From its roots as one of China's first special economic zones (SEZs), the southern city of Shenzhen in Guangdong Province has developed faster than any other Chinese cities in the past 20 years. But is this city a relic in China's economic reform? What advantages, under the new nationwide market economy, does the SEZ have over its neighbors?

Shenzhen is facing the problem of maintaining its economic edge and opening a new chapter in growth. Local officials are hoping that investment will remain strong (despite the fact that the Shenzhen Stock Exchange has stopped all initial public offerings (IPOs) by new firms) and are wondering how much the local financial industry matters to its economy.

Yu Youjun, the city's mayor, thinks that SEZs should not only enjoy preferential policies. Instead, they should take it upon themselves to pioneer in areas of standardizing the market economic system, deepening reforms and opening wider to the outside world under the unified national laws and policies.

"Just like a child who should not ask for more special gifts from his parents after growing up, now, it is time for us to give back to our motherland," he said.

However, Yu pointed out three challenges facing Shenzhen's economy. First, with China's WTO accession and overall opening up, many preferential policies the city enjoyed have vanished and the advantages of its location have decreased. In the 1980s, many multinational enterprises attracted by China's low labor costs chose to invest in Guangdong and Pearl River Delta because of the easy access to customs and shipping channels. However, in recent years, multinationals have invested in China mainly to access the growing domestic market-so they choose locations with large market influence. The Yangtze River Delta and places around the Bohai Sea have this advantage, bringing great pressures and challenges to Shenzhen in attracting investment. Shenzhen must create a better business environment so it can attract more investment from multinational companies, said Yu.

Second, other cities are developing very fast, with Shanghai as the pacesetter and Suzhou as the rising star. Shenzhen will fall behind if development there slows even a little, let alone if it stands still, Yu noted. Therefore it should develop boldly to maintain its advantages.

Third, Shenzhen has a large economic scale and it is really hard for such a mammoth city to develop at a high speed. Among China's large and medium-sized cities, Shenzhen ranks fourth in GDP and second in gross industrial output value. It is facing the problem of how to surpass itself.

To make matters worse, the fact that the Shenzhen Stock Exchange has not allowed any more IPOs has negatively affected the city's financial industry and its economy as a whole. A recent report showed that large amounts of capital has flowed to Shanghai since the Shenzhen Stock Exchange stopped new listings in October 2000.

In March 2002, Hantang Securities moved some of its major departments to Shanghai; Huafa Securities moved the whole company to Shanghai; the Three Gorges Securities changed its name to Asia Securities and moved from Yichang, Hubei Privince, to Shanghai; Tianyi Securities, Fuyou Securities and Bank of China International Securities also all moved to Shanghai.

Since the Shenzhen Stock Exchange ceased IPOs, a total of 469.5 billion yuan in funds has drained from the city's secondary stock market, an average of 18.78 billion yuan a month. While small and medium-sized investors abandoned Shenzhen for Shanghai, some securities and fund firms have also made Shanghai their home.

"The trend that investors are abandoning Shenzhen for Shanghai is becoming clearer. The Shenzhen securities market is facing a grim situation in overall development," said He Chengying, head of the comprehensive research institute of Guosen Securities.

Financial industry is the backbone of Shenzhen's economy, totaling 15 percent of the city's GDP. Based on this knowledge, Mayor Yu said Shenzhen should be better aware of the crisis and take more effective measures to deal with the challenges. The city has its own advantages, Yu said, especially in the area of comprehensive environment. In the past few years, Shenzhen has adopted a series of measures in areas of government affairs, legal system, market rectification, public security, human culture and natural environment to foster businesses in a world of improved legal system, standard management, high efficiency, fine market order, attractive environment and low operation costs.

Yu said Shenzhen also has more than 20 years of experience as an SEZ to draw from. It has a flexible and efficient management system and its institutional reform always leads other regions in China, directly boosting its economic growth. In the future, Shenzhen will deepen reforms to expand this advantage, Yu added.

Shenzhen also has advantages in basic industrial structure. In recent years, it has energetically promoted industrial restructuring and the hi-tech industry has become the pillar of its manufacturing sector. In the past three years, the share of hi-tech products' output value in the city's gross industrial output value increased at a rate of 2.5 percentage points annually, reaching 48 percent last year, higher than in any other mega-city nationwide. Shenzhen has large market shares in rising industries such as computer products, communication equipment, optical fiber communication equipment, Internet devices, digital audio and video products, biological pharmaceuticals and hi-tech medical appliances. Logistics has developed rapidly, becoming an important part of the city's manufacturing sector and its entire economy at large. The freight volumes of Shenzhen's harbor and airport have increased at an annual rate of 30-50 percent and its container handling capacity ranks second in China and sixth worldwide.

"In the new century, Shenzhen will bring its three advantages into full play to lead the country in economic development, though there are no preferential policies for Shenzhen," said Yu. "Many people may feel lost without preferential policies since they have developed on the basis of these policies ever since China's reform and opening up. This idea must be changed. The Central Government specially supported Shenzhen for the purpose of helping the city develop independently. Permanent support is impossible. After being supported for over 20 years, Shenzhen has the ability to make contributions back to our country. Meanwhile, the WTO rules require equal policies in every city. In the future keen market competition, Shenzhen must survive on its own."

A city's stamina depends on its economic structure, industrial structure, fixed asset investment, foreign capital utilization and present and future projects, Yu said. "I think Shenzhen's economic structure is rational," he added. Shenzhen has 107 major projects that will be completed within the coming two years, capable of raising the city's industrial output value by 300 billion yuan. It is estimated that its gross industrial output value will reach 600 billion yuan in 2005, more than double the 250 billion yuan earned in 2000.

Yu said that Shenzhen will make further efforts to improve its business environment and will be developed into a "garden city." It will cooperate with Hong Kong for regional development, he added.

In order to achieve this goal, Shenzhen must first develop its new advantages and further optimize its investment and development environment, especially its soft investment environment, including government affairs, legal system, market order and business environment. This is Shenzhen's lifeline, Yu said.

Meanwhile, a Hong Kong-Shenzhen economic sphere will be established. Yu said the world economy features two major developing trends, globalization and regionalization. Facing the two trends, a city cannot develop blindly or regard its surrounding cities as opponents. Shenzhen chooses Hong Kong as its cooperation partner to develop coordinately under the frame of "one country, two systems," aiming at international market, Yu said. In the economic sphere, Shenzhen and Hong Kong can share resources and advantages to mutually accelerate their development. Since Hong Kong is an international financial, logistics and trade center with a more developed service industry, Shenzhen stands to gain many benefits from a partnership.