Why the PRD matters
China’s better known cities, like Beijing, have hundreds of years of urban experience, and deep-rooted histories. The PRD’s journey from rice field to economic powerhouse has been very different. Time-wise, the transition in the Pearl River Delta has been much more compressed, while geographically its urban area is more dispersed
The PRD’s population is almost the same size as that of the UK
The end result is extraordinary, nonetheless. Many of the PRD’s busiest districts were rural backwaters less than 50 years ago. Now, the region is home to 57 million people – which is to say it has almost the same population as the UK. As the World Bank reports, its urban area sprawls across a region more than twice as big as Shanghai, four times the size of Jakarta, and five times greater than Manila – all of which are regarded as huge cities in their own right. And there is little sign that the region’s influence is fading – indeed, it’s the opposite: the changes in the Pearl River Delta are harbingers of how China may change in the years ahead.
The PRD’s trading history
For generations of foreign merchants wanting to do business with China, the only port of call was Guangzhou (known at the time by English-speakers as Canton). In the hundred years until the outbreak of the first of the Opium Wars in the mid-1800s, the city maintained a stranglehold over China’s commerce with the outside world, with foreign merchants forced to live and trade from small islands like Shamian.
That exclusive position in the China trade diminished in the second half of the nineteenth century as other ports were opened to foreign business, most notably Shanghai (as well as the likes of Xiamen and Qingdao).
In the years after Mao’s rise to power, Guangzhou regained its historic role as the commercial contact point between China and the rest of the world, playing host to the China Import and Export Fair, or the Canton Fair as it is better known.
Launched in 1957, the Fair soon became a crucial source of foreign exchange earnings for the Chinese government and was important enough to be kept running through the tensest moments of the Cultural Revolution in the late 1960s. Visiting salesmen did their best to adjust to the fervour of the period, with Japanese executives incorporating “Long Live Chairman Mao” alongside their company brand names, and occasionally breaking into revolutionary song. Years later, state news agency Xinhua reported that a Japanese trade minister impressed his Chinese hosts with a rendition of Maoist verses remembered from his previous visits to the Fair.
Jürgen Kracht, who runs Fiducia, an advisory business for international firms with China operations, first went to the Fair in the 1970s, describing it as “the only window for foreign companies to do business”. Back then it was held twice a year – for four weeks each time – but the exports on offer were pretty unimpressive, he recalls, including basic goods such as shirts and socks, simple wooden toys and firecrackers.
The Cantonese are said to be a mix of peoples who emigrated south and married with indigenous groups that originated from the Yue kingdom that once extended across much of southern China.
Today the definition has narrowed to those born in Guangdong (additionally millions of overseas Chinese are ethnically Cantonese because of the long history of emigration from the province).
Until the 1980s the Fair was the only place where Chinese trade officials met foreign sellers to discuss the country’s import needs. All of the negotiations between foreign firms and Chinese officialdom occurred there, brokering deals to import the likes of petrochemicals and machine tools.
“Based on ‘end user’ demands these guys put together a shopping list a few months before the Fair began,” Kracht explains. “Then representatives from companies like ICI and BASF would come to China. They would each be given a table and the officials would move between them, looking for the best price for the items they wanted.”
Initially much of the business was in industrial goods like specialist chemicals, dyestuffs and steel – items that the Chinese weren’t able to produce themselves. The negotiations could be baffling, Kracht remembers. “Often the procurement people knew nothing about the purpose of the products they were trying to buy. We would ask them: ‘Why do you need these dyes, what are they for?’ But they wouldn’t know, saying only that they had been instructed to get them!”
The international firms were rarely present for the haggling, choosing to be represented by specialist middlemen from Hong Kong, like Kracht’s employer of the time. “It seems ironic from today’s viewpoint, when China is regarded as a must-have market,” he acknowledges. “But back in that era it was different. Most Western firms weren’t very interested in China because the market was too small.”
By the 1990s the Fair’s popularity was growing fast and the trade officials began to be replaced by the actual manufacturers, who exhibited their goods. As China’s economy opened up, international buyers started to come to Guangzhou in much greater numbers too. By now the event had moved into a purpose-built exhibition hall in the city.
The number of overseas customers that attended last November’s Canton Fair
Today the Fair’s strategic importance is declining. Multinationals have their own operations in China and no longer rely on Hong Kong-based middlemen to help them do business. Commercial deals can be struck in hundreds of other towns and cities, and the rise of e-commerce (notably thanks to Hangzhou-based Alibaba) has bitten into the trade show business.
That said, Guangzhou’s Fair has kept its position as China’s largest trade exhibition, with an increasing share of visitors from emerging markets in Asia and Africa. But overall attendance numbers have been falling: the most recent session last November attracted 177,000 overseas customers, down from the record of 210,000 in 2012.
A signpost for China as a whole: the PRD’s role as a pioneer
The policy changes that helped the Pearl River Delta prosper over the last 35 years have now spread more widely, opening up trade and investment opportunities in other parts of China. But the region’s special status hasn’t disappeared entirely and it is well positioned to develop faster than other parts of the country because it was first to experience the dividends of the reform era.
These advantages are highlighted by Guangdong’s reputation as a trendsetter for the rest of the country, with a pioneering ethos that stands out in broader trends like urbanisation, innovation and investment.
It extends too into specific initiatives, like the internationalisation of China’s currency, the renminbi. Hong Kong has played a key role in the introduction of the renminbi into the international markets, for example, and trading companies from the PRD have been the leading beneficiaries of efforts to promote the currency’s usage outside China.
One of the new special zones – in the Qianhai district of Shenzhen – is expected to launch another round of cross-border reforms in the capital markets in the coming years.
The situation is similar for some of the other trends set to shape China over the next generation, including the transition towards an economy driven by higher-value manufacturing and service industries. The first province to prosper from the economic model based on cheap land and labour, Guangdong is also the first to move away from it, ditching its oldest factories and replacing them with more sophisticated, sustainable businesses in sectors like information and communication technology, electrical machinery, chemicals and electric carmaking.
The number of smartphones that Shenzhen-based tech giant Huawei shipped last year
It’s the same story with innovation, where company spending on research and development as a share of gross domestic product is greater in Guangdong than anywhere else in the country. Businesses in Shenzhen are investing the most of all at an estimated 4% of the city’s GDP, a ratio that brings it close to tech leaders like South Korea and Israel.
Higher incomes also mean that the PRD’s consumers will be at the forefront of China’s push towards more of a consumption-driven economy. Guangdong as a whole has ambitions to become a ‘moderately prosperous society by 2018’, which is two years ahead of the national target.
And whereas the goal in the late 1970s was to attract capital and expertise from overseas, there is a new focus today on how homegrown companies are going to prosper in international markets.
Firms like Huawei and ZTE are already having a global impact in the telecoms industry; Tencent, a massive presence in social media across China, looks set to become a major player in mobile commerce; and brands like the battery and carmaker BYD, the drone producer DJI and the smartphone manufacturer OnePlus are all garnering international attention.
The region’s rivals
Other parts of the country might protest (notably, the metropolitan area surrounding Chongqing) but the Pearl River Delta only has two main challengers as China’s foremost economic heavyweight.
The first is the Yangtze River Delta, an area in the east of the country concentrated around Shanghai but reaching out across the provinces of Jiangsu and Zhejiang.
The second is the Bohai Rim. Home to the capital city of Beijing and the municipality of Tianjin, it also extends into the provinces of Hebei, Shandong and Liaoning.
Traditionally the Yangtze River Delta has been richest, burnished by the halo effect of Shanghai, the country’s de facto commercial capital. Shanghai was once the heart of Asia’s international trade and commerce, and it is now trying to regain its title as the region’s leading hub for trade and finance.
The year that proposals for special economic zones in the PRD were formulated as part of Deng Xiaoping’s Reform and Opening Up policy. Shenzhen’s SEZ was established in May 1980
For most of the Mao era the Bohai Rim also did better economically than Guangdong, drawing on the more plentiful natural resources in the north of the country and hosting many of the heavy industries that were the focal point of national economic policy in the 1950s, 1960s and 1970s. Tianjin emerged as a leading centre for the petrochemical and metal industries, for instance, while Beijing got its boost as the political and cultural centre of the country, with industrial sectors and technology parks forged on the patronage of the leading think tanks and universities in the capital.
In contrast, Guangdong wasn’t regarded by Mao’s planners as a key player in the national economy. Too distant from the capital and China’s industrial heartlands, it wasn’t well linked to the interior and it lacked natural resources.
Admittedly, it enjoyed a disproportionate share of China’s international trade because of its proximity to Hong Kong. But the province’s reputation was more as an agricultural backwater, with an economy that wasn’t strong enough to prevent many of its poorer residents from going overseas in search of better fortune (go to any major city in the world and you are likely to find a Chinese restaurant serving Cantonese food, a reflection of the province’s vast diaspora).
The PRD’s moment
The region’s rebirth began in 1978 after Deng Xiaoping had consolidated his position as paramount leader in the years following Mao Zedong’s death in 1976.
Deng was desperate to revive China’s moribund economy and one of his starting points was a tour of Guangdong. During his visit local officials complained about shortages of the hard currency they needed to pay for foreign equipment.
He endorsed the idea of creating collection centres for surplus fruit and vegetables, which could then be sold to nearby Hong Kong and Macau. Soon the plan had grown to include factories that could make goods for export. This meant that investment and expertise was needed from outside China, and by 1979 the plan to create special economic zones was taking shape, with three of the four new zones to be located in Guangdong.
Suddenly the province’s former disadvantages were looking more like benefits. Deng and his fellow leaders didn’t want to risk disrupting more established industrial centres like Shanghai, but there was less to lose in Guangdong, where the economic base was more threadbare. Another plus point: the new zones were far enough away from the political heartlands of Beijing to be quarantined if the experimentation went awry.
Also, significantly, there was the realistic hope of attracting new investment from some of the wealthier overseas Cantonese business folk who had emigrated in the past, primarily to Hong Kong (such as billionaire Li Ka-shing) and to parts of Southeast Asia (like the father of Thai tycoon Dhanin Chearavanont of the CP Group).
“[The Party] has no money so we will give you a policy that allows you to charge ahead and cut through your own difficult road,” Deng told Xi Zhongxun, Guangdong’s governor of the time (Xi’s son Jinping is China’s current leader and his first official trip after getting the top job was – symbolically enough – to Shenzhen).
The two Party elders had just fired the starting gun for the PRD’s transformation into a modern economy, in which it would emerge as China’s new workshop of the world.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.