Shenzhen: China's sustainable city

Shenzhen's sustainable policies are improving air quality and water pollution. But why? How are electric buses helping sustainability?

byMichael Baldinger, Head of Sustainable and Impact Investing 30 May 2019
  • Shenzhen has emerged as China's leading city for sustainability policies by phasing out polluting industries, imposing tough new environmental standards, encouraging climate-friendly industries, supporting high-tech development and regenerating urban areas.
  • Historically, Shenzhen has been a testing ground for new reforms, and we believe the sustainable policies applied in the city to reduce air and water pollution will also be applied nationwide in China as part of a concerted, nationwide effort to address climate change.

Shenzhen: a microcosm of China's development story

Shenzhen was a fishing village with less than 30,000 residents 40 years ago1.

Fast forward to 2019 and it is home to 12 million people2, boasts some of China's most innovative companies, and has an economy larger than many of the world's most developed countries.

Shenzhen GDP compared, 2018 (USD bn, PPP-basis)

Within this transition lies a story, and its one that is a smaller scale version of China's boom during the past 40 years.

That's because during the period, Shenzhen has seen low-cost, labor-intensive manufacturing fall and rise; rapid urbanization; expansion in the real estate sector; and a transition to an economic model driven by high-end manufacturing, services and consumer demand.

Shenzhen's success is partly because of its location.

27.4km from the centre of Hong Kong3, Shenzhen's proximity to Asia's largest international finance and commerce hub has made it an entry point into China for foreign investment and intellectual capital, and an exit point for China's wide range of evolving exports.

But it is also to do with policy. A focal point of Deng Xiaoping's pivotal market reforms from the late 1970s, Shenzhen has always been a testing ground for other market reforms, such as China's first special economic zone in 1980, deregulation of foreign investment controls, and opening of urban residency rules.

And as China steps up its efforts to address climate change with sustainability policies to meet its lofty commitments to the Paris Agreement on Climate Change, Shenzhen is taking the lead as a testing ground for a raft of climate- friendly, sustainable development policies that will be rolled out more widely across China.

Shenzhen is taking the lead as a testing ground for a raft of climate- friendly, sustainable development policies that will be rolled out more widely across China.

These include:

  • Developing electric vehicles: Generous subsidies, large investments, and innovation by local industry leaders, like BYD, mean Shenzhen has become the center of China's electric vehicle industry, with one unit being produced every 90 seconds at a leading manufacturer in the city4. But it's not just about building the cars, the city government has built the infrastructure too, adding 8,000 streetlight poles that also double as charging stations for electric cars in recent years5.
  • Establishing low-emissions electric buses and taxis: Shenzhen became the first city in the world to fully electrify its public bus fleet, running an estimated 16,000 electric buses6. And fully-electric taxis are on the way too; 62.5% of the city's taxis were electric in 2018, and the goal is to make it 100% by 20207. Progress with electric buses and taxis is potentially one reason why Shenzhen's air pollution levels have slowly reduced between 2015 and 2019.
  • Closing down polluting factories: local authorities in Shenzhen mounted an aggressive attack on labor- and resource-intensive industries as part of a campaign against pollution. Policy measures included raising prices for inputs like water and electricity, forcing minimum wages higher, and imposing new regulations to weed out old, polluting industries.

Shenzhen: air quality trends, Jan 2015-Mar 2019 (PM 2.5 readings)

  • Regenerating urban areas: Shenzhen has aggressively introduced urban regeneration projects to modernize old industrial spaces and abandoned residential buildings in a bid to expand the property stock in a more sustainable way8. Sustained, rapid urbanization had generated record real estate prices in Shenzhen and put pressure on scarce land resources within the city9.
  • Supporting start-ups and innovative industries with tax breaks and talent policies: the Shenzhen city government is actively supporting new businesses in high tech sectors, as well as universities and research institutes, with subsidies, investment in R&D, eased visa policies for foreign experts, and incentive schemes for overseas-educated Chinese10.

If we look at innovation and new technologies being formed, there's really only two places to look at. One is Silicon Valley and the other is Shenzhen in China

Geoffrey Wong, UBS Asset Management Head of Emerging Markets and Asia Pacific Equities

But despite all these changes, it's important to remember that these policies are less of a choice and more of an imperative.

Shenzhen has to forge a sustainable future because the surrounding environment has been tarred by years of hazardous development which has polluted rivers, dirtied the air, and degraded land resources.

And Shenzhen has big ambitions because it is going to be right in the middle of the anticipated Greater Bay Area - a mega region comprising 69 million people - and that means creating a sustainable future for its citizens.

What's true for Shenzhen is also true for China more generally. The challenges are the same, but the price of failure through climate deterioration, widespread pollution, impacts on public health and possibly social stability are too great.

But as China adapts to and confronts these sustainability challenges, we'll see innovative ideas emerge, new sectors grow, and sustainable solutions present themselves, and that's why we believe that Shenzhen and China will be a key space to watch and a likely source of innovative and investible ideas in the sustainable investing field in the future.

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