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Critical Eye on Shenyang

The Come-Back City

by Paula M. Miller

Capital of Liaoning and one of China's 10 most populous cities, Shenyang is a major economic, political, and industrial center in northeastern China. The city is also the Northeast's transport hub and largest commodity distribution center. Shenyang's GDP reached ¥248.3 billion ($32.9 billion) in 2006, up 16.5 percent over 2005 (see Table). Though the city has experienced economic difficulties in the recent past, it has reenergized and is beginning to boom.

History in brief

Shenyang's history dates back more than 2,000 years, and the city is perhaps best known as the birthplace of the Qing Dynasty (1644-1911). Russia occupied the city at the end of the 19th century and began to industrialize it and build railways to connect coastal ports to key cities. Under the Japanese occupation of Manchuria (1931-45), Shenyang developed into a center of heavy industry. After Japan surrendered at the end of World War II, Shenyang successively fell under the control of Soviet (1945), Nationalist (1946), and Communist (1948) forces. The city was an industrial stronghold throughout the Maoist era (1949-76).

Though Shenyang was one of the first cities to develop under Mao Zedong's planned economy, it was slow to embrace China's market reforms during the 1980s and 1990s. In the late 1990s, the city undertook a massive reform of state-owned enterprises (SOEs), which led to bankruptcies, layoffs, and social unrest. Despite these reforms, Shenyang remains a significant base for SOEs.

In 2001, Shenyang was hit by corruption scandals that brought down the city's top leadership. Since then, Shenyang's government has strived to clean up the city (both politically and environmentally), modernize its industrial base, and develop new industries and sectors, such as financial services and tourism. China's campaign to "Revitalize the Northeast," launched by the State Council in 2003, has helped jumpstart the area (see Box).

Geography and natural resources

With a population of more than 7.2 million residents, of which about 4.9 million are registered urban residents, Shenyang and areas under its jurisdiction cover an area of 13,000 km². Rich in natural resources—including minerals, coal, and natural gas—Shenyang lies between the Liaohe Plain and the Changbai Mountains. About 147,000 hectares of forest and 82,000 hectares of pasture lie within the city limits. The Liao, Hun, and Xiushui rivers flow around the city.

Seven satellite cities, also rich in natural resources, lie within a 150 km-radius of Shenyang: Anshan, known for steel; Benxi, known for coal and iron; Fushun, known for coal; Fuxin, a coal and electricity base; Liaoyang, a chemical fiber base; Panjin, a petroleum base; and Tieling, known for coal and grain.

Transportation

Shenyang is the Northeast's air and land transportation hub. The Shenyang Taoxian International Airport, which can handle more than 6 million passengers each year, is the largest airport in Northeast China. By plane, Shenyang is about one hour from Beijing, four hours from Hong Kong, 1.5 hours from Seoul, and three hours from Tokyo. The Shenyang airport serves about 60 domestic and 15 international cities, including cities in Hong Kong, Japan, Russia, Singapore, South Korea, and Thailand. In 2006, 630,000 tons of freight passed through Shenyang's airport.

Shenyang boasts about 5,252 km of highway, including 236 km of super-highway (highways with six or more lanes). Expressways cross the province and link Shenyang to key cities such as Beijing; Changchun, Jilin; Dalian, Liaoning; Harbin, Heilongjiang; and Tianjin. The eight-lane Shenyang-Dalian Expressway connects Shenyang to Liaoning's key port city, while the six-lane Jingshen Expressway links Shenyang to Beijing. Last year, 167 million tons of goods were transported by road through Shenyang.

The city has one of the most heavily used rail hubs in China—six lines intersect in Shenyang, extending south to Beijing, north to the rest of northeast China and Russia, and southeast to North Korea. In 2006, 8.5 million tons of goods were transported by rail via Shenyang. The PRC Ministry of Railways has marked Shenyang as one of 18 Chinese cities to be developed into a state-of-the-art intermodal container hub terminal by 2010 (see the CBR, July-August 2005, Going Intermodal).

Within the city, subway lines one and two are scheduled to be completed in 2009 and 2010, respectively. The lines will help connect downtown commercial areas to manufacturing zones in the suburbs.

City layout

Agriculture, animal husbandry, and agricultural product processing dominate northeastern Shenyang; eastern Shenyang is an auto parts hub; southern Shenyang is a high-tech industrial base; and western Shenyang is home to heavy machinery manufacturing. The city center specializes in retail and financial services.

The city features two main commercial areas: Heping District's Taiyuan Jie, Shenyang's busiest street; and Shenhe District's Zhong Jie, Shenyang's 400-year-old business street. Until recently, Shenyang had few foreign-invested stores and restaurants but the city is now home to several, including Wal-Mart, Inc.; Carrefour Group; Parkson Retail Group Ltd.; B&Q plc; Starbucks Corp.; McDonald's Corp.; Pizza Hut, Inc.; and KFC Corp.

Japan, Russia, South Korea, and the United States have consulates in Shenyang's Heping District; North Korea has a consulate in Huanggu District. France recently announced it will open a consulate general's office in Shenyang in September.

Industry and services

Once China's titan of heavy industry, Shenyang has been diversifying and modernizing its industry in recent years. Today, the city is strong in machinery, autos and auto parts, petrochemicals, pharmaceuticals, aviation, textiles, electronics, food processing, building materials, metallurgy, and light industrial products. In 2001, the city began establishing software parks and plans to finish constructing a new 100-hectare Shenyang International Software Park over the next few years. In addition, Shenyang has a strong agricultural base, harvesting crops such as rice, corn, wheat, soybean, and various oil crops and vegetables.

The city has also boosted its services sector—especially banking, insurance, securities, financial consulting, commerce and trade, and real estate development. The first foreign-invested bank, South Korea's Hana Bank, arrived in Shenyang in May 2004. In 2005, the Bank of Tokyo-Mitsubishi UFJ became the first Japanese bank to open in Shenyang. Hong Kong's Bank of East Asia Ltd., Singapore's United Overseas Bank Ltd., and HSBC Holdings plc opened branches in April, June, and July 2007, respectively. In 2006, the city boasted a total of 1,063 banks and bank branches and 144 insurance-related companies, most of which were domestic. By 2010, it aims to attract 30 foreign banks and 60 non-bank financial institutions.

Shenyang has also attempted to boost its tourism industry and attract conferences and expositions. Most notably, Shenyang's new Olympic Sports Center Stadium will host eight Olympic soccer matches during the 2008 Beijing Olympics. From June to October this year, the city is hosting the World Cultural and Natural Heritage Expo. (The UNESCO World Heritage Committee has classified Shenyang's Imperial Palace and the Fu and Zhao mausoleums, which date from the Qing Dynasty, as world heritage sites.) Shenyang also hosts annual cultural events such as the International Qing Dynasty Culture Festival, South Korean Week, and International Ice and Snow Festival. Shenyang will host the Northeast Asia Commodities Fair in September. Last year, the city hosted the International Horticultural Exposition, which drew several million attendees over six months and featured exhibits from 23 countries.

According to the Shenyang Statistical Bureau, the city received a total of 45.5 million domestic and foreign tourists in 2006, up 28 percent over 2005. Last year, tourism revenue hit ¥27.2 billion ($3.6 billion). The city has 5 five-star hotels, 15 four-star hotels, and 54 three-star hotels.

Foreign fan favorites

Like other cities in northeastern China, Shenyang has benefited from China's "Revitalize the Northeast" campaign and the value-added tax policies that followed. Throughout the Northeast labor costs are low and energy supply is ample. Shenyang also boasts a solid industrial foundation, a good land and air transport network, abundant natural resources, and a skilled workforce. (Roughly 30 colleges and universities and numerous research and training institutions are located in Shenyang.) In addition, local authorities grant investment subsidies to multinational corporations (MNCs) that set up regional offices or headquarters in Shenyang. The city also offers smaller operational subsidies to companies that set up representative offices or branches in Shenyang, and companies that invest at least $10 million in constructing certain types of facilities can receive rent reductions.

Shenyang's utilized foreign direct investment more than doubled from 2004 to 2005; it hit $3.03 billion in 2006, up another 42.9 percent. In 2005, 26 foreign-invested enterprises with investment of more than $5 million were based in Shenyang. According to the China Council for the Promotion of International Trade, Shenyang Sub-Council, the top sources of foreign investment in Shenyang are South Korea, Hong Kong, the United States, Japan, and EU countries.

Both US companies interviewed for this article—Tyco International and General Motors (GM) Corp.—are expanding their operations in Shenyang and generally praised the city. A Shenyang resident since 1998, Dennis Adams, general manager of Tyco Safety Products, Shenyang, listed the city's top advantages as low direct and indirect labor costs; a deep pool of skilled, technical labor; good transportation; low land-use fees; and solid government support. He noted, "In Shenyang, Tyco is a big fish in a small pond—we were the city's third-largest exporter in 2005 and 2006 and will likely be the second-largest exporter in 2007. If needed, it's possible to arrange a meeting with the Shenyang mayor; it would be difficult to do that in Shanghai or Shenzhen. The development zone is also supportive."

Tyco has done well in Shenyang; it expanded from one employee in 1997 to nearly 2,000 employees in 2007. Tyco decided to consolidate much of its electronic article surveillance hard tag and label production in Shenyang and now operates two facilities in the city.

Chris Gubbey, former executive vice president of Shanghai GM Corp. Ltd., saw GM's operations expand across three cities—Shanghai; Yantai, Shandong; and Shenyang—in the seven years he lived in China. (Since being interviewed, Gubbey has become the chair and managing director of GM Holden Ltd. in Australia.) In August 2004, GM consolidated its Shenyang operations under a new joint venture (JV) Shanghai GM (Shenyang) Norsom Motors Co. Ltd. Shanghai GM owns 50 percent of the JV, while GM and the Shanghai Automotive Industry Corp. each own 25 percent. In contrast to its first JV plant, which produced 2,500 Chevrolet Blazers a year, the new JV plant has an annual capacity of 50,000 vehicles and produces Buick GL8 and FirstLand executive wagons. The JV plans to expand the plant and the number of models it produces.

Gubbey explained, "We needed a lot of provincial and local government support for the new JV. Restructuring could have been difficult, but it went relatively smoothly, and we're expanding now. We had to have confidence in the city and how the restructuring would be done to make that decision." Gubbey also said of the city, "Shenyang's labor and land-use costs are cheaper than Shanghai and Yantai. But the city needs to encourage suppliers to set up localized plants there. It is said that every job in the auto industry creates several more jobs in other sectors. But Shenyang hasn't been hit by the second wave yet."

The competition

When Shenyang city and development zone officials were asked to list the city's top competitors, the overwhelming response was "Dalian." Perhaps the most progressive city in Liaoning, Dalian has the largest, deepest international port in northeastern China and a tourism industry supported by its popular beaches. The city is known for its strong shipbuilding and software industries. Many MNCs, including Accenture Ltd., General Electric Co., Hewlett-Packard Co., IBM Corp., Matsushita Electric Industrial Co., Ltd., and Sony Corp., have operations there.

Supporters of Shenyang, however, note that Shenyang is relatively near three Liaoning ports—Dalian, Dadong, and Yingkou—though the latter two are much smaller. Tyco's Adams noted that Shenyang's distance from international ports is not a problem, "Tyco ships five 40-foot containers a day through Dalian. From Shenyang, that's a 3.5-hour drive on an eight-lane super-highway."

Seeking a higher profile

A knowledgeable Shenyang observer recently commented that Shenyang is the next "Shanghai on the make" and that in the next five years the city and China's Northeast will take off. The same observer, however, commented that the Northeast suffers from a low profile—that foreign tourists and investors often do not think about the Northeast as a possible travel or investment destination. Shenyang will likely need to raise its profile before it can truly take off.

Paula M. Miller is associate editor of the CBR.

Copyright 2007 US-China Business Council

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