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Chinese capitalism at work: the thrill is gone

CHINA'S remarkable resurgence began three decades ago with the designation of Shenzhen, just north of Hong Kong, as a “special economic zone”. Businesses in the zone were free to re-engage with overt capitalism and make profits by satisfying customers, not the state. The result was the transformation of a farming village into a city of 9m people, bustling with production lines and sewing machines, making everything from iPods to Nikes, in a burst of entrepreneurial zeal.

But that may describe its past more accurately than its future. Inevitably, prosperity has affected people's attitudes and the local business environment. A study by the Shenzhen Academy of Social Sciences and the Chinese University of Hong Kong, released on January 18th, shows a precipitous drop in the fraction of the population involved in starting new businesses, from 12% in 2004 to 5% in 2009. “It's not so special anymore,” says Kevin Au, a professor of management at Chinese University.

Five other medium-sized Chinese cities that are part of a separate study show similar results, says Mr Au. Collectively, their levels of enterprise differ little from those seen in western Europe, which is to say slightly weaker than in Britain, much less so than in America, but much stronger than in Japan. The strongest signs of enterprise in China can be observed in very poor, rural areas that are just beginning to develop beyond agriculture.

There are any number of explanations for what is happening in Shenzhen. Not long ago, it was a city that needed everything and attracted everyone. Immigrants flooded in from the rest of China, anxious to seize a unique opportunity. Few laws, if any, restrained business. Factories could be opened anywhere. Even the most qualified people found they could get better jobs by moving to Shenzhen.

That has changed. China has begun to develop large corporations that attract talented employees. Shenzhen itself has at least two global leaders, the telecoms giants Huawei and ZTE. Land has become harder to find and, inevitably, more expensive. One of the last big parcels was not divided up for small businesses but transferred to BYD, a fast-growing manufacturer of cars and batteries. Many laws have been enacted to protect workers and the environment, making it more costly and complex to start a business. As factories have moved away, so has low-skilled labour.

In some respects this is good news. Small firms with slipshod standards are being replaced by bigger, better ones. Where people are creating companies, they are doing so out of choice, not economic necessity. But not all the news is so positive. The study also examined two other things. Only 9% of the respondents said the technology they hoped to use in their new venture was truly innovative—less than one year old. That makes Shenzhen more engaged in innovation than Brazil or Russia, but far less than Japan or Israel, and thus more vulnerable to competition.

The study also showed a sharp recent decline in the interest of private investors. That is, at least in part, a reasonable response to the financial crisis. But it is nonetheless a real problem, because the Chinese banks lean heavily toward large state-controlled companies. Shenzhen has become a global synonym for business creation, but there is reason to wonder how much longer it will remain so.