Jewel in the crown
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Apr 8th 2017
LIBERAL ECONOMICS MAY have gone out of fashion, but not before working miracles in some parts of the world. To witness one of them, visit the Luohu immigration-control point on Shenzhen’s border with Hong Kong, where some 80m crossings are made every year. Since Deng Xiaoping designated the mainland Chinese city as a special economic zone in 1980, putting out the welcome mat for foreign investment and encouraging private enterprise, trillions of dollars of trade and investment have flowed across this border.
Forty years ago Shenzhen was a rural backwater. Today it is the most dynamic city of the Pearl river delta (PRD), China’s most innovative region. Rem Koolhaas, a Dutch architect who teaches at Harvard, called it the ultimate “generic city”—a place without legacy that can swiftly adapt and grow with the times. It is still doing that, but is now old enough to have a memory.
Not far from the border crossing is Hubei, one of the city’s original communities. Old buildings in the neighbourhood are being demolished to make way for modern structures. “If we all get involved in this transformation, every family will benefit!” declares a giant banner. The authorities are offering compensation to villagers and local homeowners.
“Many people consider this place a slum,” explains Mary Ann O’Donnell, an American expert on Shenzhen’s urban villages. It is indeed shabby compared with Nanshan, a wealthy high-tech neighbourhood nearby with an average income per person of over $50,000 a year. Yet even this humble place has benefited from globalisation. The homes here have proper walls and roofs, as well as electricity, running water and sewerage. Hubei is not heaven, but any slum-dweller in Caracas or Mumbai would love to live like this.
The PRD is home to nine mainland cities in the province of Guangdong, notably Shenzhen and Guangzhou (formerly Canton), as well as to China’s special administrative regions of Hong Kong and Macau (see map). The World Bank recently declared the PRD the world’sbiggest megacity, surpassing Tokyo. With over 66m residents, it is more populous than Italy or, just, Britain.
This modest-sized triangle of land and water near China’s southern fringe has one of the world’s most successful economies. Its GDP, at more than $1.2trn, is bigger than that of Indonesia, which has four times as many people. It has been growing at an average of 12% a year for the past decade. As a global trading power the region is outranked only by America and Germany.
For China itself, the PRD is crucial. Though it accounts for less than 1% of the country’s territory and 5% of its population, it generates more than a tenth of its GDP and a quarter of its exports. It soaks up a fifth of China’s total foreign direct investment and has attracted over a trillion dollars-worth of FDI since 1980. Above all, it is a shining example of the China that works.
None of this would have happened without free enterprise. For centuries this trading post was the country’s most globalised corner. The economic liberalisation of the 1980s and 1990s transformed the delta into China’s leading manufacturing and export hub. Now it is rapidly becoming one of the world’s most innovative clusters.
Even so, this great workshop to the world is now facing a number of challenges. Rival economies in South-East Asia and elsewhere are becoming more competitive. FDI inflows are slowing. And as the whole of China is getting older and its labour force is shrinking, the flow of migrants into the region is drying up. The net inflow of migrants into Guangdong has fallen by nearly half since 2008, from 1.1m to just 600,000 last year. Over the same period the net outflow of workers from Hunan, a poor neighbouring province, dropped from 286,000 to barely 30,000. Rising competition and a shrinking workforce are national problems—but as the most open and market-oriented part of China, the delta is feeling the pain more than the rest of the country.
This special report will ask whether the PRD can adapt to these harsh new realities and once again lead the rest of China by example. It will point to four powerful trends that should help make the delta fit for the future: diversification, integration, automation and innovation.
Diversification is necessary for two reasons. As already noted, the cheap labour that once kept the delta’s manufacturing plants going is running out and wages are rocketing, so bosses are shifting some factories to places with lower labour costs. At the same time exporting to the West has become harder. Rich-world economies have grown little since the financial crisis nearly a decade ago, and both America and Europe are becoming more resistant to trade, so the delta’s manufacturers are redirecting some of their exports to the Chinese market instead.
Governments and firms are also trying harder to integrate markets, investing in infrastructure that will make it easier to do business in the region. Unlike the Yangzi river delta cluster around Shanghai, which focuses on the domestic market, the PRD serves the world, so its infrastructure was designed mainly for exports. Its supply-chain firms are now developing new logistics systems to serve domestic demand. Automation plays a big part in this adjustment process.
Most remarkably, a region once known for copycat products is emerging as a world-class cluster for innovation. Shenzhen, a city of migrants, has rapidly moved from sweatshops to advanced manufacturing, robotics and genomics. It is home to Huawei and Tencent, two of China’s most valuable and inventive multinationals. Even Apple, an American technology giant, is building a research and development centre there.
Hong Kong, which this summer marks the 20th anniversary of its handover from Britain to China, is the perfect complement to innovative Shenzhen. Its commitment to free speech, the rule of law and international standards has made it a vibrant global financial centre. Cross-border financial flows between Guangdong and Hong Kong are an explicit part of the Closer Economic Partnership Arrangement, an accord between the mainland and Hong Kong that liberalises trade and investment in many goods and services. Hong Kong’s banking system and capital markets are in private hands, whereas their counterparts on the mainland are tightly controlled by the state. Hong Kong is also the leading offshore centre for trading the yuan and the conduit for much of the foreign investment by mainland firms.
When the mainland’s economy emerged from the devastation wrought by Mao Zedong’s policies, it was the PRD that pointed the way to the future. Shenzhen’s entrepreneurs defied central planners and demonstrated the power of market forces.
The mainland is now in difficulty again, with double-digit growth a distant memory. It is struggling with excessive public debt. Too much investment has gone into white-elephant projects and ghost cities. Failure to reform or kill bloated state-owned enterprises (SOEs) has created zombie companies.
In contrast, the PRD’s economy is made up mostly of private companies. Of the more than 100 giant SOEs controlled directly by the central government, only four are based in this market-minded region. The delta’s nimble firms have long been exposed to brutal competition in global markets. Some have succumbed or moved to cheaper places, but many of those that remain are world class. The question is, can the delta continue to lead?
