Guangzhou in danger of losing its Tier 1 city status

Wednesday, 8th October 2014 18:00 HKT
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Most foreigners will be familiar with the city of Guangzhou, or its former name Canton, which lies in southern China’s Guangdong province. Guangzhou has for centuries been the main port of entry for foreign traders with China, remnants of which can still be seen in old Chinese and Western buildings along the river front. Benefiting from foreign trade enabled Guangzhou’s GDP to develop quickly early on, ensuring it’s ‘third position’ status in today’s China, behind Beijing and Shanghai.

Yet walking around today’s Guangzhou it’s obvious the city has seen better days. Faded paint peels off weathered buildings along the main shopping promenade, whilst the local leisurely pace only seems to step up a gear around mealtimes, when crowds throng in dim sum halls, or outdoor restaurants around midnight. The pace of life seems even slower when compared with it’s young dynamic neighbour Shenzhen, which sits on the China-Hong Kong border. So it’s no surprise to read that Guangzhou might be in danger of losing its tier one city status.

A recent report by a Guangzhou based research group Trigger Trend raises this possibility. The report ranked Chinese cities in terms of their level of influence, based on 32 criteria, ranging from political influence and economic size, to industrial agglomeration, technological innovation and transportation. Assessed on these criteria, the results show Shenzhen soon passing Guangzhou, which would then mean Guangzhou dropping to fourth place.

Firstly when looking at economic indicators, Guangzhou is not only far behind Beijing and Shanghai, but even Tianjin and Shenzhen. Since 2000, Guangzhou’s GDP growth has trailed Shenzhen by a few percentage points, a gap which widened to 4.2% after 2010. Based on current growth rates, Guangzhou’s GDP will be surpassed by Tianjin in 2018, and Shenzhen in 2022. Eventually, China’s cities will rank economically as follows: Shanghai, Beijing, Tianjin, Shenzhen, Guangzhou. Guangzhou might even end up a third tier city.

Yet a city’s economic size alone does not determine tier 1 city status. The assessment included the following main criteria:

– Political position & international recognition
– Economic size
– GDP per capita & local residents income levels
– Population size
– Financial centre strength
– Transportation hub reach
– Economic & industrial influence
– Concentration level of large businesses
– Foreign trade and ability to attract Foreign Direct Investment
– Quality of Life
– Technological innovation
– Fixed asset investment

These criteria and more were applied to the 10 largest Chinese cities by economic size. To note, Beijing and Shanghai occupied the top two spots in all categories, scoring over 80 points on average in Trigger Trends rating system. Shenzhen and Guangzhou scores were in the 50-60 range.

The areas which could cause Guangzhou to lose it’s lead over Shenzhen are mainly economic.

Firstly whilst Guangzhou still has the larger economy and retail volume, it’s industrial size and quality are in decline. In the Pearl River Delta, Shenzhen’s telecommunications, electronics, machinery and automotive industries are more developed, helping Shenzhen’s industrial growth to outpace Guangzhou by 24% last year. However the gap is greater in hi-tech manufacturing, where Guangzhou’s growth is a mere 15% of Shenzhen’s hi-tech manufacturing growth. This implies less industrial efficiency, or total factor productivity.

Secondly, Guangzhou’s finance sector lags behind that of Shenzhen’s, particularly lacking favourable policies in finance. In 2013, Guangzhou’s service sector increased by 115 billion yuan, whereas Shenzhen’s saw an increase of 208 billion yuan. In terms of capital, calculated based on the total amount of financial institution deposits and loans, Guangzhou’s falls short of Shenzhen by 300 billion yuan, despite Shenzhen not enjoying provincial level political status. Shenzhen’s financial centre status and size can only be matched by Shanghai and Beijing. Tianjin’s finance sector may not yet be as large as Guangzhou’s but it’s catching up fast.

Thirdly, Guangzhou’s levels of science and technological innovation trails Beijing, Tianjin, Shanghai, and Shenzhen, ranking seventh overall in Trigger Trend’s ranking. In 2012 Guangzhou’s R&D investment totaled 30.51 billion yuan, just a third of Beijing’s. An amount even less than R&D investment in Hangzhou and Nanjing. Another measure of a city’s dedication to new technology can be seen in the number of patent applications. Here Guangzhou also fails to impress. In 2012, both Beijing, Shenzhen and Shanghai all filed over 10,000 patent applications each, whilst Guangzhou filed less than half. Again Guangzhou’s total was less than Hangzhou and Nanjing. Guangzhou’s technology investment is unlikely to catch up in the future with its limited supply of science research facilities.

Finally, Guangzhou’s traditional advantage in dealings with abroad and attracting foreign investment are also fading. In 1978, Guangzhou’s GDP ranked 8th nationwide, one-sixth of Shanghai’s and behind China’s northern cities. Following the launch of China’s opening up and reform policy, Guangzhou was able to leverage its geographical advantage and climb up the rankings. By 1989 Guangzhou’s GDP had surpassed Tianjin, ranking third overall. In 1994 Guangzhou’s GDP came closest to Beijing’s GDP, just short by 16 billion yuan, with a total of 98.5 billion yuan. Thereafter Guangzhou’s GDP fell behind as economic growth shifted to East China.

Reflecting the shift of investment from South China to the East and more recently the West, Guangzhou’s share of FDI has declined. In 2012, Guangzhou’s FDI totaled 4.58 billion dollars, less than a third of Shanghai and Tianjin, who both attracted over 15 billion dollars. Guangzhou even attracted less FDI than Chongqing and Chengdu. This economic migration away from the south means few large enterprises remain in Guangzhou. Of Fortune magazine’s Top 500 Global companies, only two are based in Guangzhou, and these are both SOEs. Importantly, Shenzhen has four, and all are private enterprises.

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(Article not to be republished without permission or citation).

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