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China economy

Guangdong moves into the future as it builds a post-industrial society

Dan Steinbock says the province is emerging as a globally important innovation zone and consumer market

PUBLISHED : Wednesday, 13 January, 2016, 5:28pm
UPDATED : Wednesday, 13 January, 2016, 5:28pm

The forces that once boosted Guangdong’s dramatic economic boom – industrialisation, booming world trade, cheap labour and low-cost manufacturing – are fading. With the slowest growth pace in 25 years, economic anxiety is said to be spreading. That standard narrative is part of the story, but not the full story.

Today, Guangdong’s economy is a dual story about the demise of industrialisation and the rise of the post-industrial society. If the focus is on the former, the story is about decline. If it’s on the latter, the story is about rejuvenation.

The real narrative has two sides, however. Last November, the US-China Joint Commission on Commerce and Trade convened in Guangzhou. In December, the leading Israeli technology institute laid a cornerstone for the first Israeli-Chinese University in China, with the support of Guangdong, Shantou municipality and a US$130 million donation by business magnate Li Ka-shing. These developments reflect Guangdong’s new strategic importance in China’s innovation-driven development strategy.

[Guangdong’s] GDP amounted to more than US$1 trillion, which puts it in the same league as Mexico

Since last March, the province has intensified efforts at industrial transformation and upgrading, while seeking to establish several industrial belts. It benefits from the Pearl River Delta economic zone, which covers nine major cities (including Guangzhou, Shenzhen, Zhuhai and Dongguan).

Guangdong leads the way in moving up the value chain from light industry to high-end manufacturing. Ranked in terms of value added, its key industries feature information and communication technology (22 per cent), but it is also strong in electrical machinery (9 per cent), chemicals (5 per cent) and automobiles (5 per cent).

Guangdong accounts for over a quarter of China’s total utilised foreign direct investment. It is home to telecom giants Huawei and ZTE. It is where corporate titans such as Lenovo, TCL, BYD, Apple, IBM, Philips, BGI, Lucent and Olympus house their manufacturing bases, research and development, and design capabilities.

When it comes to innovation, Guangdong is a trendsetter. In China, innovation – as measured by R&D per GDP – has climbed to 2.1 per cent (which, despite the huge population, is higher than that of France, the UK or Australia). In Guangdong, the comparable figure is close to 2.5 per cent but in Shenzhen it is estimated to be 4 per cent – not far from the world leaders, South Korea (4.4 per cent) and Israel (4.2 per cent).

READ MORE: China’s Huawei and ZTE up their game at CES 2016 to rid image as budget smartphone vendors, bid for global domination

The delta’s transformation enjoys government support. Last May, Beijing launched its “Made in China 2025” policy. Similar goals are emulated by Guangdong’s “Intelligence Manufacturing Development Plan (2015-2025)”. Responding to rising labour costs, manufacturers and the provincial government are investing in robotics and automation. To reduce polarisation, local leaders also seek to develop rural areas in the next five years by encouraging labour-intensive manufacturing to relocate from cities into Guangdong’s rural regions.

Last year, Guangdong’s annual growth was about 7.9 per cent, a percentage point higher than the national average. The growth target is now set at 7 per cent for 2016-2020, which is very ambitious in the current environment. The province hopes to become a “moderately prosperous society” by 2018 – two years ahead of the national target of 2020.

Among Chinese provinces, Guangdong has the largest economy and population. In 2014, its GDP, despite a rising US dollar, amounted to more than US$1 trillion, which puts it in the same league as Mexico and makes it larger than Indonesia. With 107 million people, including 30 million migrants, its population is bigger than that of the Philippines.

But Guangdong is fuelled by its cities, particularly Shenzhen and Guangzhou which account for almost 60 per cent of the delta’s GDP. Although its image was tarnished by the recent landslide, Shenzhen is close to the top of the global City Momentum Index, which tracks the speed of change of a city’s economic base and its commercial real estate market, and which Guangzhou may join in the future.

Shenzhen has emerged as China’s priciest real estate market, with average home prices soaring nearly 40 per cent in 2015. In barely a year or two, Shenzhen’s population has reportedly surged by 3 million, to 21 million. The city is likely to continue to attract new internet and finance companies, and corporate giants such as Tencent and Dajiang, while foreign banks and financial intermediaries have set up shop in the city’s development zone, Qianhai.

Manufacturers and the provincial government are investing in robotics and automation

Guangdong’s stagnating industrial indicators are a reality but these measures may no longer reflect the province’s core growth drivers, of which more than half come from services. Moreover, the sector is not just about R&D, business services or even property markets. It is also about consumption.

Guangdong is China’s largest consumer market in which disposable income continues to increase in urban households. In the province’s rapidly changing retail distribution channels, the fading mom-and-pop stores and even traditional department stores are giving way to modern chain stores, supermarkets, warehouse markets and convenience stores, while shopping malls are fast evolving into integrated shopping and entertainment centres. The province is a magnet to foreign retail concerns, including Wal-Mart, Carrefour, Parknshop, Watsons and Trust-Mart.

Within the province, Guangdong seeks growth, upgrading and innovation vis-à-vis the Guangdong Free Trade Zone, which covers Nansha (Guangzhou), Qianhai-Shekou (Shenzhen) and Hengqin (Zhuhai). It aspires to become a Guangdong-Hong Kong-Macau cooperation demonstration zone, a hub of the 21st-century Maritime Silk Road and a pilot zone of China’s new reform and opening up.

Concurrently, the pilot free trade zones in Guangdong and Fujian are being extended across the pan-Pearl River Delta region. The area is China’s largest regional collaboration initiative, covering 11 provinces and special administrative regions, from Guangdong and Fujian to Sichuan and Hunan.

READ MORE: Shenzhen, China’s test bed for ideas, shares a new vision for cities- but it’s a work in progress

Interregionally, these measures support and benefit from Beijing’s “One Belt, One Road” initiative. The grand goal is to build a new trade network connecting Hong Kong and Macau, facing Southeast Asia, and lead higher-level development in the pan-PRD region. That objective is possible but only with continuing structural reforms, as well as regional and interregional opening up. It is a story that optimists will tout and pessimists will trash. But it’s a story that is viable.

Dr Steinbock is the founder of Difference Group and has served as research director at the India, China and America Institute (US) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Centre (Singapore). www.differencegroup.net