Surging costs pressure Shenzhen, China’s Silicon Valley

Analysts urge the government to solve land supply problem if it wants to boost city’s development

PUBLISHED : Tuesday, 07 June, 2016, 9:20pm
UPDATED : Tuesday, 07 June, 2016, 9:20pm

Surging property prices in Shenzhen, China’s technology hub, will restrict the city’s development in the long term, analysts say.

In the first quarter of the year Shenzhen’s economic growth came in at 8.4 per cent, outpacing that of Beijing and Shanghai, but its home prices are growing at an even faster rate.

A number of companies, including telecommunications giant Huawei Technologies, are reportedly considering moving out of Shenzhen because of surging costs. ZTE, another telecommunications gear maker, plans to move its phone production and assembly business to Heyuan in north Guangdong by July.

Although Huawei denied the news about moving, chairman Ren Zhengfei acknowledged the cost pressure the company has faced and said expensive property prices could destroy Shenzhen’s competitiveness.

“High housing prices will definitely hit economic vitality,” said Alan Jin, head of property research at Mizuho Securities Asia.

Soaring costs could hurt Shenzhen’s ambitions to lure talent and enterprises, especially start-ups, Jin said, citing a similar situation in Hong Kong which has suffered from lack of innovation because of high rentals.

The mayor of Shenzhen Xu Qin last month said 15,000 firms have left the city in the past few years.

It takes an average of 31 years for a person working in Shenzhen to save enough money to buy a flat, compared to an average of 15 years in the US technology-focused city of San Francisco, Jin estimates.

The average income in the city is only about 3,719 yuan a month, or 44,633 yuan a year as of 2015.

Shenzhen has maintained its crown as China’s most expensive city to buy a home since last year. New home prices soared by nearly 60 per cent in the past 12 months to 51,361 yuan per square metre as of May.

Wang Hui, an analyst at CICC Research, also warns Shenzhen might lose its competitive edge if property prices continue to grow.

She criticised the government for recently raising the eligibility bar for non-residents to buy a home in the city to curb the price rises, saying the problem stems from a lack of land supply.

Shenzhen covers 1,997 square kilometres of land, which is only a third the size of Shanghai, and an eighth of Beijing. Its land utilisation ratio is nearly 50 per cent, already double that of Hong Kong.

The undersupply has pushed up land prices, from housing to industrial, and increased the burden on individuals and companies.

“Land use conflicts have become the biggest drag to the city’s economic development, land expansion is inevitable,” Wang said.

Shenzhen in the past has tried to expand land space through land reclamation and prompted city redevelopment to improve land use efficiency, but to little effect, she said.

Wang said Shenzhen should think beyond administrative boundaries and work to integrate land use with surrounding cities such as Dongguan and Huizhou.

Some experts are not so concerned about Shenzhen’s development.

“High home prices are not just a problem in Shenzhen, it exists in cities like Beijing and Shanghai too,” said Li Xunlei, chief economist of Haitong Securities.

“Shenzhen’s manufacturing transformation and upgrading has been most successful among Chinese cities, the emerging industries’ contribution to the city’s economy is even higher than Shanghai,” Li said.

The exit of traditional manufacturers from Shenzhen is a good thing for the city as it transforms into a modern services centre, he said.

DJI, the world’s largest consumer drone manufacturer and a Shenzhen-born company, spent 700 million yuan buying land in Shenzhen this February, to build its new headquarters building, a show of confidence in the city’s future.

Nevertheless, Li said the land problem would be a negative for the city.

Shenzhen’s government in May unveiled the Eastward Shift Strategic Action Plan for 2016 to 2020 to enhance development of east Shenzhen, the outer rim area of the city, in a bid to create new land supply.

The government wants 300,000 square kilometres of land there by 2020.

Li suggested officials should relax the restrictions on land transactions, such as change of land use and allowing rural workers to buy or sell land-use rights, to increase supply.

“But in the short term, the situation is unlikely to improve,” he said.