high-quality international patent filings, leading China on innovation.

Dragon, unshackled

To catch a glimpse of the future of the PRD, head to the Lok Ma Chau Loop. This valuable parcel of land, at the border between Shenzhen and Hong Kong, was left undeveloped for years because the two cities were fighting over its ownership. In January they agreed to develop it jointly as an innovation and technology park.

The best chance for the PRD’s economy of upgrading for the future lies in co-operation between the governments of the region. Xu Qin, Shenzhen’s former Communist Party secretary, sees the Loop deal as part of his city’s effort to strengthen co-operation with Hong Kong so it can become an international hub. Nicholas Yang, Hong Kong’s innovation secretary, reckons that since both cities have advanced economies based on services, they must work together “to get value from knowledge”.

The Global Entrepreneurship Monitor, a respected annual report, pointed out in its latest issue in February that both cities have seen explosive growth in entrepreneurship in recent years even as it is declining elsewhere in China. The report argued that the two cities should build on their complementary strengths. Shenzhen has many swashbuckling startups and plenty of risk capital to back them, but they often lack global sophistication and management skills. Hong Kong is more conservative, but its cosmopolitan entrepreneurs are better at scaling, branding and going global.

With more such collaboration between the two cities, they might form the nucleus of a new regional technology cluster, as recently proposed by Ma Huateng, Tencent’s influential boss (an idea subsequently endorsed by Li Keqiang, China’s prime minister). The creation of such a hub, said Mr Ma, would help China “preside over the global tech revolution of the future”. The delta can weather today’s storms if its pragmatic officials work more closely together across the board and continue to respect market forces. Earlier reforms in the region demonstrated the benefits of capitalism to the rest of China and exposed the folly of central planning. The remarkable entrepreneurs who built the delta’s economy can propel it forward. All that governments have to do is stay out of the way.