China Operations 2004

USCBC Snapshots: Pearl River Delta at a Glance

First Half, 2004

The Pearl River Delta (PRD) retained its position as one of China's main economic engines in 2004. Guangdong remains the country's top trading province, accounting for almost one-third of China's entire foreign trade volume in the first half of this year. The province reported a record trade volume of $30.43 billion in July, up 25.9 percent from the same month last year and up 52.5 percent compared to the same month in 2002.

The Closer Economic Partnership Arrangements (CEPAs) between Hong Kong and Macao special administrative regions (SARs) and the mainland have delivered positive results. Hong Kong seems to be on the road to a full post-SARS recovery, attracting a record number of tourists in July and recording first half GDP growth of 9.5 percent. Macao's GDP has grown more than 20 percent year-on-year in each of the past three quarters largely because of increased tourism and related investment.

In 2004, nine provinces plus Hong Kong and Macao signed the Pan Pearl River Delta (PPRD) Regional Cooperation Framework Agreement. The PPRD cooperative scheme offers a glint of hope that its participants will begin to remove long-standing inter-provincial barriers to trade and investment in the region.

The PRD provinces, particularly Guangdong, are also seeing the downside of rapid economic growth. The costs of key production factors such as labor, power, and land are rising. Recent government reports have revealed a shortage of unskilled labor in Guangdong's heavily industrialized cities. In addition, Guangdong's power shortages have forced the provincial government to buy electricity from other provinces and to take stern measures to reduce consumption.

The PRD provinces continue to invest in infrastructure that will link Hong Kong and Macao more closely to the mainland. The Western Corridor linking Hong Kong to Shenzhen will be completed in 2005, and Shenzhen is building its first mass transit rail system, which will connect to Hong Kong by the end of this year.

CEPA & PPRD Regional Cooperation Framework Agreement

Closer Economic Partnership Arrangement (CEPA)

Since January 2004, CEPA has allowed Hong Kong and Macao manufacturers to export certain products to the mainland duty free. In addition, service sector openings under CEPA are allowing Hong Kong and Macao expertise to flow more freely into the mainland. The most positive economic impacts so far, however, have come from tourism and service sector cooperation.

Under CEPA's general commitments, China enacted the Individual Visit Scheme in July 2003 to allow individual travel to Hong Kong and Macao from the mainland. This policy now applies to all Guangdong residents as well as individuals from 11 other mainland cities and municipalities. As a result of this policy, both Hong Kong and Macao have seen their tourism numbers rise sharply. The number of mainland visitors to Macao has nearly doubled year-on-year during the first half of 2004 to almost 4.5 million and Hong Kong attracted 5.7 million mainland visitors during the same period. The Hong Kong government has stated that 1.6 million of its visitors in the first half of 2004 are directly attributable to CEPA. The influx of mainland tourists has been a positive sign for US investors in Macao's gaming industry and has boosted Hong Kong's retail sales. Retail sales in Hong Kong grew by 13.4 percent year-on-year during the first six months and hit a four-year high.

There have also been positive developments in financial services cooperation. Chinese citizens traveling to Hong Kong and Macao can now use RMB-based UnionPay Cards for purchases, payments, and cash withdrawals. Since more Hong Kong and Macao banks are likely to join the mainland's network, experts expect to see a boost in mainland tourist dollars spent in the two SARs along with a more fluid exchange of currency.

Hong Kong is slowly taking advantage of mainland service sector liberalization, and cooperation in areas such as certification services has already begun. Guangdong will open the State Judicial Examination to Hong Kong and Macao residents for the first time this year. In addition, pending approval, an information technology (IT) examination center will be set up in Hong Kong this year to allow Hong Kong IT professionals to obtain mainland qualifications. Beginning in 2005, CEPA II will further liberalize legal, medical, financial, and transport services which should spur more service cooperation between Hong Kong and the mainland.

Pan-Pearl River Delta (PPRD) Regional Cooperation Framework Agreement

The Pan Pearl River Delta cooperative scheme was signed in June 2004 to enhance economic ties between the "9+2" regions of South China that surround the Pearl River Delta (see box). The PPRD agreement created the largest inter-provincial cooperation forum in China with the goal of using land and labor more efficiently and creating a common market in South China.

Yet so far, the scheme's major players have done little to tangibly increase cooperation. In the end, the scheme may be seen more as a superficial reaction to the Yangzi River Delta cooperative arrangements between Zhejiang, Jiangsu, and Shanghai. Experts agree that, to be successful, the participants must address serious obstacles before economic cooperation becomes viable. In particular, the 9+2 must work together to reduce barriers instead of protecting their own turf. Hong Kong and Guangdong will need to stop competing for economic leadership in the PRD, yet this kind of detente is unlikely. An example is Guangdong's continuing investments in container and port businesses. The province's container throughput growth was 23 percent higher than Hong Kong's last year and has set records this year. Though Hong Kong is more efficient, it is also about $300 per container more expensive, and Guangdong is aiming to lure customers with lower prices.

Outlook for CEPA and PPRD

CEPA essentially accelerates WTO commitments for Hong Kong and Macao firms. CEPA has positioned Hong Kong to receive more FDI from mainland firms seeking to go global and will likely attract more tourists as the mainland continues to ease individual travel restrictions. In addition, mainland firms now have more access to and will continue to demand Hong Kong's financial services expertise. While Macao benefits little from the zero tariff portion of CEPA, it is expected to gain from increased mainland tourism and tourism-related FDI that comes with it.

Inter-provincial cooperation is an important trend in China; provinces and the central government have recognized the value of using resources wisely, eliminating waste, lowering barriers to inter-provincial trade, and increasing participation in regional development. If the 9+2 members can take steps to build infrastructure and allow for freer movement of labor and capital, the PPRD will position itself to attract more investment while benefiting from increased trade.

Hong Kong will likely remain a dominant provider of supply chain management, logistics, and financial & trade services in the PRD. Guangdong, on the other hand, will continue to be a solid production base for exports to Hong Kong and to the domestic market. The province, particularly in modern cities like Shenzhen, is also looking to move up the value chain. As a result, CEPA and PPRD advocates will continue to visualize Guangdong as both a one-stop shop for exports and a major domestic marketplace.

Economic Issues in the PRD

Power

Though Guangdong produces more than one-third of the total electricity output in the PPRD and is China's largest producer of electrical power, it has suffered from severe shortages this year. Guangdong purchases additional power from inland provinces and Hong Kong to meet its increasing demand for energy. Though losses from brownouts and shutdowns are hard to measure, they are real. The provincial government has been directing firms to shift operating schedules, limit electricity usage, and even cease operations for periods of time in order to save power and prevent unexpected power loss.

Land

China's action to curtail the rampant expansion of development zones in China has also affected Guangdong. According to data from the Guangdong Provincial Department of Land and Resources, the number of development zones has been cut by almost 80 percent, from 499 to 102, with the planned development zone area reduced from 840,000 acres to about 251,000. Though the Guangdong government stresses the positive environmental impact and the compensation paid to farmers, less land available for development could boost already-rising land prices in the province.

Labor

China's Ministry of Labor and Social Security (MLSS) recently reported a serious shortage of low-skilled, migrant workers in China's southeastern coastal areas. Within the PRD, the report estimated that there is a shortage of 2 million workers, or about 10 percent of the total migrant work force there. Shenzhen and Dongguan are short 400,000 and 270,000 laborers, respectively, according to the report. MLSS cites low wages and poor factory working conditions as the reasons workers have stopped migrating to work at factories in these areas. Rising food prices in China over the last year have also made farming a more attractive option for young rural workers. Labor shortages in coastal factory areas threaten to drive up manufacturing costs in the short term and generate higher capital investments in the medium to long term.

Textiles

Another area of uncertainty for the PRD is in textile exports to the United States. A recent World Trade Organization report projected that China's share of the US garment market will rise to 50 percent after the quota system ends this year, up from 16 percent in 2002, the year restrictions were initially lifted. US safeguard quotas, which can last for up to three years, could have serious implications for textile firms that have either shifted or plan to shift investments to the PRD in preparation for the opening of the US textile market.

Infrastructure Projects in PRD

Hong Kong, with its efficient port, robust services, and well-developed infrastructure, remains an important point of entry to the PRD. Appropriately, much of the recent infrastructure development in the Pearl River Delta has been focused on enhancing links between Hong Kong and Guangdong. Other projects aim to connect Guangdong with inland provinces.

Investment Projects in the PRD

Politics in the PRD

In Hong Kong's September elections, pro-democracy candidates won three new seats, giving them a total of 25 in the 60-seat Legislative Council. Currently, the electoral system in Hong Kong only allows for 30 Legislative Council seats to be directly elected and Beijing has not made any commitments to allow direct elections for all seats in 2008. Furthermore, Beijing has ruled out a popular election for the next chief executive in 2007. Hong Kong people have expressed dissatisfaction with these arrangements, which could become flashpoints that test the strength of ties between Beijing and Hong Kong in the future.

 

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Last Updated: 23-Nov-04