SO WHAT'S UP with the Pearl River Delta? Last year, foreign investment into Guangdong, most of it destined for the delta region, fell by nearly one-third. After four years in which the province attracted more than US$11 billion annually from overseas, last year's total dropped to US$7.8 billion. This year, factories in the delta are suffering from widespread labour shortages - of about two million people, if a report by the Ministry of Labour and Social Security is to be believed. They are also being hit by power shortages, more expensive inputs because of the rising cost of oil and other commodities, and the possibility of seeing the prices of their exports being forcibly increased if China were to revalue the renminbi upwards. It would appear that life should be looking a little tougher for the region which has established itself as the world's most important light industrial manufacturing centre. But it isn't. Last year, Guangdong's overall economic performance was its strongest in years. Its gross domestic product growth of 14.3 per cent was beaten only by a city, Tianjin, a backward area growing off a small base, Inner Mongolia, and by China's private industrial heartland, Zhejiang province, which recorded a fractionally better performance, with growth of 14.4 per cent. This year may prove even better. The province reported GDP growth of 14.8 per cent in the first nine months, and expects about 14.5 per cent for the year as a whole. Much of the responsibility for this can be attributed to China's continuing astonishing export growth. Guangdong's export growth has been a little lower than the national average of late - last year it was up 29 per cent, compared with 35 per cent for the country. Nonetheless, the US$154 billion worth of goods it sent overseas were more than a quarter of the national total. All the same, we may be seeing the end of an era - the period extending over the last two decades during which the factories of the Pearl River Delta made the region the world's leading export manufacturing and processing centre. Certainly, officials and others in the delta region need to do some thinking. One thing they should consider is just how quickly the greater Shanghai region - Shanghai proper, plus its neighbouring provinces, Jiangsu and Zhejiang - has closed the export manufacturing gap. In 1998, Guangdong exported US$76 billion worth of goods - half the amount it now sends abroad. That growth pales, however, compared with greater Shanghai's. It increased its exports from US$42billion to US$149billion - putting it on a par with Guangdong, and likely to move ahead this year. In foreign investment, Greater Shanghai is already ahead. Last year Shanghai, Zhejiang and Jiangsu's combined total inflow of US$21billion was nearly three times as much as Guangdong's US$7.8billion. So what is happening? In some areas, the Pearl River Delta is showing some gratifying signs of maturity - and while officials need to do some thinking, they need not necessarily leap into action. One development which should be pleasing them is a growing diversity in the Pearl River Delta's economy. Most impressively, given its historical lack of a major industrial presence, is its possible emergence as an automotive base. Honda's Guangzhou-based joint venture, formed from the wreckage of a previous venture with France's Peugeot, is performing tidily. The company is scheduled to start producing small cars for export at a second venture next year. At Huadu, to the north of Guangzhou, Nissan is producing Sunnys in a venture with Dongfeng Automotive; while to the south, Toyota is developing an engine plant at Nansha. If the region emerges as a rival to Shanghai in car-making - and does so with Japanese companies leading the way, rather than European or American ones - it will have added a major new dimension to its industrial base. The delta's services sector is another area with much potential. Transport leads the way: Guangzhou-based China Southern has ambitious goals to make use of the facilities offered by the city's new Baiyun airport; as does FedEx, which is considering making it its Asian hub. Shenzhen's port, meanwhile, now has the world's fourth biggest throughput (behind only Hong Kong, Singapore and Shanghai). Tourism is growing fast, and already accounts for about 10 per cent of the economy. Guangdong may not be known for its historical landmarks, but it is a golfer's paradise, has more luxury hotels (33 five-stars at last count) than any other province, and has the richest population. Perhaps more importantly, the Pearl River Delta has Hong Kong and Macau, which will drive tourism more than any other part of the country is capable of in the next few years with the opening of Disneyland and new casinos. With China's most open media market, broadcasting and publishing are two other sectors offering openings for foreign and Hong Kong-based television and publishing companies. Liberalisation of the banking sector, due for the end of 2006, should also offer opportunities for rapid growth. Indeed, with by far China's biggest volume of private savings deposits - around 15 per cent of China's 11 trillion yuan in savings - Guangdong has no problem finding sources of capital to fund its continuing growth, providing banks can put in place decent risk management and capital allocation procedures. Clearly, the potential exists for Guangdong in general and the Pearl River Delta in particular to continue its great run. Even if foreign investment were to remain below the levels of recent years, the region has enough economic momentum to continue expanding strongly. And now, thanks to the establishment of the Pan-PRD 'Nine Plus Two' grouping, it has a larger hinterland to begin exploring. Perhaps the biggest threat is internal, in particular to do with mindsets among officials who may be reluctant to allow the market to determine in which direction their economy develops. The Pear River Delta has done very well exploiting one large niche - export manufacturing and processing - over the last two decades. It did this largely without government intervention or direction, but by allowing Hong Kong and foreign business to operate, and providing where necessary the infrastructure for them to do so. THE TEST for the next decade will be whether officials in the region can continue in this vein. They must facilitate business, rather than try to direct it, to avoid creating more large-scale failures, such as Zhuhai's airport, which remains mired in debt years after being completed in the mid-1990s. For Hong Kong, the future development of the delta raises different questions. In particular, much of the talk of cooperation and integration with the region has to be considered more thoughtfully. While working together with others sounds nice, the reality is that Hong Kong is going to have to look at delta cities increasingly as much as competitors as partners. The delta's growth and increasing economic diversity will allow more opportunities beyond manufacturing for Hong Kong-based companies - something which is acknowledged in the Closer Economic Partnership Arrangement (Cepa) and its service sector market opening measures. For Hong Kong, and especially its government, this means taking a long hard look at offers to get involved in mega-projects, especially in their funding. Instead, it should concentrate on pushing in areas where governments can make a difference - such as encouraging official transparency, the use of the law to resolve commercial disputes, stronger attempts to protect intellectual property and rigorous anti-corruption measures. Doing so will contribute more to the continued development of the Pearl River Delta than any amount of spending it can contribute to infrastructure construction.