Strong innovation capabilities and opening-up experience make city a natural choice as pilot demonstration area for socialism with Chinese characteristics

The Chinese government has unveiled a plan to build Shenzhen into a pilot demonstration area of socialism with Chinese characteristics. It indicates China's willingness to spur development and reform through innovation and further opening-up. But why Shenzhen?

There are many reasons. To start with, it reflects the Guangdong-Hong Kong-Macao Greater Bay Area's significance to China's national development strategy. China's high-tech capital, Shenzhen, has been opening-up over the past four decades, in the process of growing from a small fishing village to a modern metropolis. Official data shows that in 2018, its GDP surpassed that of its neighbor Hong Kong.

China's most dynamic mega city, Shenzhen, is known for its strong innovation capabilities, market maturity, high level of opening-up, complete manufacturing industrial chain, inclusiveness, and a perfect interaction between market and government. All this is borne out from the largest number of Patent Cooperation Treaty applications Shenzhen has generated for 15 consecutive years now. Also, Shenzhen-based telecom giant Huawei was crowned for the maximum number of international patent applicants in 2018. Among Chinese cities, Shenzhen has earned the maximum foreign exchange through high-tech product exports. The city is home to seven private and joint-stock companies that are on the Fortune Global 500 list, among them Huawei and Tencent. Furthermore, 77 percent of the city's R&D input is from businesses and 80 percent of its invention patents are possessed by businesses.

The city has complete industrial chains manufacturing computer and electronic communication equipment and leads the development of surrounding cities such as Dongguan, Huizhou and even cities located on the western bank of the Pearl River. Shenzhen even boasts inclusiveness, its proactive, service-oriented government pioneering labor market, social insurance and housing market reforms. Not surprisingly, the relationship between local businesses and Shenzhen's government is one of the best among Chinese cities.

However, some weaknesses exist. Take the case of innovation. Shenzhen lacks support from first-rate universities and research institutes and is weak in basic research. No university in Shenzhen is included among the top 500 on the QS World University Rankings 2019; also the number of Shenzhen-based Chinese national key laboratories and academicians is less than half the number in Beijing. Second, the business environment is yet to improve enough to attract venture capital and topnotch international research institutes and talents. Insufficient venture investment in favor of innovations is evident from the fact that the number of venture capital funds in Shenzhen is only one-third of that in Beijing.

Furthermore, its public services can barely meet the surging demand, especially for high-quality medical resources. However, a recently-released document heralds sufficient policy support to solve the aforementioned issues. To beef up basic research, a comprehensive national science center will be established with labs focused on 5G, artificial intelligence and cyberspace science. Currently, China has only three such centers, in Beijing, Shanghai and Hefei, respectively. The one to be set up in Shenzhen will significantly make up for the city's weakness in basic research.

In terms of financing support for innovation, connections between Shenzhen's financial market and those in Hong Kong and Macao will be promoted by improving rules on the listing of securities, refinancing, mergers and acquisitions and reorganization on the Growth Enterprise Market in the Shenzhen Stock Exchange.

According to the document, new measures on accelerating renminbi internationalization will be piloted in Shenzhen, cross-border financial supervision will be exploited and foreign exchange management reform will be carried out to solve the problem of insufficient financing for innovations and startups.

To make the city more international, the central government will support Shenzhen setting up overseas research institutes, implement a more open and convenient system for the introduction of foreign talent, improve the city's international image by holding large-scale sports events and cultural exchanges, and build an international cruise port. Moreover, policy support will be given to the city to improve its education, cultural and medical services. Most importantly, it will be granted more legislative flexibility to help make the city more open and innovative, better allocate resources and improve the business environment.

Hong Kong is complementary to Shenzhen in all three aforementioned aspects - innovation-related basic research, financing support for innovations and improving public services. It has several world-class universities, such as the University of Hong Kong, the Chinese University of Hong Kong and the Hong Kong University of Science and Technology, all of which figure in the top 100 of the QS World University Rankings 2019.

Also, Hong Kong is an international city with a free port and a separate customs territory, judicial independence and world-acclaimed business environment. As the No. 3 global financial center, it has attracted a large amount of international capital and talent. Its medical service is also first-rate in the world, with the region's residents having the longest life expectancy in the world. Therefore, the document suggests Shenzhen, Hong Kong and Macao strengthen financial, technology, cultural, medical, elderly care and social insurance cooperation.

Shenzhen's prospects in innovating financial services are worth mentioning. For instance, the Growth Enterprise Market of the Shenzhen Stock Exchange will be encouraged to reform on the registration system. This means there will be cooperation as well as competition between the financial services of Shenzhen, Hong Kong and Shanghai.

On the one hand, competition will help increase efficiency and, eventually, lead to differentiated division of labor. On the other hand, the Chinese market is large enough to have more than one financial hub.

Another highlight of the document is that Shenzhen will be encouraged to conduct digital currency research and the application of innovations such as mobile payment. China is leading the world in small-amount mobile payment applications. Digital currency, if successfully launched, will greatly promote cross-border trade and financing and help China shake off constraints from a dollar-denominated financial system.