An emerging metropolis

It has been called an economic dream team. Hong Kong and Shenzhen, two of Asia's urban powerhouses, are considering joining forces to create a giant metropolis of 20 million people that would rival New York and London. Alexandra Harney writes

As neighbours across China's southern border, Hong Kong and Shenzhen are closely linked. Since Beijing declared Shenzhen China's first special economic zone in 1980, Hong Kong investors have played a leading role in its development, opening factories and offices in the city.

These business ties have only strengthened since Hong Kong returned to Chinese sovereignty in 1997. Nearly a third of luxury property sales in Shenzhen are to Hong Kong residents. And the special economic zone's relatively low prices have helped make Shenzhen a popular destination for shopping and leisure. The Lowu border between Shenzhen and Hong Kong is the busiest in the world, with 252,000 crossings every day.

Both cities boast strong fundamentals. Hong Kong is a linchpin of global commerce, home to the Asian headquarters of multinationals and investment banks, and one of the world's busiest ports. A manufacturing juggernaut, Shenzhen also boasts the country's second largest stock exchange and its highest per capita income. In 2006, Hong Kong's economy grew 6.9%, while Shenzhen's grew 15%.

But in China's fast-forward economy, even this pace is not fast enough. Officials on both sides of the border are worried that their cities are losing momentum: Shenzhen has developed so fast it has run out of space, and Hong Kong fears its role is quickly being usurped by Shenzhen and Shanghai.

In July, at the second annual conference on cross-border co-operation, Shenzhen mayor Xu Zongheng and then-acting chief executive of Hong Kong, Henry Tang, agreed on the need to improve the flow of goods, people, capital and information across the border. At the same conference, Xu trumpeted the partnership as an 'economic dream team'.

The following month, the Bauhinia Foundation Research Centre, an influential Hong Kong think-tank, published a report advocating the creation of a metropolis straddling the border. By 2020, the report argued, the combined cities could have a gross domestic product on a purchasing power parity basis of US$1.11 trillion by 2020, putting them ahead of London, Paris, Los Angeles and Chicago.

'With its strong economic capabilities, first-rate aviation and harbour operating capabilities, as well as competitive advantages of a free port, the Hong Kong-Shenzhen Metropolis can no doubt join the league of the world's major metropolises,' the report concluded.

There is nothing Chinese cities like better than to be global leaders. Indeed, Beijing has been trying to strengthen ties between Hong Kong and its hinterland for years, particularly since the outbreak of Severe Acute Respiratory Syndrome in 2003 that nearly brought the city to a standstill.

That summer, the Chinese Government introduced the Closer Economic Partnership Arrangement (CEPA), an agreement that gave Hong Kong businesses additional incentives to invest in China. Also in 2003, the State Council, China's cabinet, gave Hong Kong, neighbouring Guangdong province and Macau permission to start planning a giant bridge connecting Hong Kong, Zhuhai and Macau.

Then came the Pan-Pearl River Delta (Pan-PRD) agreement in 2004, in which nine mainland Chinese provinces, Hong Kong and Macau proposed to form a giant economic region in southern China with a population roughly equivalent to the European Union.

Few of these, however, have offered many tangible benefits. The bridge is still stuck in bureaucratic limbo. The Pan-PRD programme and CEPA have created little visible economic stimulus.

Integration of Hong Kong and Shenzhen is arguably an even larger challenge than earlier attempts at cross-border co-operation. The cities operate under different legal systems: Hong Kong follows its own laws, most a legacy of British rule, while Shenzhen adheres to the mainland Chinese legal system. They use different currencies: the renminbi in Shenzhen and the Hong Kong dollar in Hong Kong. The renminbi is a non-convertible currency tightly controlled by the Chinese Government, so this situation is not likely to change anytime soon.

'Hong Kong is just too different,' argues Zhong Jian, director of the China Center for Special Economic Zone Research at Shenzhen University. Professor Zhong contends that despite Shenzhen's higher growth rate, it still lags behind Hong Kong in its overall development.

Future complications

Indeed, while Shenzhen is a goliath on the mainland and is growing much faster than its mature neighbour, its gross domestic product in 2006 was still a fraction of Hong Kong's. The former British colony's low taxes, clear and accountable legal system and open economy make it a particularly easy place for foreign investors to do business. And tying its fate to one mainland city could complicate future collaboration with other regions, says Professor Zhong; a view shared by other commentators.

'Hong Kong cannot afford to think small,' says Anthony Cheung, professor of politics at the City University of Hong Kong and a member of the local government's Executive Council. 'When we are talking about closer collaboration between Hong Kong and Shenzhen, we must not do this at the expense of having the Hong Kong presence felt in this larger region.'

Still, short of a merger, there is plenty Hong Kong and Shenzhen could do together. As a young city built on former farmland, Shenzhen needs more universities; expanding exchanges with Hong Kong institutions would be a fillip to its high technology industry. The twin cities could make it easier for Shenzhen residents to travel to Hong Kong. Currently, residents who lack local registration papers must return to their hometowns, often hundreds of miles away, to obtain an exit permit. Hong Kong could expand its talent pool by making it cheaper and easier for skilled Shenzhen residents to study and migrate there.

Next year, Shenzhen will introduce a computerised identity card system that could make it simpler for some residents to visit Hong Kong. And the Hong Kong Government recently increased its stake in the Hong Kong Stock Exchange, fuelling speculation that it was preparing to increase co-operation with mainland bourses - one of which is in Shenzhen.

Shenzhen and Hong Kong would also benefit from closer co-operation on reducing environmental pollution. A blanket of smog that floats down from Shenzhen and nearby industrial cities is starting to drive away the very international businesspeople Hong Kong wants to attract.

Equally important is better cross-border co-operation on stock market regulation and corporate governance. Hong Kong investigators sometimes struggle to convince officials across the border to help with investigations into Hong Kong-listed mainland companies. Strengthening regulatory efforts with Shenzhen would serve as a model for collaboration with other areas in China.

The twin cities' divergent political systems - the Chinese Communist Party keeps a grip on Shenzhen and Hong Kong maintains a partial democracy - are likely to complicate government-level collaboration. But talking about a blueprint for the ways the cities might interact in the future is a step in the right direction, analysts say.

'We have to ask: what can we aspire to be in the next 10, 20, 30 years?' says Professor Cheung. 'We must have some sort of outlook.'

Alexandra Harney is a freelance journalist based in Hong Kong.