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Abstract
Following gaige kaifang, the twin strategy of reform and opening up, Shenzhen has been designated as a Special Economic Zone. The city appeared to have bright future and would serve as the growth engine in China. Despite having an impressive record of economic development since 1979, the prestige of Shenzhen as a commercial centre has always been overshadowed by Shanghai and Hong Kong. A breakthrough finally came when the State Council of China decided to develop Qianhai, a town near Shenzhen, into an international commercial centre. However, shortly after, the China (Shanghai) Pilot Free Trade Zone representing an unprecedented degree of openness in relation to foreign investment and international trade was launched. No one seems to remember the once-hopeful Qianhai area. The aim of this paper is to examine the path of development of the two leading commercial centres in China amidst the wider context of Chinese economic reform. A common issue facing both cities is, although the state generally has no problem in outlining a vision of reform, a translation of this vision into actual credible measures that could be implemented is often problematic.
Acknowledgements
The author would like to thank the audience, in particular Stelios Andreadakis, Daniel Attenborough, Samuel Beatson, Flora Huang, Xinmin Liu, Kurt Lundgren, Sean Thomas, Marina Thorborg, for the helpful comments received. Further, comments from the anonymous reviewers are gratefully acknowledged. Also, the author would like to especially acknowledge the generous financial support provided by the Sino-British Fellowship Trust in support of the research for this paper. All errors are my own.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes
* This paper was presented in the Chinese Economic Association UK/Europe 2014 Conference, at the University of Gothenburg, Sweden, 1-2 September 2014 and a seminar for the Centre for European Law and Internationalisation, at the University of Leicester, England, 26 November 2014.
1. The average annual GDP growth rate in the period of 1978–2014 was 9.82%. Those of developed economies like the US and UK were 2.75 and 2.24%, respectively; and those of emerging economies like Brazil, Russia and India were 2.93, 0.8 (from 1990 onwards) and 5.95%, respectively. Data available from the World Bank.
2. To put all this into the specific context of China, see Allen, Qian, and Qian (Citation2005); Yeung and Huang (Citation2013) and Zheng and Wang (Citation2014).
3. See Company Law 2005, art 1.
4. Hu’s own explanation of his idea during a trip to Jiangxi, as quoted in Fewsmith (Citation2004).
5. Despite the coining of the term ‘socialism with Chinese characteristics’, the Chinese Constitution essentially recognised only socialist ownership. See Constitution of China, art 6. In 1988, an amendment of the constitution expressly authorised the development of a private economy. See art 11 of the Constitution, which provides the following, ‘the state permits the private sector of the economy to exist and developing within the limits prescribed by law. The private sector of the economy is a complement to the socialist public economy’.
6. For more about the calamity of pre-reform era, see, for example, Chapter 2 of Gang (Citation2012).
7. Although such a Chinese mentality of prudence was adopted by Deng Xiaoping, it was indeed proposed and said repeatedly by Chen Yun as early as 1950, who was the Chairman of the CPC Central Advisory Commission between 1988 and 1992, one of the most influential leaders of China known as ‘the Eight Elders’ during the 1980s and 1990s. See Xinhua News (Citation2014).
8. The full name is Law of the People’s Republic of China on Sino-Foreign Equity Joint Venture Companies. The law was adopted by the Second Session of the Fifth National People’s Congress on 1 July 1979 and became effective on 6 July.
9. SEZ Regulations, arts 9–10.
10. SEZ Regulations, Chapter III.
11. SEZ Regulations, Chapter IV.
12. SEZ Regulations, art 4.
13. SEZ Regulations, art 2.
14. SEZ Regulations, art 3. The functions and powers of the Committee were stipulated in Article 23.
15. SEZ Regulations, art 7.
16. SEZ Regulations, art 14 and Nishitateno (Citation1983, 178–79).
17. SEZ Regulations. art 13.
18. SEZ Regulations. art 15.
19. SEZ Regulations. arts 21–22.
20. These regulations were Provisional Entry/Exit Regulations (Guangdong Special Economic Zones); Provisional Regulations for Business Registration (Guangdong Special Economic Zones); Provisional Labour and Wage Regulations (Guangdong Special Economic Zones); and Provisional Land Regulations for Shenzhen Special Economic Zone.
21. China surpassed Japan in terms of nominal GDP in 2010, making the Chinese economy the world’s second largest, only behind the United States. China has grown at a rate of 9.9% over the past 30 years. The poverty rate fell from more than 65% to less than 10%, meaning that some 500 million people were lifted out of poverty. Other growth indicators include: three of the world’s top 5 banks are now Chinese; 89 Chinese companies were on the Global Fortune 500 list in 2013. China is home to the world’s second-largest highway network, the world’s 3 longest sea bridges and 6 of the world’s 10 largest container ports. See World Bank (Citation2013, 4).
22. See Ng Citation2003, 430 for the GDP data of Hong Kong. The data for Shenzhen came from Di Tommaso, Rubini, and Barbieri (Citation2012, 67). In 2013, the GDP per capita for two cities were HKD 295,701 (up 1179%) and RMB 136,947 (up 22,599%) respectively. The 2013 data came from the Census and Statistics Department of Hong Kong and Shenzhen Economic and Social Development Report 2013 (via ChinaKnowledge.com).
23. Data from Di Tommaso, Rubini, and Barbieri (Citation2012, 66) and Shenzhen Government.
24. Data from CitationShenzhen Statistical Yearbook.
25. This could be understandable as by 1984, the four zones no longer enjoyed their exclusive status. In that year, China further opened 14 coastal cities to overseas investment: Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai.
26. The comparable annual growth rates during the same period were 32, 9 and 13% for Zhuhai, Shantou and Xiamen, respectively. Over the same period, China as a whole expanded 1.5 times, 3 times for Zhuhai, 1.4 for Shantou and 1.6 for Xiamen.
27. For example, as early as 1985, Shenzhen’s output of television sets and radio-cassette recorders accounted for one-sixth and one-third, respectively, of the national total. See Yeung, Lee, and Kee (Citation2009, 229–230).
28. According to Gartner (Citation2014), a leading technology research and consulting firm, among the top 10 best-selling mobile phone companies in 2013, ZTE and Huawei were ranked the fifth and sixth, respectively, behind Samsung, Nokia, Apple and LG Electronics. Indeed, there were three more Chinese companies on the top 10 list, including TCL Communication, Lenovo and Yulong. Tencent is the fourth largest internet company behind Google, Amazon and Ebay in terms of market capitalisation. Internet companies refer to those that conduct the majority of its business on the internet. See BBC (Citation2014). Foxconn is the world’s largest contract manufacturer, known for assembling famous electronic goods like Apple's iPhone and iPad. Its Shenzhen Longhua campus, covering 2.5 square kilometres, employed 240,000 people. See Economist (Citation2012).
29. In essence, Hong Kong would import the goods manufactured in China and re-export them to the rest of the world.
30. See, for example, the charts of bank credit and stock market capitalisation to GDP of selected economies in Winters and Yusuf (Citation2007, 114).
31. The problem of the Chinese bank-centred system can be explained by several factors. First, state-controlled banks have remained dominant in the banking sector. The state ownership of banks has reduced competition and lessened the pressure on banks to operate on a commercial, profit-oriented basis. Second, there is a lack of good internal credit assessment capabilities in many banks. The reason behind most of the non-performing loans in the past was the directed lending policies of the government to fund SOEs regardless of their profitability. Third, these state-owned banks have a decentralised structure. Lending decisions are made at the local branch level, which is susceptible to influence from local government and favouritism towards local SOEs. This diffuse structure of banks and many SOEs makes it difficult for banks to collect and share useful information to make an informed lending decision. For more discussions, see McKinsey Global Institute (Citation2006).
32. These were introduced in May 1990 and included: banning illegal off-floor trading; imposing a 0.5% stamp duty on both sellers and buyers; setting a daily price change ceiling and floor limits of 10%; increasing the number of branches; and enhancing the disclosure of market information and the provision of proper guidance to the public. Later, in May 1991, the Government introduced the Provisional Measures of Shenzhen Municipality for Administration of the Issuance and Trading of Shares and subsequently in January 1992, the Provisional Regulations of Shenzhen Municipality Concerning Joint Stock Limited Companies. See China Securities Regulatory Commission (Citation2008, 161).
33. Speech made by Deng Xiaoping on his Southern Excursion in 1992. See China Securities Regulatory Commission (Citation2008: 161).
34. The two bodies were set up to oversee the securities market on behalf of the State Council. The SCSC was composed of the heads of ministries and commissions, such as the State Commission for Restructuring and Economic Reform, the State Planning Commission, the Ministry of Finance and the People’s Bank of China (PBOC). It was responsible for higher level oversight for securities market to develop long-term strategies, draft relevant laws, rules and regulations, and coordinate different levels of government. On the other hand, the CSRC was responsible for frontline regulation by supervising the trading activities, securities firms and listed companies. In April 1998, the two were consolidated into one regulator, the CSRC.
35. For the full story, see Yeung (Citation2010).
36. Data from the World Federation of Exchanges.
37. Visit the website of Global Financial Centres of Index Z/Yen Group http://www.zyen.com/research/gfci.html.
38. According to the World Bank (Citation2008: 18), smaller businesses which contributed some 60% of China’s GDP, accounted for only 15% of outstanding credit, most of which from banks. This showed that the financial market could have allocated resources more fairly.
39. Data from CitationShanghai Statistical Yearbook.
40. The official approval came two years later in 1992.
41. Refer to the discussions of the SEZ Regulations above.
42. Pudong Regulations, art 7.
43. Pudong Regulations, art 7.
44. On 14 November 1986, Deng Xiaoping met a New York Stock Exchange delegation and especially gave them a share of Shanghai Feile Audio Equipment Company as a gift.
45. From a legal perspective, A-shares issued by Chinese companies that are listed and traded in the Shanghai or Shenzhen Stock Exchanges can only be sold to and held by Chinese investors. See the Standard Opinion for Companies Limited by Shares, an early version of China’s company law, which outlined the nature of different types of shares. An exception to this will be those under the Qualified Foreign Institutional Investors scheme. The scheme, launched in 2003, allows licensed foreign investors to buy and sell RMB-denominated A-shares in Chinese stock exchanges (in Shanghai and Shenzhen). The Chinese stock market remains largely closed off to foreign investors owing to China's exercise of tight capital controls which restrict the movement of assets in and out of the country.
46. Before 1983, Shanghai was essentially a domestic economy and had little direct trade with the outside world except for the former Soviet Union. Occasional trade was handled through Hong Kong. See Wang and Slack (Citation2004, 362). Recent figure from the World Shipping Council (Citation2013).
47. Refer to a quote above from People’s Daily’s (Citation1992).
48. The Official Reply, Section 3.1.
49. The Official Reply, Section 3.2.
50. The Official Reply, Section 5.
51. The Official Reply, Sections 4–7. For example, Hong Kong service providers are allowed to set up fully owned international schools or hospitals. But for law firms and telecommunications services, only joint operation or joint venture is permitted.
52. For more about this, see Trade and Industry Department of Hong Kong, ‘Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA)’ http://www.tid.gov.hk/english/cepa/cepa_overview.html. Ten Supplements have been signed since then to expand market liberalisation and further facilitated trade and investment for the economic cooperation and sustainable development of the two places.
53. For example, the Financial Services and the Treasury Bureau of Hong Kong and the Ministry of Finance of China signed on 27 August 2004 an agreement on the mutual exemption of certain examination papers for Mainland and Hong Kong accountants.
54. The preferential treatment takes various forms, including allowing wholly owned operations, relaxing restrictions on equity shareholding, reducing registered capital requirements, relaxing restrictions over geographical location and business scope, etc. As of 30 June 2014, 2806 service suppliers have applied for the Certificates of Hong Kong Service Supplier to take advantage of CEPA treatment. Data from the Trade and Industry Department of Hong Kong.
55. The Official Reply, Section 2.
56. See Wei (Citation2014, 408). Normally, Chinese lenders must adhere to official lending rates. But on 20 July 2013, the PBOC ended all restrictions on lending rates, which previously had a floor of 70% of the PBOC benchmark rate. Banks are now free to set lending rates (except for residential mortgages) at any level they want. See Economist (Citation2013).
57. The Official Reply, Section 2.3. See also Hong Kong Monetary Authority (Citation2013). In June 2007, the National Development and Reform Committee (NDRC) issued the Interim Measures for the Administration of the Issuance of RMB Bonds in Hong Kong by Onshore Financial Institutions, marking the beginning of RMB bonds in Hong Kong. At that time, only China-incorporated financial institutions were allowed to issue RMB bonds in Hong Kong and were required to remit the proceeds from such issues back to China. In May 2012, the NDRC published the Circular on the Matters relating to the Issuance of RMB Bonds in Hong Kong by Onshore Non-Financial Institutions. Non-financial institutions in China are formally permitted to issue RMB bonds in Hong Kong.
58. The Official Reply, Section 2.4.
59. The original Domestic Institutional Investor (QDII) scheme was launched in May 2006, allowing licensed domestic institutional investors to invest in overseas markets. In 2012, the Mainland authorities said they planned to introduce a Domestic Individual Investor (QDII2) scheme to allow some individual investors to trade directly in Hong Kong securities, but that scheme has yet to materialise as of 2014. See South China Morning Post (Citation2013b).
60. As of 2014, officials acknowledge there have been problems with transportation, land reform and cross-border management. International companies are still trading in temporary two-storey and three-storey buildings as opposed to high-rise office blocks, as originally envisaged. See China Daily Citation(2014b).
61. The Opinions of the State Council on Promoting the Development of Shanghai’s Modern Service Industry and Advanced Manufacturing Industry, and Promoting the Construction of Shanghai International Financial Centre and International Shipping Centre were issued on 14 April 2009.
62. The English version of this Framework Plan is available from the official website of the FTZ, available at: http://en.shftz.gov.cn/FrameworkPlan.html.
63. Framework Plan, Section 1.1. The term ‘China Dream’ was first used by Xi in November 2012. He used the term numerous times in his first address to the nation as head of state on 17 March 2013. See BBC (Citation2013).
64. Framework Plan, Section 2.1.
65. Framework Plan, Section 2.2. A detailed list of services sectors to open up is contained in the appendix of the Plan. Market access restrictions will be relaxed in most sectors, except in respect of banks, information and communication services.
66. Framework Plan, Section 2.3.
67. Framework Plan, Section 2.4.
68. Framework Plan, Sections 2.5 and 3.2. Certain administrative examination and approval requirements under Law of the People’s Republic of China on Wholly Foreign Owned Enterprises; Law of the People’s Republic of China on Sino-Foreign Equity Joint Venture Companies; and Law of the People’s Republic of China on Sino-Foreign Cooperative Joint Venture Companies will be temporarily adjusted.
69. Whilst all Hong Kong and overseas investors will be allowed to trade the Shanghai Stock Exchange’s securities through Shanghai–Hong Kong Stock Connect, only Mainland institutional investors and those individual investors who satisfy the eligibility criteria (i.e. individual investors who hold an aggregate balance of not less than RMB 500,000 in their securities and cash accounts) will be accepted to trade securities in Hong Kong through the scheme. Also, trading under Shanghai–Hong Kong Stock Connect is currently subject to a maximum cross-boundary investment quota (i.e. Aggregate Quota), together with a Daily Quota. For more information regarding the scheme, see Hong Kong Stock Exchange (Citation2015).
70. Note the subsequent market crash in July 2015, to be discussed below, which put into doubt the Chinese authorities’ ability to regulate a market.
71. Major reforms to company registration and supervision were seen.
72. In general, there are two main types of systems for listing shares. One is the registration system, while the other is the review and approval system. The former is simpler, and is found in the US, the UK, Hong Kong, Australia, Canada, Singapore, Germany and France. As long as the applicant complies with all the prescribed listing requirements, no further procedures are required. In this system, the market is the ultimate decisive factor. By contrast, under the review and approval system, the relevant authority will examine and verify the documents for listing, and if necessary, disallow the company’s listing. Therefore, in practice, the authority has the power to decide whether a company can be listed or not. This system is adopted by China, New Zealand, Sweden and Switzerland. See Huang and Yeung (Citation2014, 108).