By China Briefing

Traditionally overshadowed by metropolises such as Shanghai and Beijing, Zhejiang Province’s capital city of Hangzhou found itself in the global spotlight during the G20 Summit. To beautify the city and ease congestion for its international guests, the government shut down polluting factories, shipped away migrant workers, gave citizens vouchers to encourage vacation, and spent more than $1 billion on a new convention center.

But Hangzhou’s allure is not simply cosmetic. While China’s overall growth is slowing and its manufacturing sector struggles, Hangzhou continues to steadily grow on the back of the burgeoning high-tech industry, making it a model city for China’s broader economic transition.

The emergence of high-tech

China experienced its slowest growth in 25 years with 2015’s GDP growth of only 6.9 percent. Shanghai’s growth slowed from 7 percent to 6.9 percent; Suzhou’s from 8 percent to 7.5 percent; and Nanjing’s from 10.1 percent to 9.3 percent.

In contrast, Hangzhou’s GDP growth swelled—from 8.2 percent in 2014 to 10.2 percent in 2015, reaching RMB 1.01 trillion—in spite of the city’s secondary industry growth tumbling from 8.1 percent to 5.6 percent. Hangzhou’s impressive growth is due in large part to its burgeoning high-tech and services sectors, as the city’s tertiary industry exploded to 14.6 percent growth. The information industry accounted for  23 percent of Hangzhou’s total GDP in 2015 and drove 45 percent of its growth.

The tech industry has thrived in the birthplace of Chinese ecommerce giant Alibaba and its founder, Jack Ma. Alibaba, which owns Taobao and Tmall, and made history in 2014 with the largest IPO on record, undoubtedly helped Hangzhou earn the title “Capital of Ecommerce in China” in 2008. Not only does Alibaba attract significant business outright, but it also indirectly contributes to Hangzhou’s economy.

In April 2016, Hangzhou became one of China’s 10 cross-border ecommerce pilot cities, giving it preferential powers and tax policies for administering foreign goods. From 2004 to 2014, former Alibaba employees helped create about 130 internet companies, including the social media and fashion shopping platform Mogujie and ridesharing company Didi Dache. Didi Dache merged with Hangzhou-based Kuaidi Dache, which later became Didi Chuxing. The presence of such major firms allows for the transfer of skills and knowledge to facilitate startups and entrepreneurship.

Government promotions

The success of Hangzhou’s tech sector is not merely a byproduct of Alibaba’s enormous growth, but also a result of government efforts to promote the industry. The government provides tax breaks for high tech firms, incentives for internet startups, including housing subsidies for entrepreneurs and events to promote private and foreign investment to support startups.

The Hangzhou High-tech Enterprises Incubator, part of China’s wider Torch Program that supports entrepreneurship and innovation, helped secure foreign funding for Baidu, Suntech Power Holdings, and Focus Media Holding.

Hangzhou also has several industrial parks and development zones, including the Hangzhou High-tech Industry Development Zone, which houses more than two-thirds of the city’s tech companies. Notable investors in this zone include Alibaba, Microsoft, IBM, Nokia, Panasonic, and Mitsubishi. Another key development zone is the Yuhang Future Science and Technology City, created with attracting foreign talent.

According to Liang Liming, vice governor of Zhejiang,the province’s private enterprises have had the highest output in the country  for more than a decade. By the end of 2014, more than 12,400 foreign-funded companies – with a combined capital of$137 billion – were registered in Hangzhou, and 34 Fortune 500 companies had an investment project in the city.

Other key industries

While Hangzhou is quickly becoming known for tech and ecommerce, it is home to several other prominent industries, including equipment manufacturing and biotechnology. Although Hangzhou’s manufacturing growth declined in 2015, its equipment manufacturing industry performed strongly, posting RMB 108.61 billion in value-added output.

Hangzhou is also a large producer of bio-pharmaceuticals and biochemicals, and is home to Hangzhou East China Pharmaceutical Group, the largest antibiotics producer in Zhejiang. Foreign investment is encouraged in this sector, as part of an effort to acquire foreign technology and expertise to improve the industry’s research and development capabilities and move up the value chain. Pfizer recently responded to this need; it plans to invest$350 million in a biotech center in Hangzhou, the company’s first in Asia. In return for its investment, Pfizer hopes to navigate the complex regulatory and clearance process surrounding pharmaceuticals in China with greater ease, thereby giving it an advantage in accessing the country’s lucrative market.

Rising property and labor costs may cause difficulties in some segments of Hangzhou’s economy. The city has a large food and beverage manufacturing industry, led by Hangzhou Wahaha Group – China’s largest beverage producer. As operation costs continue to rise, this sector may eventually leave the city for lower cost locations such as Indonesia. Similarly, although Hangzhou is known as China’s “capital of silk and women’s garments,” this industry is also under threat due to its labor-intensive and low value-added nature.

Going forward

With the much publicized G20 conference, Hangzhou entered the international consciousness as one of China’s leading innovation and tech hubs. The central government’s “Made in China 2025” campaign aims to make significant strides in value-added manufacturing. By 2035, China aims to compete with developed industrial economies, and seeks to be a leader by 2049 – the 100th anniversary of the founding of the People’s Republic of China. Like many Chinese cities, Hangzhou may experience some difficulties as the economy shifts from an investment and manufacturing driven economy and competition from other tech hubs in cities such as Beijing and Shenzhen increases. However, with its leading tech sector, strong government support, and strategic location, Hangzhou is well-positioned to benefit from the government’s long term plans, making it the ideal showcase for China’s economic ambitions.

 

About the Author

This article was originally published by China Briefing, a subsidiary of Dezan Shira & Associates. Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.

Posted by China Briefing