Will Shenzhen be the new Hong Kong?

In the wake of the recent Hong Kong protests, China announced an initiative to upgrade Shenzhen into a model of "high-quality development, an example of law and order and civilisation, as well as societal satisfaction and sustainability", raising speculation this to be a backup plan to position Shenzhen as the replacement Hong Kong.

This is something we do not expect to happen for quite a few years yet. And the FT's Lex column [see Hong Kong v Shenzhen: Central casting] agrees, saying that multinational companies will simply move their headquarters to Singapore:

"...Shenzhen lacks too many basics for multinationals to consider a move. There are concerns about the fairness and transparency of the legal system. The Chinese yuan is not convertible. Free movement of capital is not allowed. Even Chinese internet giant Tencent, which has its headquarters in Shenzhen, is listed in Hong Kong."

"Hong Kong’s higher credit rating and the special trading status granted under the US-Hong Kong Policy Act are big advantages. US tariffs do not apply to Hong Kong. China’s free trade zones have fallen short of expectations. Surveillance on foreign companies is increasing. Censorship is a concern."

"Singapore remains the only sensible alternative for more than 1,500 multinational companies in Hong Kong. For now, the main advantage Shenzhen has as a city is easy access to Hong Kong. Its understudy position is underlined rather than undercut by the recent surge in air traffic."

This echoes our comments on why loss of freedom in HK could lead to mass emigration [see here] as well as capital flight (article coming). In fact looking at China's various other Free Trade Zone (FTZ) initiatives of recent years, none of them seem to have undermined HK's position, and for similar reasons the FT cited above, for example:

- Shanghai FTZ, launched in 2013, targeting at becoming "an international financial centre by 2020", has seen banks exiting due to capital controls (source: Reuters);

- Qianhai Special Economic Zone, established in 2012, targeting at becoming "a key services centre in APAC district, playing a vital role in modern global services arena, and an important base for global services trade by 2020", may have now been absorbed into the even more ambitious Greater Bay Area initiative (source: Wiki).

All of this tells us that instead of worrying about Shenzhen, HK must preserve its current free and independent legal and governance infrastructure if it is to compete with Singapore for global business and talent. Once it loses its core values, HK will become just another second-tier Chinese city with half the land area and population of Shenzhen.