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Hangzhou shows the way to China's new economy

Signs that China's reforms may be paying off have sprung up in the eastern coastal city of Hangzhou, where a booming high-tech and software sector has fired up the local economy in defiance of a nationwide slowdown.

From venture capital funds to big data firms, hundreds of technology-linked companies have set up shop in Hangzhou, capital of Zhejiang province, to create a thriving services center that is picking up the slack from wilting factory growth.

Once home to thousands of makers of household wares, Zhejiang's transformation is an exemplar of Chinese leaders' vision of an economy powered less by exports and investment and more by services and advanced industry, as embodied in the country's "Made in China 2025" strategy published on Tuesday.

The province, which accounted for 6.3 percent of China's economy last year, is benefiting from reforms being rolled out across China, such as tax breaks for high-tech firms, more funding for internet start-ups, and a better logistics network to aid e-commerce.

A case in point, Kuaidi Dache, part of China's biggest taxi-hailing app, employs close to 2,000 workers today, compared with fewer than 10 just three years ago.

The CBD skyline of Hangzhou, China.
Andy Brandl | Moment | Getty Images
The CBD skyline of Hangzhou, China.

"Kuaidi was founded in Hangzhou, which has a very open economy and is very receptive to new technologies," said Zhao Dong, Kuaidi's co-founder and chief operating officer.

At the Internet Finance Building in west Hangzhou, which houses technology start-ups, Silicon Valley culture is taking root.

Young workers stroll about in tee-shirts, jeans and sneakers, and offices are lined with treadmills, ping-pong tables and spaces for Friday night parties.

Growth in Zhejiang accelerated to 8.2 percent in the first quarter of this year, up from 7 percent a year earlier, while growth in the rest of China slipped to 7 percent, a quarterly low not seen since the depths of the 2008/09 global financial crisis.

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In Hangzhou, a city of 7 million people just an hour's train ride from Shanghai, local authorities have long allowed private enterprise to flourish.

It is the birthplace of e-commerce giant Alibaba Group, which earned annual revenues of 76.2 billion yuan ($12.3 billion) in its last financial year, and hired nearly 13,000 employees in the year since March 2014.

"There's a whole ecosystem that has developed around Alibaba," said Jin Zhongkun, co-founder of Loafer's Weekend, a Hangzhou events app that promotes activities to subscribers.

"It used to be that Zhejiang was supported by small and medium-sized enterprises that focused on exports, but now you see a lot of really good venture capital firms."

The marrying kind

Hangzhou is not unique. The services sector in the southern city of Shenzhen is also expanding rapidly, and growth in other local economies in eastern China has only slowed a shade this year. Countrywide, the services sector is employing an increasing share of the working population, up to 38.5 percent in 2013, leaving manufacturing behind on 30 percent.

Kevin Lai, an economist at Daiwa in Hong Kong, said this would put a floor beneath China's economic slowdown, though it could only temper the drag on growth from headwinds such as China's massive local government debt. Eastern provinces such as Jiangsu and Zhejiang are among China's most indebted local governments.

For Liu Yang, a deputy manager at Hangzhou Efuton Tea, one of China's top online tea sellers, Hangzhou's pro-business environment is a model for the rest of China.

Companies here receive "enormous" state support, Liu said. Entrepreneurs get housing subsidies, and companies are invited to networking and industrial design events run by the government. Liu had just returned from a local-government-led tour of Haier Group, China's biggest household appliance maker, in Qingdao, eastern China.

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"This is a government that helps companies," Liu said.

Official figures reflect the reshaping of Zhejiang's economy.

Investment in its services sector jumped 33.3 percent in the first three months of the year, far outstripping a 5.8 percent rise in factory investment.

Investment in the communications, software and IT industries was particularly buoyant, soaring 138.5 percent, compared with spending cuts in some factories. Investment in ferrous metal smelting fell 23.6 percent.

That is altering perceptions among young Hangzhou residents, said Cai Jingyan, a spokeswoman at Kuaidi. Many now aspire to work for Chinese internet firms instead of multinational corporations and state-owned giants such as Hangzhou Iron and Steel Group, known as Hanggang.

"There's a popular saying in Hangzhou - back in the day, girls wanted to marry boys who worked at Hanggang. But now they want to marry boys who work at Alibaba," Cai said.