While Shenzhen and Xiamen flourish, Zhuhai has yet to take advantage of its special status

by Alex Frew McMillan
Translation by Sally Chang and Takako Whilden

Ever since former premier Deng Xiaoping pioneered the concept of special economic Zones (seZ) in China in the late 1970s, these areas have been the destinations of choice for international investors, helping spur the local economies. shenzhen became the first special economic Zone in 1980, closely followed by Zhuhai and shantou – both also in Guangdong Province – and Xiamen, in Fujian Province, as well as Hainan island.

The cities were given special economic privileges with foreign investors receiving special tax incentives if they set up shop in the seZs. The municipalities were also given greater freedom in the kind of international trade they could permit. even today, the seZs enjoy preferential treatment. They are typically the first places any liberalisation plans are tested, giving them an automatic advantage in attracting overseas investment.

For instance, China is required to open up its banking system to overseas banks now it is a member of the World Trade Organisation. The first four cities that were opened up to foreign banks looking to do business in yuan were shanghai, shenzhen, Tianjin and Dalian in 2001, followed by Guangzhou, Zhuhai, Qingdao, nanjing and Wuhan in 2002.

The rapid economic activity has also spurred strong growth in property prices. in shenzhen, prices for residential real estate jumped more than 100% between the end of 2005 and the end of 2007 as Chinese investors poured money into the city and Hongkongers looked for cheaper purchases across the border. such rapid growth creates problems and, after the central government moved to curb bank lending last year, the shenzhen market has seen a stiff correction.

“Residential prices more than doubled to an almost unsustainable level,” says Xavier Wong, the head of research at Hong Kong property consultants Knight Frank. “so the investment demand collapsed in shenzhen after the more restrictive credit tightening.”

Austerity measures kicked in last year mainly thanks to changes in bank-lending policy. The central bank’s raising of interest and bank-reserve rates led to high-street banks requiring much stricter income proof and typically issuing mortgages of only up to 50% of the property’s value. A new policy introduced in september also requires anyone buying a second home to put down at least 40% of the purchase price as a downpayment and pay 110% of the normal interest rate.

“Due to this policy, investment demand decreased significantly and the property market subsequently cooled down,” notes property agency DTZ in a report. To make matters worse, a well-known realestate agency, Zhongtian Zhiye, went bankrupt in november, further dampening public confidence. shanghai’s property market was recently hit by a similar slowdown, as bank-lending changes also hit homes there. That followed other austerity measures in 2006 designed to shift developers away from high-end property and encourage them to build mass-market apartments.

Despite the recent problems in shenzhen and shanghai, the real-estate picture in mainland China is a lot more varied. China watchers say they’ve noticed a push from developers keen to move beyond shanghai and beijing and into so-called second-tier and third-tier cities.

The numbers speak for themselves. Whereas first-tier cities accounted for 62% of all the international capital that moved into Chinese real estate as recently as 2004, the tide has now turned – second- and third-tier cities captured a majority of the inflows in 2006, attracting 57.1% of the foreign capital, compared with just 42.9% for the first-tier cities.

There is no formal definition of what constitutes a first-tier, second-tier or third-tier city in China. but Wong at Knight Frank sets the barrier for a second-tier city at a population of three million and a minimum per-capita GDP of us$2,000 or more.

Xiamen is a great example. With a per capita income of us$8,431 in 2005 (the latest figures available), it was the richest city in a recent Jones Lang Lasalle report highlighting 30 “emerging city winners” in the second tier that are already attracting the attention of occupiers, investors and developers.

Computer maker Dell has become one of the city’s biggest boosters. it opened its first factory in 1998 and then doubled its capacity with a second factory in 2006. The operations boost the whole area – Dell says it spends around us$16bn per year on parts and components from suppliers in China alone.

Jones Lang Lasalle ranks shanghai, beijing, Guangzhou, Hong Kong, shenzhen and Macau in its first tier of Chinese cities. All have strong economies that drive the highest incomes in the country.

Xiamen is in the next rank alongside places such as Qingdao, Xian, Chengdu, Hangzhou and Wuhan – supported by its strong port operations and the heavy investment that Taiwanese investors have channelled into Fujian province.

Most of the special economic Zones make it onto the Tier ii or Tier iii lists. but Zhuhai is noticeable by its absence. Jones Lang Lasalle left it out of the third tier but put it on a “watch list” of four cities – Zhuhai, Wenzhou, Lanzhou and urumqi – that it said “could emerge as tomorrow’s rising urban stars”.

John Au-yeung, a property broker with the Hong Kong-based agency Fidelity Real estate & Management Co, says Zhuhai’s property market remains something of a backwater. “it’s not going very well – there’s not enough investment there compared with shenzhen,” says Au-yeung.

He believes the city won’t realise its full potential until a couple of major infrastructure projects come to fruition: the Hong Kong-Macau-Zhuhai bridge, and the build out of a deep-water port.

“A port is important for economic development,” says Au-yueng who also notes that Hutchison Whampoa chairman Li Ka-shing, whose company controls 13% of the world’s container port operations, has thrown his considerable support behind the plan.

“if Li Ka-shing’s project really goes ahead, then it will definitely stimulate the development of the Zhuhai economy. Land in Zhuhai is still much cheaper than in shenzhen so there is an incentive for people to invest there. And investments in factories will bring about other investments.” besides Hutchison Whampoa, Zhuhai has already lured operations from multinationals such as Wal-Mart and Citibank as it looks to make the leap from a city with potential to a serious contender. “As Zhuhai develops more scale it will be an interesting city to track,” concludes Jones Lang Lasalle.

The Rising Cost of Living

Austerity measures may have reduced the number of property transactions in shanghai and shenzhen but as our table shows, prices are still rising sharply. Zhuhai, despite an impressive year-on-year rise, lags way behind its fellow special economic Zones.