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How the PRD is facing the future

Soon after becoming head of the Communist Party in late 2012, Xi Jinping made a tour of Guangdong, his first official business outside Beijing.

In Shenzhen he put flowers at the statue that commemorates Deng Xiaoping’s visit to the city in 1992 and he planted a banyan tree, just as Deng had done during his visit 20 years before.

Xi Jinping: made the trop south from Beijing to Shenzhen on becoming Party head in 2012

Xi Jinping: made the trip south from Beijing to Shenzhen on becoming Party head in 2012

China’s president has a powerful personal connection to Shenzhen: his father was Guangdong’s governor during its early reforms, and one of the architects of Shenzhen’s special economic zone.

Political analysts seized on the symbolism of Xi’s visit, with some contrasting it to the first days in office of Hu Jintao – Xi’s predecessor – who had travelled to a town in Hubei famous for its role in the Communist revolution, where he made a speech lauding Mao Zedong.

Almost 40 years after the PRD took on its pioneering role in the country’s extraordinary transformation, Guangdong’s economy no longer stands out from the rest of China quite as distinctly as it once did. Yet Xi’s visit seemed to signal that Shenzhen and the region around it remain special. “We must keep to this correct path,” China’s leader told the media. “We must stay unwavering on the road to a prosperous country and people, and there must be new pioneering.”

In this section we look at why the region is going to remain at the forefront of changes in China’s economy, and outline some of the challenges that need to be overcome if the PRD is going to reach its full potential as the country adapts to a ‘new normal’.

 

Manufacturing matters

Why ought we to worry about the Pearl River Delta’s future as a workshop of the world when China is supposed to be ‘rebalancing’ away from an economy that’s long been viewed as too dependent on industrial investment and manufacturing? That trend looks to be well-advanced: in January HSBC economist John Zhu reported in a research note that services had now surpassed industry as the main driver of Chinese economic growth.

But this surprising news was mainly due to weaker manufacturing data, Zhu said, and he warned that it would be a mistake for the authorities to shift the economy too far away from its industrial base. Eventually the economy will move towards a greater share for services and consumption, but it needs to go through an extended phase of industrial upgrading first, he posited.

The reasoning is straightforward: absolute levels of industrial investment are already high but investment in capital stock per individual worker is relatively low, so there is good reason to think that further investment will give productivity a significant boost.

It also means that manufacturing will continue to play a crucial role in generating growth. Investment in new technology for factories and better training for workers – precisely the kind of policies that are now being promoted in the PRD – is still expected to deliver meaningful returns.

 

Going global

Guangdong’s factories have helped to forge its reputation as an export powerhouse. But until relatively recently they had done less to bring China’s own brands to the wider world. Much of their commercial contact with global customers was controlled through middlemen in Hong Kong and Taiwan, and the majority of their goods were sold under foreign labels, not as domestic brands.

Growth area: one of BYD's environment-friendly buses

Growth area: one of BYD’s environment-friendly buses

Today the role of the PRD is changing and so too are the aspirations of its leading firms. It helps that the ‘Made in China’ moniker has started to get a makeover, moving away from its low-cost, low-quality origins. At city level, reputations are being remade as well, like Shenzhen’s newfound status as a hotbed for consumer hardware, where prototypes can be converted into mass-produced goods in record time. And the region’s most influential companies are expanding in overseas markets too. Some of these firms are profiled in the next chapter as Pearl River Pioneers. Networking equipment from Huawei and ZTE provides the backbone for many of the world’s telcos, and both firms are moving into consumer-facing businesses with smartphone, laptop and tablet brands of their own. White goods makers like Gree and Midea are capturing global market share with their own brands of household appliances. DJI’s consumer drone business is taking off overseas. BYD’s electric buses are carrying passengers in North America, Brazil and Europe, and it hopes to sell more of its electric cars in foreign markets too.

Each of these companies is making a name for itself with its own products, rather than doing anonymous production for others. And despite their relative youth, they are already becoming global players. These new champions of the PRD are cost-competitive, especially with the economies of scale generated by China’s domestic market. They are constantly improving their product quality and they are committed to spending more on branding, research and design.

 

Still feeling special

Another reason that the PRD will continue to prosper is that it still has a pioneering role as far as policymakers are concerned, as witnessed in the launch of another set of special zones.

Guangzhou-Nansha, Shenzhen-Qianhai-Shekou and Zhuhai-Hengqin New District will all play roles in fostering the next phase of growth in Guangdong, as well as shaping some of the wider changes in the national economy in the years that follow.

Like their predecessors in the late 1970s and 1980s, the zones are prioritising deeper cooperation with the rest of the world, and hope to encourage innovation and industrial transformation. But there is a basic split of duties between the three, shaped primarily by their locations.

Qianhai, with the greatest emphasis on upgrading China’s financial services sector in its blueprint, seems likely to be the heaviest-hitter of the group, primarily because of its position between Hong Kong and Shenzhen, the most advanced cities in the region. The prediction is that businesses there will play a key role in deepening cross-border reforms in the capital markets, especially for renminbi liberalisation, which should strengthen Hong Kong’s position as the leading offshore centre for the Chinese currency.

To the west of Qianhai is Hengqin, an island separated by a narrow waterway from the Cotai Strip, the centre of Macau’s gaming activity. Macau has been one of world’s worst performing economies over the past year and a half, following a dramatic downturn in high-stakes gambling in the city, although there’s little prospect of its long-term position as Asia’s casino king coming under challenge. The problem is that space in the gaming hub is severely constrained, but officials in Hengqin say they can speed up the diversification of Macau’s economy by providing new opportunities for a wider range of businesses. Although gambling won’t be permitted on mainland Chinese soil, Hengqin plans to capitalise on its neighbour’s reputation by picking up tourism projects of its own, and providing wider access to leisure and entertainment for the millions of people already visiting Macau.

Sitting a little further north is Nansha, the largest of the three new zones. Nansha’s main advantage is its position at the heart of the Pearl River Delta, only a short drive from the provincial capital, Guangzhou. It seems most focused on capitalising on its port facilities by establishing itself as a new hub for maritime logistics, shipbuilding and ship insurance. Local planners are also wooing hi-tech electronics firms, medical device companies and carmakers, promoting the benefits of their heavy investment in road and rail links.

“We are building a ‘one-hour life cycle’ encompassing Nansha, Hong Kong and Macau,” Guangzhou’s then mayor, Chen Jianhua, explained to the China Daily last year. “Our goal is to make sure that it takes no more than one hour for people to commute to work within the region. They can leave their home in the morning and be back in the evening.”

 

Roads and rivalries

An advanced network of roads and railways is a key feature of the PRD’s economic heft. The transport infrastructure along Guangdong’s coast is already some of the best in Asia, although the region continues to be even more knitted together as its urban area spreads.

There are seven international ports in the PRD, led by Shenzhen and Hong Kong, and plenty of international connections at airports in Hong Kong, Guangzhou, Shenzhen and Macau. Inside China, new bullet trains connect Guangzhou and Shenzhen with other cities on the eastern coast, while another high-speed line heads north through Hunan province and onwards all the way to Beijing.

48 minutes

The journey time between Hong Kong and Guangzhou, once Hong Kong’s stretch of express rail is ready

The investment in new expressways and rail networks around the Pearl River has also been substantial, in pursuit of the policy goal of ensuring travel times between any of the major urban areas is less than an hour.

Shorter journey time is one of the main benefits envisaged for a new Express Rail Link between Hong Kong and Guangzhou. Designed to plug Hong Kong into China’s national high-speed network, the much-discussed link will connect Hong Kong with Guangzhou in 48 minutes, with stops in Shenzhen and Dongguan along the way. But progress on Hong Kong’s stretch of high-speed line has slowed to a crawl and it failed to meet its completion deadline at the end of last year. That’s been embarrassing for the city’s mass transit provider, which has a reputation for excellence in engineering. It now says the new link won’t launch until the third quarter of 2018 at the earliest, amid political wrangling over the ballooning cost of the project.

Indeed, the politics of transport encapsulate some of the challenges facing the PRD, where any sense of communal identity must first overcome the competing ambitions of each of its individual cities.

Huge projects like the Hong Kong-Macau-Zhuhai Bridge – a 42km-combination of tunnels, bridges and man-made islands bringing Hong Kong and the western banks of the Pearl River Delta into road contact for the first time – offer an example. The project has taken years to come to fruition, with approvals needed from the governments of Hong Kong and Macau, the authorities in Zhuhai’s special economic zone, Guangdong’s provincial government and the central government in Beijing. With so many different interests and jurisdictions, the debate about how to finance the bridge has also been a difficult one. No wonder, perhaps, that Gordon Wu, the Hong Kong businessman who has championed the crossing for most of his career, once likened the project to “having five mothers-in-law”.

Under construction: the new bridge between Hong Kong, Zhuhai and Macau

Under construction: the new bridge between Hong Kong, Zhuhai and Macau

Construction of the bridge is also behind schedule, but when it opens next year it will serve as the first of Hong Kong’s road links into mainland China that doesn’t run through Shenzhen.

Shenzhen’s planners are pushing for a direct crossing to the western Pearl River Delta of their own (from near the city’s international airport to the city of Zhongshan) just 20 miles north of the Hong Kong-Zhuhai-Macau link.

All of this new investment will be positive for transport times across the region. But it is also a symbol of the competitive instincts of the different cities, which all want to grab a larger share of the regional PRD economy.

Presumably the new Shenzhen link will alter the economics of the bridge connecting Hong Kong and Zhuhai, drawing some of its potential traffic further north. Even so, it was objections from Guangzhou that are said to have held up Shenzhen’s plan, after concerns that the crossing would obstruct shipping on its way to Nansha, Guangzhou’s preferred manufacturing and logistics hub.

The Shenzhen-Zhongshan project now has the go-ahead, although it seems likely to incorporate a sea tunnel as well as a bridge, perhaps to mollify some of the opposition to the plan in the provincial capital.

In another sign of local rivalry, Guangzhou’s policy chiefs were celebrating in February when the State Council approved their plans to cement the city’s position as a trade centre and transportation hub, signing-off on its target to have a population of 18 million residents by the end of the decade. Local analysts described the announcement as a sign that Guangzhou will try to expand its influence over nearby cities, including Hong Kong. Previously, the call to develop Guangzhou’s port and aviation facilities hadn’t enjoyed Beijing’s wholehearted support, partly due to concerns about the impact on public opinion in the former British colony. Now the mood seems to be shifting and Guangzhou may assert more of its political authority, wresting back some of the prestige and promoting itself as the leading city in the PRD.

 

Mind the gap

Other commentators have warned that the Qianhai financial zone in Shenzhen could challenge Hong Kong’s regional role in financial services, especially if the new district secures special privileges in cross-border capital flows.

The counterargument is that Qianhai will take years to threaten Hong Kong and that it seems more likely to serve as a complementary financial hub, offering space for Hong Kong’s financial services industry to expand.

The debate about the impact of regional integration is similar in the property sector, where critics of Hong Kong’s sky-high property values contend that prices can only fall as the Pearl River Delta becomes a more integrated economy.

To some degree the gap with Hong Kong is already narrowing, especially in Shenzhen, where property prices have increased more than 500% over the past decade, surpassing Beijing and Shanghai as the most expensive place in China to buy real estate.

500%

Increase in Shenzhen’s property prices over the last 10 years

But homes and apartments in the rest of the Pearl River Delta still cost significantly less than in Hong Kong, prompting questions about what happens to the city’s real estate once it gets easier to live and work in cheaper parts of Guangdong.

Might not some of Hong Kong’s residential real estate fall in value when it becomes easier to commute over the bridge from nearby Zhuhai, for example? And as transport times to Guangzhou and Shenzhen are cut to less than an hour, why pay so much more for a tiny apartment in the former colony? For a Hong Kong middle class that has been priced out of the property market, a new option will be to buy a more reasonably priced apartment or house in Guangzhou and commute – much as a financial services worker might buy in Hertfordshire and travel to work in London.

On the flipside the richest people in the PRD may wish to have a base in Hong Kong. It’s reckoned shorter transport times and smoother immigration processes will spur more southbound traffic as mainlanders come in and out of Hong Kong in greater numbers.

After all, living in Hong Kong – and sending your kids to an international school – appeals to many businesspeople from China. The city’s real estate sector has been such a popular investment choice that the Hong Kong government imposes a 15% surcharge on property sales to non-residents. Buyers from mainland China accounted for as much as 40% of purchases of new property before the tax was levied, according to JLL, the real estate services specialist, although the share had fallen to about 10% last year, as the Chinese broadened their horizons to property markets in the UK, the US and Australia.

Closer connections with the mainland have spurred prices in commercial property in Hong Kong, JLL reports, and rents and values have spiked because of the influx of Chinese visitors. Hundreds of mainland corporates have been taking new office space in the city, while JLL is also predicting a boom in warehousing facilities, because Chinese companies will demand the higher quality of Hong Kong’s logistics services as they move up the value chain.

 

Finding a role

Predicting exactly how the Pearl River Delta is going to change is no easy matter. An easier forecast is that change will happen quickly in a region where rice fields are already being replaced by robots, and sweatshops are giving way to smart manufacturing.

Simply put, the Pearl River Delta is undergoing its second great transformation (and in less than a lifetime). Partly that’s because many of the forces that boosted its dramatic emergence – industrialisation, booming world trade, cheap labour and low-cost manufacturing – have been fading. Yet it’s also a mark of the region’s impressive achievements, as its best companies go global and its pillar industries undergo upgrading and new investment.

Trumping Tokyo as the world’s biggest ‘city’ – to cite that World Bank study again – the PRD is already home to a vibrant generation of manufacturers and consumers. Boundaries will continue to blur across cities and industries as urbanisation increases. But a basic separation of duties might look something like this: Hong Kong holds on to its position as the region’s financial and professional services hub, taking on the role of a London or New York; Macau’s contribution is closer to that of Las Vegas, a leader in leisure and entertainment; Shenzhen stands out as the Silicon Valley, a launch-pad for the future generation of Chinese start-ups and a focal point for investment in tech and consumer hardware; Guangzhou exerts its influence as the political capital, regional transport hub and headquarters for the province’s larger state-owned firms; and cities like Foshan take on the mantle of modern manufacturing by smaller firms, infused with the spirit of Germany’s Mittelstand.

Just like today, competition between these cities will be constant and coordinating a common approach that benefits them all will be a challenge.

But policy guidelines will only get the PRD so far. It’s just as likely that the animal spirits that generated Guangdong’s first great boom will play their own role in stimulating its economy’s second act, as this great sprawl of cities and sectors combines into something much greater than its constituent parts.


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