China’s Cocoon

China’s Cocoon

HONG KONG — The skies last week in Hong Kong and Shenzhen were perpetually the dark blue-gray of an impending downpour, the air thick with humidity as the outer bands of a typhoon swept through South China. But though the skies were active and threatening, the air had an unfamiliar freshness about it, the smoky, tasty residue of recent years missing.

It’s not the time of year or the weather, residents said. It’s the recession. The toll taken on Pearl River Delta manufacturing is enough to evoke nostalgia among those who recall the region before it was transformed into the world’s factory floor.

Evidence of a region slammed by the global recession is all around: restaurants and malls deserted, containers piled high anywhere there’s space, minimal street traffic. Although news reports suggest China is weathering the downturn and decoupling from the U.S., the Pearl River Delta is feeling the pain. When the recession hit, the region’s ubiquitous low-margin, labor-intensive assembly plants churning out toys, footwear, apparel and household goods could no longer remain profitable, and thousands disappeared. Workers by the hundreds of thousands saw no option but to stay home after the Spring Festival holiday in February.

And therein lies the key to a possible prosperous future of a region whose GDP is still five times that of Vietnam and almost the size of Thailand and Malaysia combined, according to the China Economic Quarterly. The Pearl River Delta region is undergoing a profound restructuring after decades of explosive growth, and will emerge looking very different.

The region’s average growth rate of 16 percent from 1980-2007 versus 10 percent nationally underscores how successfully it led China out of communism beginning in 1979. With only 4 percent of the population, it is responsible for 30 percent of China’s exports and 10 percent of output, the magazine said in a June article on the Pearl River Delta titled “Bloodied But Unbowed.”
Shenzhen, from where many exports depart, has become the world’s fourth-largest container port. But the breakneck growth has come at the expense of sustainability. Assembly plants generate relatively little economic value, exposing the region’s weakness when the recession hit.

In 2007, the Pearl River Delta accounted for only 1.2 billion yuan, or $175.7 million, in value-added production versus 9.8 billion yuan in the Yangtze River Delta. It attracted only $15 billion in foreign direct investment versus $37 billion up north. Mountains box in the Pearl River Delta, while miles of flat, accessible land surround Shanghai, said Sunny Ho, executive director of the Hong Kong Shippers’ Council.

With growth in the Pearl River Delta stalled largely by the pullback in U.S. consumer spending, many are looking for clues as to what the region’s future will look like after the recession. For the ports, facing a combination of the cyclical recession and loss of market share to faster growing regions, the issue is critical.

Will the Pearl River Delta, which developed a decade ahead of Shanghai but is years behind its northern competitor in developing higher value-added product, end up an economic backwater? Will Shanghai and its neighboring regions continue to gain, aided by the Yangtze River and its ability to reach deep into the hinterland? Or will a new, more sustainable growth model emerge?

Some see signs of the latter. When thousands of workers failed to return after the Spring Festival, “the reality was that the (Pearl River Delta) was already well on its way to moving beyond the low-end assembly work identified with Dongguan (a Pearl River Delta city that typifies low-cost, labor-intensive assembly), and toward a far more diverse and dynamic economy,” Tom Miller, managing editor of China Economic Quarterly, wrote.

Ho said this was largely because of government fiat, through the introduction of worker-friendly labor laws, marginalizing of dirty industries, ending tax incentives for low-end exporters, and a focus on the domestic market. That process will continue along with the restructuring of traditional Pearl River Delta industries into larger, more vertically integrated players as many small companies disappear.

China Economic Quarterly cited a plan by the National Development and Reform Commission, the national planning office, aiming for 60 percent of the region’s economy to be services-related in 2020, up from 47 percent in 2007. For the ports, this could be a mixed blessing, because higher technology often means less cargo.

But other, more positive developments are occurring simultaneously, including the recent long-awaited approval of a $5.6 billion Hong Kong-Macao-Zhuhai bridge that will open the underdeveloped western Pearl River Delta to larger development.

I have argued before that China in coming years will not witness any significant loss in market share as a supplier to the U.S. and other nations. It is losing some low-end production, but the Pearl River Delta will retain a lot of it, albeit in a different guise.

Peter Tirschwell is senior adviser of The Journal of Commerce. He can be contacted at 973-848-7158, or at ptirschwell@joc.com.