The importance of the Pearl River Delta in China

Introduction

As the pioneer of reform and opening-up and an important economic hub of China, the Pearl River Delta has played a remarkable leading role and had an important strategic status in the overall effort of China to pursue economic and social development.

Guangdong and in particular the Pearl River Delta has seen phenomenal growth since the late 1970s when Deng Xiaoping implemented his “open door” economic reform policies. Long considered the southern gate to China, the Pearl River Delta was designated as the open door to China through which the country would attract foreign direct investment and make its move towards a more market oriented economy. Over the last two decades, the region has done just that, averaging an annual growth rate of 15% of real GDP, which has elevated the region to the forefront of prosperity in China. Equally impressive is the amount of FDI that the delta has accumulated over that same time period.

Since 1978, private enterprise, foreign investment and international trade have been consequently more mature and developed in the PRD compared with the rest of China. Chen Yun, an ally and supporter of Deng Xiaoping’s early market reforms, may be best known for suggesting that the Chinese economy should operate like a “bird in a cage,” with the cage representing socialism.  The cage, he said, “Should not be too small for the bird will suffocate yet the bird must be caged, if not it will fly away.” Because of this ideology, it has made the PRD the wealthiest and fastest growing in the entire Mainland.

It is estimated that 59,000 Hong Kong enterprises have their factories in the Mainland, of which around 53,000 factories are located in a cluster in the Pearl River Delta. Such a concentration of production provides job opportunities for 1.5 million Hong Kong citizens and 10 million people in Guangdong, and injects a tremendous contribution to the economic development of the Pearl River Delta.

And it seems the euphemism is not lost on today’s political leaders as Wang Yang, the Communist Party secretary of Guangdong is also relating the economy to a bird in a cage. However this time Wang is pushing to “empty that cage so that new birds can come in.” In other words, Wang is advocating changing the basic development model of Guangdong from one based on cheap land and labor to a model based on adding value, environmental responsibility and sustainability.

This whole idea revolves around the small to medium sized enterprises that have been the cornerstone to the delta’s phenomenal growth ever since Deng opened China to the world in the late 70s. And they are the reason for Guangdong’s transformation into the powerhouse that it is today. Therefore, the idea is to “free the birds from their cage” in this case the SMEs and “replace them with new birds” or rather; upgrade industries in order to strengthen the long-term competitiveness of the region.

This paper will offer a look at the development of industry in the Pearl River Delta starting with a look at the area’s history, then onto some of the challenges facing growth followed by government policies designed to revitalize and sustain growth in the PRD so as to keep its powerhouse status. By providing an overall picture of the PRD since the market reform period until present, the reader will hopefully gain further insight as to the direction the PRD will take in the future and how it will shape China’s economic and social development.

PRD – Industry Overlook

Beginning Development of PRD

Guangdong and in particular the Pearl River Delta has seen phenomenal growth since the late 1970s when Deng Xiaoping implemented his “open door” economic reform policies. Long considered the southern gate to China, the Pearl River Delta was designated as the open door to China through which the country would attract foreign direct investment and make its move towards a more market oriented economy. Over the last two decades, the region has averaged an annual growth rate of 15% of real GDP that has elevated the region to the forefront of prosperity in China. Equally impressive is the amount of FDI that the delta has accumulated over that same time period.

The Pearl River Delta had the logistical advantage to the inner provinces owing to its geographical proximity to major international shipping routes, which allowed it easy access to the world’s economies. For this reason, in the late 70s three of four Special Economic Zones (SEZs) were established in the provinces of Guangdong with the other in Fujian. Xiamen was selected in the Fujian province along with the cities of Shenzhen, Zhuhai and Shantou in the Guangdong province to be the sites of the newly formed SEZs. Shenzhen was strategic due to being immediately next door to Hong Kong, which was at the time still a British colony. Zhuhai was next to Macau and Shantou in the eastern part of Guangdong was selected for its proximity to Taiwan.

Besides the establishment of the SEZs within the province, the central government also granted the local government of Guangdong greater independence with respect to the designing of its economic policy. This economic separation from the rest of the country allowed a more rapid transition to a market economy.

At the height of ideological thought during the 1960s and 70s, Beijing’s economic policy failed to include the Guangdong province. While the central government prepared for war and focused on its third front policy, which repositioned industry away from the coastlines in favor of the more insulated inner provinces, Guangdong went virtually untouched. State owned enterprises were few and the industry in the area was considered to be lacking and in disarray. This neglect actually worked in Guangdong’s favor as country opened up to reform policies. Fewer SOEs meant less trouble had to be spent tearing down and restructuring inefficient state run industry – a burden still hampering areas of China even today.

Another reason behind the Pearl River Delta’s success lies in its population, which has strong ties to major Chinese communities around the globe. The wealthy among the overseas Chinese have been ardent supporters of Guangdong’s economic miracle. Having Hong Kong, the region’s biggest source of FDI, as its immediate neighbor cannot be emphasized enough. “In 1981 about 40% of Hong Kong’s population was said to have been born in Mainland China. And in the early 1990s about 80% of Hong Kong’s population were either born in Guangdong or could trace its family roots to the neighboring province.”

Add too to this remarkable list the fact that Guangdong was blessed with an endless supply of cheap labor supplied by migrants from inner provinces as well as relatively inexpensive land in which to build up enterprise and it’s not hard to understand the reasons behind the Pearl River Delta’s success.

Distribution of Industry in the PRD 

The PRD region in particular has been at the vanguard of China’s economic reforms that began in 1978 and over the past 3 decades has thrived to become an economic powerhouse for China. Popularly known as the world’s factory, the PRD over the years has established itself as a low value-added, labor-intensive manufacturing base with such industry clusters as: textiles and apparel, footwear, plastic products, electronic and electrical goods, computers, electronic information, toys, etc. High technological industries have been much slower to develop but have been making great inroads since the mid-nineties with such industries as hi-tech electronic equipment and machinery, chemical products and motor vehicles.

A broad range of industrial clusters has developed across the PRD’s nine municipalities: Guangzhou, Shenzhen, Foshan, Zhuhai, Jiangmen, Zhongshan, Dongguan, Huizhou and Zhaoqing. The east side of the delta focuses on electronics and IT products while household appliance products dominate the industries on the west side. This “clustering effect” of the industries, whereby industries gain a competitive advantage by concentrating in close proximity to one another, has contributed greatly to the success of the PRD. “In the PRD, a supply chain has taken shape, where it is convenient to source all parts, components and accessories of a product, so that orders could be completed quickly. When upstream and downstream industries are clustered, resources are consolidated and specialization is deepened. Thus, efficiency is enhanced and cost reduced.” Industrial clusters across the nine municipalities include the following:

• Guangzhou – Guangzhou is the provincial capital and regional hub for southern China. Recently the area has been moving towards high-tech and heavy industries such as the automobiles. Honda, Toyota and Nissan have all set up shop in Guangdong. Other high-tech and heavy industries can also be found in the city, including machinery and equipment, petrochemical, electronic information, pharmaceutical, building materials, etc.
• Dongguan – Dongguan is the world’s processing and manufacturing base, as well as an important export base in China. One of the strongest pillar industries to be found in the Dongguan is the electronic information industry; other prominent industries include the production of toys, household electrical appliances and printing.
• Shenzhen – Shenzhen has a very strong industrial sector mainly due to its geographical advantage of being the only municipality bordering Hong Kong. It is still a large manufacturing base for traditional industries but has seen high-tech development as well such as electronic info and petrochemicals. It is also upgrading its logistics sector, and to establish itself as a sourcing center for multinational enterprises. (China South International Industrial Materials City, August 2004) [electronic info products include” printer, telephones, video recorders and such]
• Zhongshan – Zhongshan is located on the west bank of the delta, it is rich in resources and has easy port access. It is noted most for its production of redwood furniture, casual wear and domestic appliances.
• Foshan – Foshan is the third-largest manufacturing base in the PRD.  Key industries in Foshan include textile and apparel, shoe making, leather products, metal products, household electrical appliances, furniture, aluminum materials, ceramics, etc.
• Jiangmen – One thing to note about Jiangmen is their particularly strong motorcycle industry.
• Zhuhai – In Zhuhai the electronic information industry and electrical machinery manufacturing are the two biggest industries for growth. However, recently biomedicine and medical equipment manufacturing as well as the software industry have been making great strides. Zhuhai is also putting a lot of effort into developing heavy industries like petrochemicals, steel and ship making.
• Huizhou – Huizhou is an important manufacturing hub for electronics and IT products with output being among the highest in the world. It’s also one of biggest producers of computer circuit boards in Asia.
• Zhaoqing – Most notable about Zhaoqing is that it has developed a number of industrial zones such as the Zhaoqing New Hi-tech Industry Development Zone which has been responsible for fostering some key enterprises such as the Fenghua Group, Xinghu Group and Blue Ribbon Group.

The Role of FDI in the Development of Guangdong’s Pearl River Delta 

Since the early 80s, the Pearl River Delta has seen unprecedented growth that has thrust the delta to the top of the most prosperous areas of China. With an annual growth rate of almost 15% the region has topped the national growth rate of around 8%. Along with the skyrocketing development has come a flood of FDI. In the 80s FDI growth was gradual but accelerated rapidly in the 90s. “The increase in 1992 and 1993 resulted from Deng Xiaoping’s tour of Southern China when he reaffirmed the open-door policy and encouraged faster reform.” The Asian Financial Crisis in 1997 saw FDI flat line but once again took off in the early 2000s.  Once again financial crisis, this time on a global scale, in 2008 brought down FDI figures. After decades of economic reform China has become one of the leading destinations for FDI with Guangdong taking a large share of the inflow. According to the Organization for Economic Cooperation and Development’s report on the ‘Foreign Direct Investment in China’, Guangdong province absorbed almost one half of the FDI inflow during the 80s and more than a quarter of the inflow during the 90s.

International Sources of FDI to Guangdong 

One of the reasons that Deng and other top leaders selected Guangdong province was for its geographical location. Shenzhen is located next door to Hong Kong, Zhuhai near Macau and Shantou is situated between Hong Kong and Taiwan. With all of them being seaports they were in a good position to expand trade with the neighboring developed economies. They all had the advantage of being able to offer cheap land and labor to countries such as Hong Kong, Macao, Taiwan, Singapore, Malaysia, and Thailand. If all went according to plan and investors from these economies were able to turn a profit then perhaps other investors from larger economies like Japan, Korea and Western countries could also be wooed into doing business with China.

East Asia is Guangdong’s strongest source of FDI with Hong Kong clearly in the lead. Taiwan, although appearing lower on the list, could very well be the second largest investor to China and the Guangdong region “In fact, Taiwan’s investment in China could be two to three times larger than publically acknowledged.” This fact explains the two surprising entries to the list – the Virgin Islands and Samoa. It is common for Taiwanese investors to use the countries of Hong Kong, the Virgin Islands and Samoa among others to sidestep multiple restrictions put in place by Taiwanese authorities.

Other big global investors have been the United States, Japan and Europe. “It is worth pointing out that renowned Foreign Invested Enterprises (FIE) from developed countries have been the primary investors in China, and they fund large-scale capital and technological intensive projects. The presences of these FIEs, such as IBM, GE, GM, Motorola, Sony and Samsung, are particularly significant to China since it signals the greater possibility of even more future foreign investment.”

Major Types of FDI in China 

The main types of FDI in China as well as the Pearl River Delta region occur through joint ventures, cooperative ventures and wholly foreign owned enterprises. Before 2001, major restrictions on wholly foreign owned enterprises kept their numbers to a minimum. However, since China’s acceptance into the WTO those restrictions have been lifted and wholly foreign owned enterprises have overtaken the previously preferred joint ventures to become the predominant form of FDI.

By being wholly foreign owned, enterprises can avoid complications with joint ventures and firm up their corporate control, improve overall efficiency and better utilize corporate resources. “Even at those joint ventures, foreign shareholders have tended to increase their investments to wield greater corporate control.”

Distribution of FDI by Industry 

Most of the investment in China’s coastal areas has been in the form of greenfield investment, “where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up. In addition to building new facilities, most parent companies also create new long-term jobs in the foreign country by hiring new employees.” And most of that FDI has been funneled into the secondary industries like manufacturing. Guangdong is very strong in the light manufacturing industry. “A majority of FDI has gone into the manufacturing industry because China possesses a competitive edge thanks to its lower costs of production and relatively powerful ability to supply supporting parts.”In recent years, however, much emphasis has been put on developing heavy, new and high technology industries. “The share of heavy industries in gross industrial output increased from 47.1% in 2000 to 61.6% in 2007. The output value of high technology industry above designated size was RMB 1,475 billion in 2007, about 5.4 times of which in 2000.”

More foreign investment is also being focused on the tertiary industries with the real estate industry absorbing the majority of the funding. As the market in China matures, the hope is to develop Guangdong “into a regional financial center, modern logistics hub in southern China, as well as an international business travel and shopping center.”

Spillover Effects of FDI on Innovation in Industry 

One of the primary reasons Deng Xiaoping decided to open up China to the outside world was to allow China to adopt new technologies and ideas so as to put the nation among the advanced countries of the world. By setting up industrial and economic zones along China’s eastern coast, Deng was hoping to invite foreign direct investment. The inflow of FDI has brought with it more than just the accumulation of capital and the expansion of global trade. It has also had a big hand in transforming the economy and has introduced positive effects on innovation within China through many avenues.

As for the economy, FIEs have also had a big hand in transforming China from a centrally planned economy dominated by state owned enterprises (SOE) to a market oriented one in which firms have various forms of ownership.

The presence of FIEs in the region also contributes towards the rise in local competition, where SOEs and local firms are forced to become more efficient by investing more in infrastructure and human capital. “Interaction between the FIEs and local government officials as well as local businesses also helps facilitate the development and adoption of rules and the laws suitable for a market-oriented economy.”

As for industry, one such avenue for innovation is reverse engineering. Foreign firms import new technology and products which can then be studied through reverse engineering by local firms which in turn can develop improvements and then apply newer innovations to that technology. Another spillover effect of FDI is with the transfer of labor, where employees at all levels from management to ordinary workers learn new technological skills at foreign firms and eventually leave to begin their own companies or join the ranks of local rival companies. This transfer of training knowledge benefits the society as a whole.  Also by the presence of foreign technology and ideas in the region, it can have a positive ‘demonstration effect’ on local innovators to come up with new products. This also aids in the reducing the amount of trial and error that is put into developing new products. “Such a demonstration effect tends to be strong for minor innovations and significant in countries such as China where there was a lack of product variety prior to entry of foreign investors.”

And finally, a vertical spillover effect can take place when FDI firms transfer technological know-how through licensing of technology to local firms and through training of their staff. The close proximity of the FDI firms with their local contacts also helps speed up the transfer of this know-how. The clustering effect that is seen among industries in the Pearl River Delta makes for an ideal environment for the transfer of technological ideas and innovations.

It used to be that China was seen as a place for foreign corporations to dump their outdated technologies, not so true anymore as foreign firms have increasingly adopted new technologies to maintain their market shares. “With the number of patents rising annually at about 30%, foreign firms have been putting more focus on localizing their research and development capabilities.”

Foreign R&D centers are springing up in rapid numbers in China. “According to the Chinese Ministry of Commerce, multinational corporations have established more than 1200 R&D centers in China as of 2010, mainly for telecommunication, bio-medicine, software development and so on.” But as multinationals increase their research and development in China, local companies are rising to challenge them. The Chinese are working feverishly to change the old expression, “Made in China” to “Designed in China” and with the spillover of state-of-the-art technologies and highly skilled personnel becoming more rapid the days of China competing as an equal among the multinationals is approaching fast.

Development of the Nine Targeted Industries 

One of the Guangdong Provincial measures to better coordinate industrial development within the Pearl River Delta came out of the Guangdong’s 11th Five year Plan. This industrial blueprint was to put primary focus on a few of the large industries within the region, which have shown strong innovative capability and have established their own brands. “Emphasis would also be placed on building strong regional brands across the province, upgrading the standards of the industrial clusters, building more specialized production bases, and improving the existing infrastructure such as R&D, logistics, communications, quality control systems, etc.”

The focus was to be on nine major industries, which included three emerging industries, three traditional industries and three industries with high potential for growth. The three emerging industries are electronic information, electrical machinery and special purpose equipment and petro-chemical industries. The three traditional industries include the textile and garments industry, food and beverages as well as the construction materials industry. The three industries with high potential growth include logging and papermaking, the pharmaceuticals and the motor vehicle industries.

From 2001 to 2005, the gross industrial output value of the nine major industries growth rate was 23.8%. Looking to the growth rates for three emerging industries, three traditional industries as well as the three high potential industries we can see a jump of 27.7 %, 13.9% and 23.1% respectively.

A Breakdown of the Nine Targeted Industries 

The total industrial output value for the three emerging industries stood at RMB 1,863.3 for the year 2005. We can see that Shenzhen is by far the strongest of the PRD cities when it comes to electronic information with an industrial output value of 573.5 billion RMB. Electronic information revolves around the production of computers, software and telecommunications. Guangzhou is the clear winner in Petrochemicals 104.5 billion RMB output value and Shenzhen along with Foshan are both dominant in Electrical Machinery with 114 and 105 billion RMB output respectively.

As for the three traditional industries of textiles and garments, food and beverages and building materials industries, their combined industrial output for 2005 was RMB 507.3 billion with an annual growth rate of 13.9% over the last five years. The cities with the largest output for textiles and garments were Dongguan, Guangzhou, Zhongshan and Foshan with around 33 billion RMB worth of output. We can see that Foshan is king of the Building Materials industry with 47 billion RMB output value. And for the food and beverages industry, Guangzhou is clearly the strongest topping out at 43 Billion RMB.

In 2005, the industries for high potential growth – logging and papermaking, medical and pharmaceutical products, and motor vehicles, “totaled to RMB 248.6 billion.” The motor vehicle industry’s growth between 2000 and 2005 was phenomenal with a 34.4% growth rate. Guangzhou which has seen the major auto manufacturing companies of Honda, Toyota and Nissan all setting up shop within its limits, is clearly leading the PRD in the manufacture of motor vehicles with a total output value of RMB 108 billion. Also worth noting is, “Guangdong has the highest ownership of vehicles for personal use and for carrying passengers and goods, and motorcycles.”As for the other high potential industries of logging and papermaking and medical and pharmaceutical products, we see Dongguan leading the former with a total output of RMB 20 billion and Guangzhou leading the latter industry with a RMB 8 billion total output for the year 2005.

The PRD model

For the last twenty years, the economical development of the Pearl River Delta (PRD) has been very successful. The success of the region is a model par excellence for China’s export-oriented economic growth. When we speak of the “PRD model”, we mainly talk about a typical manufacturing firm, which processes imported, semi-finished goods or raw materials based on foreign-patented technology and finally export the finished products to foreign markets. Furthermore, with almost unlimited supply of cheap migrant labor from the less developed inland provinces, foreign investments, the PRD enjoyed an advantage as China opened itself to foreign economies.

In the past decades, the PRD has been a major force of China’s economic growth and a platform for the country’s growing integration into the global economy. As the result, by the end of 2007, Guangdong, as the main province of the PRD, experienced an economic growth of international trade from about US$ 21 billion in 1978 to US$ 634 billion. The trade of Guangdong, also known “as the workbench of the world”, represented about 29% of China’s total trade. Table 1 and 2 illustrate very clearly the success of Guangdong.

However, since the 2008 the economy of the PRD has experienced enormous problems, which can be revealed by looking at the Table 1and Table 2 which illustrates the Growth National Product (GPD) of the Chinese provinces: Even though the nominal Growth National Product of Guangdong remains the highest of all 31 provinces, the growth rate of the GDP has been one of the slowest in the Peoples Republic of China (PRC). Guangdong only reached 9.5 percent growth rate (rank 27 in the PRD), while other regions like Inner Mongolia and Tianjin had a economic growth rate of 16.9% GDP (rank 1) and 14.4% (rank 2). The graph in table 5 shows the development of the real growth rate of Guangdong from 2002 to 2008. The table confirms that Guangdong has been suffered at the begin of the economic crisis. In 2008 the real growth rate dropped dramatically from 14.9 in 20007 percent to 12.3 percent in 2008.

These numbers mirror that the Pearl River Delta, particularly, Guangdong province, is facing critical economical problems.

In the year of 2008, a worldwide economic crisis led to an economic downturn, which also or maybe in particular, affected the PRD. Being heavily reliant on exporting goods and FDI, the PRD region suffered from a sharp decline in their economic development. Small and Medium Enterprises (SME) massively laid –off workers. Even though the economic crisis might be one of the main reasons for the economic downturn, this chapter of the paper is putting the events of the economic crisis besides and attempts to look deeper into the economic structure and the economic model of the PRD.

Cities in the PRD, like Hong Kong, Guangzhou and Shenzhen, have been competing with each other for attracting foreign companies and FDI’s and the governmental substitutions. Because of ineffective inner-city competition and a lack of a unified development plan the competition between the cities were facing unhealthy competition, started unnecessary investment projects. The competition was ineffective, unhealthy and a waste of resources.  As Zhu states, with the construction of the Guangzhou Baiyun Airport, an oversupply of air transportation in the PRD region was risked by the local government.

But not only the competition within the PRD has created an obstacle for the development of the region’s development, the PRD also has faced harsh competition with other economic regions of the PRD. The Yangtze River Delta, in which fast economic development started in 1984, (YRD) is maybe the main competitor for the PRD. The strong growth of the region over the past decades is mainly because of its coordinated efforts of economic development.

The Table 6 indicates the recent economic performance of the two regions and reveals that the YRD has been by far more successful. Another reason for the unequal development is the success for the YRD to attract FDIs. There has been also a growing competition for foreign investment between the Pearl River Delta and Yangtze River Delta. The Foreign Direct Investment (FDI) flows into the YRD have been rising at a faster rate than those into PRD region. At the same time, the amount of goods exported from the YRD is also increasing more rapidly than is the amount exported from PRD.

As table 7 shows, the PRD has, compared to the Yangtze River Delta, a lack of trained and skilled worker. Since human resources are essential for the economic development, the PRD is facing a blockade for industrial upgrading in the PRD region and as a result, has been lagging behind the YRD. Since 2007, the total number of professionally qualified workers in the YRD region has been more than twice that of the PRD region. In 2007, for instance, the PRD and YRD regions had 2 million and 5.4 million professionally qualified workers, respectively. This year, just after the Lunar New Year holiday, industries in Guangzhou were facing a labor shortage of estimated 150,000, while almost 30 percent of the labor demand of Dongguan cannot be satisfied. Shenzhen had a shortage of 819,000 laborers in last quarter of 2009. Zhongshan has a labor shortage of about 130,000. Total labor shortage in the Pearl River delta exceeds 2 million.  Along with the lack of high-level human capital the Pearl River Delta is lacking investments in educational infrastructure and Research and Development Capacity. As human capital and R&D capacity are requirements for successful restructuring, the region may face severe constraints in the subsequent efforts at industrial upgrading.

In the short run, the sharp falls in export will inevitably lead to more severe reduction in growth and employment as the restructuring is still at an early stage; in the long run, structural problems, such as the lack of domestic demand and shortage of high-quality human resources, may pose serious threats to the restructuring process.8 The rapid loss of comparative advantage in labor-intensive process export industries, the main engine for growth in the last twenty years, also places greater urgency upon prompt response to the crisis.

Industrial Clusters in PRD

A characteristic of the PRD industrial clusters is the development of industrial clusters. These industrial clusters mean a specialization of production of one or more typical products; and prevail commonly in traditional manufacturing industries, agriculture as well as electronic information industry.

This feature of having highly specialized cities or township enabled the region of the PRD to develop rapidly, however, also includes several disadvantages which contribute to the slowdown of the economic development. The industrial clusters of the PRD, for instance, have a relatively large operation scale, but the profit margin of some of the traditional industries remains at a low level. For example, the price of a piece of cloth costs only 30 yuan in China; but it can be sold for 1,500 yuan in the international market after a famous international brand has stuck its label onto the piece of cloth.  However, the producer in the PRD receives a profit margin of the products with 3%, sometimes even less than 1%. Especially now, during the economic crisis and rising production costs in the PRD, it makes it very difficult for companies in the first sector.

Another typical problem of the economic structure of the PRD is that several cities or townships have the same specific sectors and types of industries. This overlapping of industrial cluster resulted in severe competition in the PRD. Currently, there are about 18 major textile and apparel clusters across the PRD, producing comparable cloth with similar design.  This means that at times, these clusters compete for the same FDI and the same export contracts.

The low-end and labor-intensive manufacturing industries based in the region are traditionally in need of cheap labor and resources. However, rising labor cost is another source of the crisis in the PRD. A new labor law, implemented in January 2008, reduced the employer’s bargaining power and legalizes mandatory social security and over-time payment for workers. With this law, firms in the region experience rising labor cost by up to 25%. Starting from 2005, the labor cost in Shenzhen, for instance, has been rising gradually; during the first quarter of 2008 the wages reached its highest level in recent years.

However, not only the region’s labor cost has been raised, but many SME have been confronted by other rising costs of inputs. Reasons for this are the global financial crisis and the rising inflation in China. Prices of oil related products and other main raw materials, such as coal, fiber, paper, and important raw materials were affected.   With rising costs, a large number of factories have been shut down or were moved into cheaper provinces of the PRC or were even built up abroad. Therefore, an industrial “hollowing out” in the PRD could emerge owing to the shortage of both low-end manufacturing and high-end technological industries.

Conclusion

The export oriented and low-end manufacturing industries of the PRD have contributed greatly to the fast economic growth of the region since 1980. However, this model is unsustainable due to the problems, which were just pointed out. The backward industrial structure has become a roadblock to the local industrial restructuring of the PRD region. The Pearl River Delta region has suffered from the lack of skilled labor, rising costs supply and severe competition. It’s now up to the policy makers of the PRD to transform the region and strengthen the economic development.

Part 4 Future Development Goals for Sustainability

In this chapter, first we would to like go into objectives of “The Outline of the Reform and Development Plan of the PRD (2008-2009), “The ShenZhen 2030 Development Strategy” and also shortly explain the process of PRD integration and economic cooperation with the SARs. In order to explain legal framework of PRD integration process with Macao and Hong Kong we will also touch two agreements – Closer Economic Partnership Arrangement between Mainland and Hong Kong and also Macao. In the second part of this chapter, we are going to introduce six proposes of the optimization of spatial structure within the Greater PRD City-region- namely, a centralized “Bay Area” and “Metropolitan Areas” with its global functions, “Development Axes” oriented towards hinterland, “Development Tiers” for radiating function, integrated “Sub-regions” and “poly-centric network” of cities/towns .

In the third section we would to like point out some cases of implementation those above mentioned strategies have begun and plans such as project of Hong Kong – Zhuhai – Macao Bridge, Guangzhou-Shenzhen-Hong Kong Express Rail Link, Guangyhou Subway, Zhong Shan Industrial zona – 4 new areas and an process of technology transformation in the framework of “The Shenzhen/Hong Kong Innovation Circle”. And finally, the challenges of implementing of the development plans and strategies of the PDR will be listed.

a)The Outline of the Reform and Development Plan of the PRD (2008-2020)

In December 2008, China’s National Development and Reform Commission (“NDRC”) issued a document titled “The Outline of the Plan for the Reform and Development of the Pearl River Delta (2008-2020)”.  For our better understanding what is going to happen in the PRD region I would to like introduce the goals of “The Outline of the Plan for the Reform and Development of the Pearl River Delta (2008-2020)”.  The document divided its’ goals to two periods:

-It is hoped that in 2012 the GDP will reach RMB 80,000, with the service industries accounting for 53% of the growth. The per capita incomes for urban and rural residents will have increased remarkably compared with those of 2007, the average life expectancy will have reached 78 years, the social security system will have covered all urban and rural areas, and everybody will be able to enjoy basic public services. The urbanization level will have reached over 80%, the amount of land for construction use needed for every 100 million yuan of newly added regional GDP will have decreased, the difference between the energy consumption for each unit of GDP in the region and the advanced level in the world will have narrowed significantly, and the environment quality will have further improved.

-Till 2020, the per capita GDP of the region will have reached RMB135,000, with the service industries accounting for 60%; the income levels for the urban and rural residents will have doubled compared with those of 2012, and a reasonable and orderly income distribution system will have basically taken form; the average life expectancy will have reached 80 years, and the a higher level of social insurance will have been realized for the whole society; the urbanization level will have reached 85%, and the energy consumption per capita GDP and the environmental quality will have reached or approached the advanced levels of the world.

The plan also supposes that by 2012 there will be 100 state laboratories, and that three to five industrial clusters will come to operation in region. According the plan, by 2020 tech manufacturing will generate at least 30% of total industrial output . Later on, proposes of the optimization of spatial structure within the Greater PRD City-region will be elaborated on.  But now let me focus on the next plan of the development in the region – “Shenzhen 2030 Development Strategy”.

b) The Shenzhen 2030 Development Strategy

The draft of the Shenzhen 2030 Development Strategy was completed in January 2006. It’s aimed at guiding the city’s development in the upcoming 25 years. Hong Kong’s 2030 Planning Vision and Strategy inspired the strategy. It contains a general report and 12 special reports on the city’s status, population, housing, land development and management, industries, environment, transportation system, reconstruction and harbor reclamation, building a symbiotic relationship between Shenzhen and Hong Kong, and the creation of a satellite city.

The general report also sets a target for Shenzhen to become an international vanguard city in terms of sustainable development. The city is expected to become a national base and research center for the high-tech industry, a regional logistics center, and an international metropolis cooperating and jointly developing with Hong Kong.

c)Integration and economic cooperation with the SARs

According to “The Outline of the Plan for the Reform and Development of the Pearl River Delta” the PRD is expected to bolster its‘ cooperation and push forward regional integration with Hong Kong and Macau, transforming the larger PRD into one of the most vigorous and competitive areas in the Asia-Pacific region.

Recently, there has been cooperation between the mainland because of two SARs-the Mainland and Hong Kong (or Macau) Closer Economic Partnership Arrangement and the Closer Economic Partnership Arrangement (CEPA).

Hong Kong – Closer Economic Partnership Arrangement (CEPA)

CEPA is the first free trade agreement ever concluded between the Government of the Hong Kong SARs and the Central People’s Government of the PRC. It was signed on 29 June 2003, and it opens up mainland’s markets for Hong Kong goods and services, greatly enhancing the economic cooperation and integration between the Mainland and Hong Kong through reducing and even eliminating tariffs and non-tariff barriers on substantially all the trade in goods between the two sides. This will progressively achieve liberalization of trade in services through reduction or elimination of substantially all discriminatory measures and promote trade and investment facilitation. “

SEPA is an important agreement is because it is annually extended by Annual supplements conditioning further cooperation between those areas.

Macau – Mainland and Macau Closer Economic Partnership Arrangement – (CEPA)

The Closer Economic Partnership Arrangement is an economic agreement between the Government of the Macau Special Administrative Region and the Central People’s Government, which was signed on October 18, 2003. This agreement is in order to establish closer economic and trade relations, providing liberalization and conditioning for three main economic and trade areas. The agreement and the supplements elaborate further details of the general principles in each specific area, including: – Arrangement for Implementation of Zero Tariff for Trade in Goods, Rules of Origin for Trade in Goods, Procedures for the Issuing and Verification of Certificates of Origin, Specific Commitments on Liberalization of Trade in Services, Definition of “Service Supplier” and Related Requirements and Trade and Investment Facilitation.

Brief introduction of development strategies

The Bay Area and three Metropolitan Area strategy is to ensure that the Bay Area and the three Metropolitan Areas, via coordination or cooperation actions, will surmount the constraints set by administrative divisions and inadequate transport infrastructure. This will provide efficient distribution of economic factors, and form an enhanced spatial structure to consolidate economic development. Externally, the Bay Area and the three Metropolitan Areas would participate in international competition and cooperation “on behalf” of the Greater PRD, targeting to exercise the consolidation functions of global cities like New York, London and Tokyo. Internally, it should take a pivotal role in promoting the overall economic development of PRD and “Circum-PRD” as well as serving as an economic centre of China.

The “Three Axes” refers to the three major development axes in the region – namely the roughly north-south running “Guangzhou/Shenzhen/Hong Kong Development Axis”, “Guangzhou/Zhuhai/Macao Development Axis”, and “Coastal Development Axis” (this axis connecting Shenzhen and Hong Kong on the east bank with Zhongshan, Zhuhai and Macao on the west bank, via the Hong Kong-Zhuhai-Macao Bridge, Shenzhen-Zhongshan Bridge and, in the long term, the railway bridge crossing Pearl River). The idea of “Three Axes” is developed on the basis of the “regional development backbone” set out in the “Planning for the PRD Townships” for strengthening Guangzhou and Shenzhen as the regional centers and integrating the functions of the areas along the Guangzhou-Hong Kong axis to improve the overall competitiveness of the region. From the perspective of Hong Kong and Macao, the three major development axes mark the first time that both cities are included in the PRD transportation hub at the Bay Area.

The “Four Tiers” refer to the multi-tier development space formed by the Bay Area, the outer Greater PRD, the “Circum-PRD” (including the eastern, western and northern Guangdong and the adjoining peripheral areas) and the “Pan-PRD” (including nine provinces, i.e. Guangdong, Fujian, Jiangxi, Guangxi, Hainan, Hunan, Sichuan, Yunnan and Guizhou).

The “Circum-PRD” and “Pan-PRD” form the principal hinterland that connects Greater PRD with the other regions in China. Their function is to consolidate and expand the influences of the Greater PRD, notably the Bay Area. (Figure 2)

“Development of Three Sub-regions in a Poly-centric Pattern” – The Sub-regions will serve as the spatial units for integration of economic development in the Greater PRD region. Eastern Sub-region – Hong Kong and Shenzhen should work together to build a global centre of finance, logistics, trading, innovation, and innovative culture. Central Sub-region- Guangzhou should make full use of its advantages as a provincial capital and a major city in the Greater PRD region. Building on the integration of Guangzhou and Foshan, Guangzhou, Foshan and Zhaoqing should join hands to implement their consensus in building a “Guangzhou-Foshan-Zhaoqing economic zone”. Western Sub-region- on the basis of the protection of ecology, the cities in this Sub-region should work towards closer cooperation in areas such as planning, transportation, industry, environmental protection, technology, contingency management, Hong Kong – Macao cooperation, and servicing the western Guangdong in order to enhance the overall development level and competitiveness of the Sub-region. “Poly-centric pattern” refers to the multi-node network of cities and towns in the Greater PRD City-region, which are of different scales and are arranged in clearly defined hierarchy. The “development of three Sub-regions in a poly-centric pattern” underpins the distinctive functional framework of the Greater PRD City-region for co-ordinated development of the region. The formation of the three Sub-regions will bring Hong Kong and Macao into the framework in which the cities in PRD have been working towards closer relationships. While promoting the functional integration of Hong Kong, Macao and PRD, the gap between the development levels of the east and west banks of the Pearl River should be narrowed to achieve a more balanced regional development.

Implementation of the Development Strategies and Plans – Some Recent Projects of PRD Development

a) Hong Kong – Zhuhai – Macao Bridge (HZMB)

In order to reduce transportation costs, time for travellers and goods across the PRD, encourage closer economic integration between Hong Kong and the PRD, and strengthen Hong Kong’s position as a logistics, financial and tourism centre or provide Hong Kong a benefit from his new economic hinterland, with its vast human and land resources, the HZMB was established. The HZMB project will consists of three sections. The western section comprises a 13 km link road within Zhuhai and the Zhuhai-Macao Boundary Crossing Facilities (ZMBCF) will connect ZMBCF to the inland area of Zhuhai. The middle section is the HZMB Main Bridge which will be a 30 km long dual 3-lane carriageway in the form of bridge-cum-tunnel structure, comprising about 23 km sea viaduct and 7 km immersed tunnel. The eastern section of the HZMB project will be within the Hong Kong SAR boundary and comprises the 12 km dual 3-lane Hong Kong Link Road connecting the HZMB Main Bridge to the Hong Kong Boundary Crossing Facilities. The three governments would construct HZMB Main Bridge jointly. The estimated project cost for the HZMB Main Bridge is about 38 billion RMB. The Mainland, HKSAR and Macao SAR governments will altogether contribute RMB15.73 billion, which is about 42% of the project cost of the Main Bridge. The remaining 58% will be financed by bank loans.

b) Guangzhou-Shenzhen-Hong Kong Express Rail Link

This new Hi-speech Rail Link will connect Kowloon, Hong Kong in the south and Guangzhou, Guangdong Province, People’s Republic of China (PRC) in the north. It is divided into two sections, the Mainland Section, and the Hong Kong Section. Under the plan the total distance will be 142 kilometers, and the expected travel time from West Kowloon Terminus in Kowloon to Guangzhou South Railway Station in Shibi, Guangzhou will be 48 minutes. It will be connected with the Wuguang High-Speed Railway at Guangzhou South Station, and the Xiashen Railway at Shenzhen North Station (Longhua Station). It will be open in phases between 2010 (Mainland Section) and 2016(Hong Kong Section).

c) Guangzhou Subway

Guangzhou, the capital city of Guangdong province, plans to build nine subways with a total length of 255 kilometers in the country’s 11th Five-Year Program period (2006-2010). The city currently has a total subway length of 59.2 kilometers.  With the nine new subways built by 2010, subways will account for more than half of Guangzhou’s public passenger transport capacity, according to Lu Guanglin, general manager of the Guangzhou Subway Corporation. Lu pledged Guangzhou will invest no less than 5 billion yuan ($623.2 million) every year in subway construction. The Guangzhou subway system, which began operations in 1999, currently has four operational lines.

d) Zhong Shan Industrial Zone – 4 new areas

During the first presentation, the professor recommended us to focus on case of new developing industrial zones in Zhongshan city. When we found the information about the place, we were surprised. The Zhongshan Torch Hi-tech Industrial Development Zone (hereinafter referred to as Zhongshan Torch Zone) is a nation-level new hi-tech industrial development zone, which was jointly established by the Ministry of Science and Technology of the People’s Republic of China, the People’s Government of Guangdong Province and the Zhongshan Municipal Government in 1990. However, there are four new rising industrial parks that we would to like use in this part as an example of headlong development of specialized industrial areas.

As one of the important bases to be developed by Zhongshan City, Liyu Industrial Park is located beside Linhai Base with its highlights of excellent geological conditions and perfect logistics circumstances. The dominant industry is to be heavy-duty equipment manufacturing, involving fields like precision mechanism, transportation equipment and complete set of special equipment. Technology Industrial Strip Technology Industrial Strip is the technological industrialization base under construction by Zhongshan Torch Zone and the incubation base for medium- and small-sized enterprises. To take Hong Kong Science Park as its example, Technology Industrial Strip will gradually build a 350,000-square-meter industrial promotion and acceleration park and a 650,000-square-meter technological innovation area, which perform 6 functions like technology incubation, technology services, technology exhibition, technology trade, technology finance and technology inhabitation.

Another example is the Yat-sen Technology Park – Covering an area of approximately 1600 mu for the first phase, Yat-sen Technology Park is developed and managed by Zhongshan Zhangjiabian Enterprise Group Co., Ltd. Till now 15 projects have been introduced into the park, of which the total investment is nearly 350 million USD. These projects are as follows: Thyssenkrupp escalators and boarding bridges by Thyssenkrupp Group from Germany, CTS auto parts by CTS Group from United States, Meiban Precision Technology Co., Ltd. by Singapore Meiban Group, Cosmos Precision Metalwork Co., Ltd by Japan Cosmos Incorporation, Kimura Plastic Co., Ltd. by Kimura Incorporation from Japan and so on. The second phase of the Park will cover 600 mu, into which key projects like micro-electronic will be introduced.

There is also the South China City of Modern Traditional Chinese Medicine and Pharmaceuticals – Relying on National Health Technology Industrial Base, South China City of Modern Traditional Chinese Medicine and Pharmaceuticals has been shaped into the comprehensive base with traditional Chinese medicine enterprises and their relevant organizations as the backbones to integrate such five functions as administration, production, study, research and trade. Consisting of such two parts as main projects and their auxiliary ones, the Town has formed the economic system of traditional Chinese medicine and pharmaceuticals by means of intensive development. The main projects include traditional Chinese medicine production base, innovation service system for traditional Chinese medicine industry, and modern logistics and export system for traditional Chinese medicine; the auxiliary projects cover plantation base of crude drugs for traditional Chinese medicine, modern clinical base of traditional Chinese medicine, talent-cultivating base of traditional Chinese medicine and base of fit-keeping, tour and science popularization through traditional Chinese medicine .

e) Shenzhen/Hong Kong Innovation Circle

Within the PRD one trend is apparent – the movement of technologies to the north. For example the Hong Kong industries have relocated most of their production lines northwards, taking advantage of the low production cost in the Mainland. The majority of them are engaging in original equipment manufacturing (OEM). In the face of competition from other regions and in order to maintain Hong Kong’s competitive advantages in the global arena, innovation and technology are the crucial factors for promoting sustainable economic development and industry upgrading .

In May 21, 2007 was signed a co-operation agreement on “Shenzhen/Hong Kong Innovation Circle”.  The co-operation agreement aims at comprehensive promotion and enhancement of technology collaboration between Shenzhen and Hong Kong including exchange of talent and sharing of resources, with a view to upgrading the two places into a region with ample innovation resources and dynamic innovation activities.

Both sides are supposed strengthen exchange and sharing of innovative talents, equipment, and project information, and will encourage the relevant R&D organizations to launch exchange programs on technology management for researchers and co-operation between science and technology parks and intermediary organizations.

Challenges of Implementation Outline and the Developmental Plans of PRD

On the end of this part we would to like mentioned some challenges of implementing those plans of PRD development 1) Traditional industrial structure outdated – the main goals set by those plans and proposals are indeed ambitious, it would not be easy to transform local industries from labour intensive, low value-added to high value-added, technology-based manufacturing, and to strengthen its industrial competitiveness. In fact the existing structure may create serious obstacles for the realization of the goals. 2) Underdevelopment of high technology industries -the traditional industrial structure is a double-edged sword. The export oriented and low-end manufacturing industries have contributed greatly to the fast economic growth of the PRD region since 1980. However, this model is unsustainable due to environmental pollution and land shortage. The backward industrial structure has become a roadblock to the local industrial restructuring of the PRD region. 3) Lack of trained and skilled workers – the PRD region has suffered from the underdevelopment of high technology industries for years. In 2007 the average ratio of high-tech industries to total industrial output was 26.5% in the PRD, compared to 31.5% in the Yangtze River Delta (YRD) 4. Many of the science and industrial parks in the PRD, initially set up to house high technological industries, such as Songshan Science Park in Dongguan, are only sparsely occupied. Therefore, the implementation of those plains might be undermined by the lack of high-end industries in Guangdong. 4) Industrial “hollowing out” of PRD – the potential “Industrial Hollowing Out Effect” is another serious concern to the PRD. A large number of low-end and labor-intensive manufacturing industries in this region have, due to state policies and the global economic crisis, been shut down. Therefore, an industrial “hollowing out” in the PRD could emerge owing to the shortage of both low-end manufacturing and high-end technological industries. 5) Resistance to modernization – the local enterprises’ resistance to industrial modernization should not be underestimated. For enterprises in low-end industrial sectors, the transformation will be a long drawn-out process.

Conclusion

Starting from the reforms set by Deng Xiao-ping, the PRD has taken advantage of the cheap resources and low-cost labour force, while providing capital, technology, management expertise, as well as assuming responsibility for product sales distribution and export. The PRD restructured its economy and re-positioned itself from an export oriented manufacturing base to a tertiary industry driven service economy.

As the PRD experienced rapid growth in the years that follow, the eastern and central regions have run into a host of problems such as scarcity of land and expansion space, energy shortage and escalating labor costs. Although the growth rate of Western PRD in the past was not quite in the same league as that of the eastern and central PRD, much resources and space remain virtually untapped. Aided by infrastructural development and policy support, the opportunity is ripe to initiate more in-depth, and broader collaboration with Western PRD cities.

In addition, Western PRD cities have individual qualities and strengths (such as well developed private sectors, significant domestic trade, strong proprietary innovation capability, and clusters of speciality townships, etc), and are expected to shun the “high speed, high growth rate, high energy consumption, high pollution” development model. In doing so, the cities significantly raised entry requirements for foreign investment, setting out conditions for unit land utilization of investment to output ratio, environmental protection, technology sophistication, and so forth for foreign investment, labor and resources intensive types of production are no longer targeted by Western PRD cities.

In summing up the above analysis, this study has the following recommendations for the Guangdong provincial government:

Guangdong provincial government

-To construct a government services platform, raise the efficiency and quality of government services (for example, to provide “one-stop” service to investors in real sense of the word, rather than merely housing the different departments in the same office building).

-To proactively drive the development of infrastructure projects linking the Western PRD with Hong Kong.

-To strengthen the transparency of the relevant planning, strategies and policies for the Western PRD development. To enhance the accuracy, timeliness, and scope of the official release of relevant information.

-To provide clear guidance to external investment.

-To coordinate and manage the development of each Western PRD city.

-To render assistance to the Mainland companies and community to learn the strengths of Hong Kong services and be acquainted with the range of service offered by Hong Kong to Mainland business (including private sector business), as well as to facilitate the development of Hong Kong service industry in Western PRD.

-To proactively search out and understand the comparative advantages of Western PRD through various channels, proactively get acquainted with the local development planning schemes, plans, strategies as well as policy measures for attracting foreign investment, so as to formulate effective specific investment strategy.

-In the areas of investment, to proactively promote the brand name of Hong Kong and to devote more intensive efforts in stepping up Hong Kong investment in areas with comparative advantage such as finance, logistics, manufacturing and professional services, etc, and to provide customer tailored solutions according to the requirements of the Western PRD cities;

-To actively maintain contact with the private sector in Western PRD, familiarize with its characteristics, development plans, issues of concern, and support service requirements etc. To apply Hong Kong’s strengths to assist Western PRD private sector enterprise to expand into overseas markets;

-To collaborate in such areas as science and technology, education and personnel training, etc with Western PRD cities.

With these suggestions, we feel that the PRD will be able to withstand any challenge that it may incur. However, the PRD is transforming itself from developing traditional and light industries to more heavy and high-tech ones. We can see this from factories that produce goods like textiles slowing being replaced by factories that are producing computer and TV componets. As this is taking place, competition is being sprouted not only between companies that are manufacturing high-tech goods, but also, for factories that are lacking workers due to them migrating to other areas in and out of the PRD for other work.

This phenomenon, of light industries slowing disappearing shows that the PRD’s economy has been shifting into a direction of a high-tech based one.  With correct allocation and utilization of resources and technology, however, the PRD will continue to develop strong, will be the gateway of Southeast Asia entering China, and will be the fastest growing economy in the fasting growing nation in the world.