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Xiongan New Area -- Questions over tried and tested formula

Market reaction bodes ill for China's new economic zone

China's new special economic zone, to be developed in Hebei Province, is widely expected to become a "success," inasmuch as it will likely attract many high-profile domestic companies and government organs. Whether it can become a driving force to spread economic reform across the country, however, is a very different matter.

The Central Committee of the Communist Party of China and the Chinese State Council suddenly announced in a joint notice on April 1 that a new district called the Xiongan New Area would be created in the northeastern province.  

Few people had heard the name "Xiongan" beforehand, if it even existed. Since the announcement, however, it has become widely known across China.

Similarly, when the Shenzhen Special Economic Zone was announced in August 1980, most people, at least in northern China, didn't know where Shenzhen was and many could not even read the character for "zhen" correctly.

This time it is different. Following the announcement of the decision to create the Xiongan New Area, the place was flooded with cars from Beijing and other neighboring cities, causing unprecedentedly heavy traffic, according to media reports.

Housing prices in backwater towns in the area like Xiongxian, Rongcheng and Anxin have shot up overnight.

On April 5, when the Shanghai stock market reopened after the Qingming Festival holiday season, a considerable number of "Xiongan stocks," such as companies tipped for involvement in infrastructure improvements, went limit-up.

At present, there is virtually no concrete blueprint for the Xiongan New Area, except for its name, leading to questions over what has caused the boom in the property and stock markets.

A "special" special zone

China currently has 19 state-level new development districts, but is the first one that was authorized jointly in the names of both the CPC Central Committee and the National Council. Why does the administration of President Xi Jinping attach so much importance to the 19th new district?

Xi and his confidential aide Li Zhanshu, director of the General Office of the party, launched hugely successful careers in Hebei, so they both have a personal attachment.

With such high-level backing, it is safe to assume the "millennial plan," as it is decribed in the April 1 notice, will be successful. Large state-owned enterprises under both provincial central government have declared an intention to participate.

The notice, furthermore, positions the creation of the Xiongan New Area on par with the establishment of the Shenzhen Special Economic Zone in the 1980s and the development of the Pudong New Area in Shanghai around a decade later. The Xiongan boom undeniably reflects past successful cases.

Old methods

To rehabilitate the Chinese economy after the Cultural Revolution, Deng Xiaoping ordered the creation of a special economic zone in Shenzhen, Guangdong Province. The Pearl River Delta, which has emerged from Shenzhen, has not only developed into the "factory of the world," but also become the driving force spreading reform and openness across China.

Deng also decided to develop the Pudong New Area in 1990 to revitalize the campaign after it had stagnated due to the Tiananmen Square incident.

The strategy has proved successful as the Pudong district, once shunned by locals, has developed into a modern financial and commercial center for China and Shanghai.

What are Xi's expectations for Xiongan?

The administration may be considering accelerating the development of the metropolitan economic zone, which includes Hebei and Tianjin, by letting them shoulder parts of Beijing's metropolitan functions to overcome traffic congestion and other problems in the capital.

But it seems more likely that the biggest purpose of the project for Xi is the challenge of spreading the country's economic growth to the northeast and other regions from the booming coastal areas.

Xi's first term as general secretary of the CPC, the post he assumed at the 18th National Congress of the party in 2012, will end at the 19th congress in the fall of this year.

But the overall reform plan adopted at the Third Plenum of the CPC Central Committee in 2013 has made almost no substantive progress. Key reforms related to the foundations of the Chinese economy, such as those for the family register system, state-owned enterprises and regulations, have made little headway in the face of resistance from various interested parties.

The Xi administration has also failed to effectively address pollution, real estate bubbles and other economic problems which have been the source of public discontent. The establishment of a special zone to break a sense of political and economic stagnation carries a certain sense of deja vu.

Concern about the outlook for the Xiongan New Area has been largely unvoiced.

The development strategy for Shenzhen and Pudong has been successful mainly because tax and other preferential measures have attracted foreign businesses. In other words, Shenzhen and Pudong were oriented toward door-opening from the beginning.

Xiongan offers few merits for foreign companies, partly because of its distance from the sea.

The area will likely develop into a modern city full of high-rise buildings. After all, the central government can order big state-owned enterprises, government organs and universities to move into the district. 

The key question is how to foster a spirit of reform and openness. The project needs to offer a grand design in the face of worries over whether it will become a "red special zone" led by the government and state-owned enterprises.

When the Shenzhen Special Economic Zone was created, there were neither vested interests, such as large state-run enterprises, nor fraudulent motives like speculative real estate investment.

A rocky road may lie ahead for the Xiongan New Area.

Xiao Minjie is a China-focused senior economist at Financial Market and Economic Research of SMBC Nikko Securities. After graduating from Wuhan University in China, Xiao enrolled in a doctoral program at the University of Tsukuba in Japan. He took the current post after heading Shanghai office of Daiwa Institute of Research. He is the author of "Ninki Chugokujin Economist Niyoru Chugoku Keizai Jijo" (The Chinese economic situation analyzed by a popular Chinese economist).

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