An annual report released Monday by the Chinese Academy of Social Sciences shows that Shenzhen, Guangdong Province, has again topped the list of the 10 most competitive cities in China. Yet only days ago, the Shenzhen government refuted media reports that telecommunications giants Huawei Technologies Inc and ZTE Corp are leaving the city. Despite the denial, ZTE reportedly will move part of its production to Heyuan, another city in the province, while keeping its headquarters in Shenzhen.

Shenzhen authorities also recently revealed that a staggering number of small- and medium-sized enterprises - 15,000 - are moving out of the city. The withdrawal is probably prompted by the skyrocketing operating costs in Shenzhen, which primarily originates in the soaring prices of housing and land in the megacity.

In recent years, dramatic hikes in Shenzhen property prices mean they are among the most expensive in the country. Enterprises have to endure higher production costs while employees are reluctant to come to Shenzhen given the cost of living burden. Enterprises can only help employees get a firm foothold in the city by paying more, which thereby makes Shenzhen more expensive. To retain competitiveness, the city needs cutting-edge technology and innovation and other pluses.

What's happening in Shenzhen is the epitome of the results of rising economic development costs in China. As labor costs jump and property prices in big cities far exceed those of other developing countries, the cost of production and overall operations in China have changed drastically.

Both foreign and Chinese firms are moving to lower-cost countries and China finds it harder to retain labor-intensive industries.

A comprehensive industrial upgrade is the only way to make China a high-income economy. But with a 1.3 billion population, China is unable to solely depend on hi-tech industries, capital and business centers. It needs hi-tech industries to drive other industries at various tiers to create jobs for hundreds of millions. In the long-term, labor-intensive industries will still be important for China.

If China's first-tier cities like Shenzhen use very high property prices to support their industrial development, they will have to become a manufacturing center of products with high added value and it will therefore dominate this type of production in China.

However, this way will damage the development potential of other areas of the country. 

For the sake of balanced development, keeping some labor-intensive industries in cities like Shenzhen can help balance their development and make room for industrial balance nationwide. This is the way these cities will become more vibrant and creative.

China's mega cities should not compare their housing prices with those in downtown areas of global financial hubs like New York and London. Only a few lucky Chinese cities will achieve this, and not for many years to come.