BusinessCircle1705p052Translated by Amber Yang       Edited by Elizabeth Winkelman

Xiongan is the 19th “National New Area” to be officially created on 1st April 2017. It is also the first new zone to be endorsed by the Central Committee of the Chinese Communist Party and the State Council. Xiongan is located in the east of Baoding city, Hebei province, 130 kilometres between both Beijing and Tianjin. In setting up the new Xiongan area, spanning Xiongxian, Rongcheng and Anxin counties in Hebei province, it is expected to drive a new economic engine and advance a coordinated development of Beijing-Tianjin-Baoding regions with its geographical advantages, convenient transport, ecological environment with strong potential resources. Since the area’s overall exploration and development degree is low, it possesses broad development space and basic conditions for high level development and construction. The New Area will cover around 100 square kilometres initially and will be expanded to 200 square kilometres in the mid-term and about 2,000 square kilometres in the long-term.

The creation of Xiongan is a historical and strategic decision by the CPC Central Committee with Xi Jinping as the core leader.  It is another new district with national implications following in the steps of Shenzhen and Pudong. The decision is strategically crucial for the millennium to come.

The State Council executive meeting examined and approved Eight Proposals:

  1. Xiongan is to be positioned as a city of technological innovation: corporations establishing science and technology enterprises or willing to migrate to the New Area will be exempt from tax for 3 to 5 years, as well as enjoying preferential policies such as reductions on rental offices.
  2. Tax revenue shared collectively by Hebei and Beijing. Encouraging enterprises in Beijing to relocate to the New Area.
  3. Rejection of all polluting and manufacturing companies.
  4. Xiongan will be China’s Silicon Valley, focusing on high-end technology industries.
  5. Xiongan will not require registered permanent residence but work permits, which can be obtained by providing a business license and labor contract. Work permits are exercised according to a points-based system.
  6. Xiongan does not provide commercial residential buildings but will provide public rental housing supported by the State. People who hold work permits or business licenses can apply for public rental housing on a family-by-family basis. People who hold a labor contract can apply for dormitories, both will be offered at an affordable price.
  7. Employees retired from work will not remain in Xiongan, and public rental housing will be withdrawn by the state. They can either go back to their hometown or stay in surrounding areas. A series of liveable satellite towns will therefore be developed and real estate for the aged in surrounding areas will be more popular.
  8. The headquarters of state-owned enterprises and institutional units in Beijing will be relocated in Xiongan as examples, as well as a number of universities excluding Beijing University and Tsinghua University. Children born in Xiongan will not hold permanent residence in Xiongan, but will hold a residency permit, allowing them to access to Xiongan public schools. Xiongan will also establish its own college entrance examination system.

Morgan Stanley estimates that 4.52 million people in Beijing will be re-directed to Xiongan. The migration scheme is expected to achieve 80% movement in the next 15 years, totalling 3.62 million people moving from Beijing to Xiongan. Apart from the externality, the rapid development of Xiongan will prompt its annual population to grow at 1.5%, half of Beijing’s current population growth rate 3%. This means the size of population in Xiongan will reach up to 5.4 million over the coming 15 years, with population density at 2,720 per square kilometre. China’s investment growth rate will therefore accelerate to 0.3% and GDP growth rate to 0.13-0.19%.

According to a report by Morgan Stanley, China’s national investment growth is likely to boost up with the increase in Xiongan’s population. The report predicts the population in Xiongan will reach 3.4 million to 6.7 million over the next decade, luring as much as 2 trillion yuan ($385 billion) in investments, adding as much as 0.15 to 0.63 percentage points to China’s investment growth.

Unlike the Shenzhen Special Economic Zone and Shanghai Pudong New Area, the Xiongan New Area is designed as a salve to ease Beijing’s overcrowding, air pollution and congested traffic.

Thinking optimistically, the Chinese government might be able to finish Beijing’s population migration (4.52 million people) in the next decade, and the population growth in Xiongan will reach 3%. Xiongan will then have 5.4 million people and boost China’s investment growth by 0.6% and its GDP by 0.26-0.38% per year.

To make a conservative estimate, which is half of the targeted population (4.52 million people) migrating to Xiongan without any additional population, Xiongan’s contribution to China’s investment growth will be 0.15% and its GDP growth be 0.06-0.08%.

Xiongan will become the only city in China developing without real estate as a pillar industry, which is very suitable for a migrating workforce in Beijing. The nation will become the “landlord”, but those who retire will still need to go back home. Second- and third-tier cities will also experience an increase in their property prices.

Nevertheless, China will provide preferential policies on education such as children going to school without having to register for permanent residence. Langfang and Baoding, surrounded by Beijing and Tianjin, will potentially be the most popular regions for retired people in the future, bringing a mass of opportunities for Baoding. Once the Xiongan model is successful, tremendous pressure on Chinese people especially for those working and living in Beijing will be removed instantaneously. Problems related to marriage, housing prices and education will then be easier to tackle.

Since the Xiongan New Area will be an area to pool non-capital functions of Beijing, what are the industries and functions that will be distributed to the area?

Beijing is a place where most of the high-end industries, emerging industries, innovative factors and resources gather together. Technology hubs like Zhongguancun represents China’s highest level of innovation, embracing the best innovation resources. All of these results are to be transferred to surrounding areas. Therefore, Xiongan will develop into a demonstration area for innovative development. Also, priority will be given to ecological development, people’s livelihood, traditional culture and open, coordinated development. In detail, the area has key tasks including constructing green, smart town infrastructure, creating a beautiful ecological environment, developing high-end industries and cultivating new kinetic energy, providing high quality public services, building a convenient and green transportation network, pushing institutional mechanism reforms and motivating market vitality, establishing a new platform for opening up international cooperation.

Beijing’s overcrowding makes it barely possible to provide more space for industries. With the rise of Xiongan, Beijing will be able to activate its functions, forming a coordinated innovative community between Beijing, Tianjin and Hebei, establishing and perfecting a regional innovation system, and integrating innovation resources to bridge the development gap, connect industrial chains and regroup regional resources.

The history of China’s industries has experienced three phases: the first phase is 1979-1999 when light industries and textile industries were booming; the second phase is 2000-2012, which marked the development of heavy chemical industries and equipment manufacturing industries; and the third phase lies in future development—innovation. Hence, to become the innovation centre of China or even of the world is now the “big goal” of Xiongan.

Three Conjectures on “Xiongan 2.0”

“Xiongan 1.0” is now starting to surface—the establishment of Xiongan: demolition and relocation, infrastructure construction, real estate investment, and migrating public institutions. But what will “Xiongan 2.0” be like? We suspect that Xiongan 2.0 might be divided into three aspects: alleviation of the crowding out of real economy by real estate, changes in household registration system’s distortion of human capital allocation and corporate tax pressure reduction.

Follow Singapore in Real Esate—Public Rental Housing System

It seems that Xiongan New Area might transcend the period of land finance to becoming a special zone of real estate policy. It will carry out a new real estate trial implementation, commercial housing will not be allowed to be built in the New Area. The construction model will be centred on public rental housing and low-rent housing. Fixed residential land will not be available and indigenous residents will be evacuated to other regions. No residential buildings will be approved to be established in the New Area.

The status quo in Xiongan shows that it is already starting to follow Singapore’s model — halting housing construction approvals, suspension of home sales and exercising purchase restrictions. The features of this model is government being the main body of supplying affordable housing, responsible for the construction, organisation and management of the affordable housing. By fully mobilising resources, the government will be able to solve housing problems for most of the residents.

If Xiongan followed in the footsteps of the Singapore model, its real estate planning might firstly focus on building an independent specialised construction and operation agency for affordable housing. This agency will represent the government to establish public rental housing, accountable for not only the overall planning, design and construction, but the management and operation of the largest real estate. Meanwhile, the original public housing will be withdrawn and reconstructed to create market for public rental housing, leaving no space for commercial housing.

Follow the United States in Household Registration System—Citizenship

The essence of registered permanent residence is having priority over using urban resources. The more intense the resource competition is, the more values are added to registered permanent residence in a certain region. Limited supply of household registration in large cities can cause inefficiency in distribution of human capital, leading to distortion and limited free mobility of human capital.

In order to change the distortion of human capital, the government needs to strengthen supply of urban resources, lower the magnitude of imbalance in urban resources distribution. From the aspect of urban resources investment, we assume instead of setting up household registration, Xiongan might use this residence permit system to allocate human resources.

Follow Shanghai and Shenzhen in Tax Revenue—Combination of Exemptions and Subsidies

Thanks to the preferential tax policies in the early years of development, Shenzhen and Pudong were able to widen their tax bases for future development. If Xiongan wanted to transcend land finance and alleviate burdens on corporations, tax concessions and government subsidies in the early age might be necessary.

First the government needs to encourage migration of corporations by using tax sharing tools as corporations still get to share the revenue by the time they emigrate from Xiongan, which is beneficial for accelerating the migration of industries into Hebei province.

Then it is the implementation of preferential tax policy on technology companies and small and medium enterprises. Xiongan’s future plan aims at founding high-tech industry park. There will be exemptions on corporate income tax and reductions on rental housing for technology firms, according to some recent documents. For other enterprises, the government will use the experiences of Shanghai Free Trade Zone to reduce corporate income tax rate for eligible enterprises, while increasing subsidies for small and medium enterprises as well as start-ups.