Race to become China's economic powerhouse

Guangdong Governor Lu Ruihua cast doubt on views that investments are leaving his province for Shanghai

HONG KONG, China -- Is Guangdong losing its competitive edge to Shanghai?

The denial by Guangdong Governor Lu Ruihua that Taiwan businessmen are forsaking the Pearl River Delta for the Greater Shanghai Region (GSR) has highlighted the cut-throat contest between the two richest and most dynamic regions of China.

Speaking on the fringes of the Guangdong Communist Party congress earlier this month, Lu cast doubt on the increasingly popular view that Taiwan investments are leaving his province for the GSR, which includes the nearby provinces of Jiangsu and Zhejiang.

"In the past, very little Taiwan capital had gone north," Lu said.

"That's why the recent spurt of growth [in the Shanghai region] has led to the misconception that Taiwan businesses are abandoning Guangdong."

Lu said 14,000 Taiwan concerns had ploughed $11 billion into Guangdong, or 10 percent of total foreign direct investment (FDI) in the go-go province.

By contrast, Taiwan's capital outlay in Shanghai is estimated at around $6.6 billion.

However, where competition between nations -- or cities within a country -- is concerned, momentum matters most.

There is little doubt that so far as prestigious, cutting-edge start-ups are concerned, cities and technological zones in the Shanghai region including Kunshan, Suzhou and the Zhangjiang Hi-Tech Park in Pudong, are gaining at the expense of star cities in the Pearl River estuary such as Guangzhou, Shenzhen and Dongguan.

For example, two high-profile firms from Taiwan, Semiconductor Manufacturing International Corp and Grace Semiconductor Manufacturing, are building multi-billion yuan chip foundries in the Shanghai area.

The same goes for big-name companies from the U.S. and Europe, which are setting up a China-region headquarters as well as research and development facilities in the GSR.

Guangdong's edge

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To be sure, Guangdong's status as the foremost locomotive of growth remains unchallenged.

The province accounts for 10 percent of national GDP and one third of total exports.

Fully 44 percent of industrial output in Shenzhen are classified as hi-tech products, the highest such rate in China.

Yet taking the longer perspective, the GSR has a number of advantages over Guangdong.

Foremost is the size of the hinterland -- and potential market.

The GSR has an area of 99,600 square km and a population of 83 million, roughly twice the comparative figures in the Pearl River estuary.

Moreover, efforts are being made to render the entire Yangtze River estuary -- which goes as far upstream as the megacities of Chongqing and Chengdu -- into one gigantic market.

While the Guangdong economy is dependent on exports, the Shanghai region can thrive on domestic sales alone, hence its appeal to Taiwanese and multinational firms.

Moreover, Guangdong cities have acquired their reputation as can-do, experimental zones partly because they were given extra leeway by late patriarch Deng Xiaoping, who designated Shenzhen China's first special economic zone (SEZ) in 1979.

With the spread of the open-door, market-oriented policies to the rest of coastal areas, however, Shanghai is not only catching up but surpassing Guangdong in more fields than one.

Shanghai's appeal

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A recent survey by Beijing's Economics Daily named Shanghai as China's most competitive city, ahead of Shenzhen, Guangzhou and Beijing.

Shanghai also beat Shenzhen and Guanzhou in another study on business capacities and potentials completed by the prestigious Nanjing University School of Economics and Management.

GSR officials say cities in the region are as aggressive in enticing human resources as they are in attracting FDI.

For example, the Shanghai municipal government announced recently that it was pulling out the stops to recruit about 30,000 professionals in the fields of IT, engineering, finance and management.

On top of new approaches such as using global headhunting firms, local authorities have indicated foreign and overseas-Chinese experts who want to settle in Shanghai will be granted green cards -- which entitle them to equal rights as Shanghaiese in areas such as acquiring business licenses.

According to Shanghai-based hi-tech commentator Yang Wenhui, the GSR has successfully lured large numbers of top-flight ethnic-Chinese talents in Silicon Valley as well as Hsinchu Science Park, dubbed "Taiwan's Silicon Valley."

Is Guangdong, then, obliged by force of circumstances to playing second fiddle to Shanghai?

Not necessarily.

Analysts say dynamos such as Shenzhen and Guangzhou still retain a substantial edge over Shanghai in the two areas crucial to fast-track development: freedom from government interference as well as institutions that encourage creativity and innovation.

For example, the majority of GSR businesses still have substantial government participation while most firms in Shenzhen and Dongguan are either private, quasi-private, or international ventures.

And Guangdong excels in the unique culture of "going full speed when seeing a yellow light – and making a detour when seeing a red light."

Shenzhen on the race

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Shenzhen's gung-ho mayor, Yu Youjun, has vowed that the SEZ will continue its tradition of being "the first to implement and experiment [with new approaches], the first to explore new paths, and the first to introduce new policies."

In the spring, Shenzhen announced that overseas and Taiwan firms can set up wholly owned companies in its Luohu District without having to go through the usual procedure of finding local partners first.

The SEZ is also lobbying central authorities to allow small and medium-sized Hong Kong banks -- or those that cannot meet the national requirement of having assets in excess of $20 billion -- to operate in the zone.

No less important is the role that national politics has played in the relative fortunes of Shanghai and Guangdong.

Since President Jiang Zemin, a former mayor and party boss of Shanghai became party General Secretary in 1989, the so-called Shanghai Faction has dominated both Communist party and government departments.

For more than a dozen years, Shanghai has been the apple in the eye of central authorities -- and the beneficiary of hefty national investments and what locals call "super-special" deals.

Equally significant is the fact that at least according to Guangdong cadres, senior officials that Beijing has picked to run Guangzhou or Shenzhen are northerners -- and Jiang loyalists -- whose foremost concern is preventing the "ahead-of-the-times" province from falling out of line.

However, thorough leadership changes are taking place at the upcoming 16th Communist Party Congress.

Neither Hu Jintao, the likely new party general secretary and president, nor the frontrunner for the premier's job, Wen Jiabao, are members of the Shanghai Faction.

Party sources in Shanghai say municipal officials are nervous that the city's privileged status could be affected once the Shanghai Faction ceases to have the run of the government.

The sources have cited as example the Shanghai leadership's anxiety that new mega-projects -- for example, a multi-billion yuan scheme to spruce up the famous Bund -- be approved while Jiang is still president.

The argument goes that the Hu-Wen leadership will adopt more equitable policies in the distribution of resources -- and that Guangdong's irrepressible businessmen can take advantage of the new political climate to go after greater glories.