Tag Archives: Guangdong

Guangdong Pilots The Next Phase Of China’s Development

There is more to Guangdong than the export workshop to the world. Away from the prosperous Pearl River Delta along the coasts to east and west and particularly in the mountainous north of the province, poverty is deeper, income inequality greater, job opportunities fewer and social services more meager. In that sense it provides a microcosm of the development issues facing the country as a whole. Just as Guangdong was in the vanguard of the economic reforms and opening of the country over the past three decades, so it is being put forward as a pilot for the next stage of China’s development redressing growing inequalities.

For the past couple of years, and despite the trials of the global economic crisis that hit the Pearl River Delta’s manufacturers hard, Guangdong provincial authorities and the World Bank have been taking an unprecedented deep dive into Guangdong’s economic disparities. The result is a newly published study* which lays out a blueprint for tackling the issues of inequality that has become one of the top challenges of China’s development agenda.

The report is book length — more than 350 pages — and detailed, but worth the time of anyone who wants a glimpse at one way that China nationally could meet the aspirations of the Party over the next decade to transform the economic basis of the country into something more socially harmonious between rich and poor and urban and rural and focused on domestic consumption rather than export and infrastructure investment driven growth.

The approach suggested is three pronged: reduce absolute poverty through direct social assistance; reduce income inequality by promoting non-farm industry in rural areas; and contain the inequality of outcomes via taxation and public finance reform to ensure the equal provision of social services. The report makes specific policy recommendations concerning the relocation of industries and labor, vocational training, developing rural financial services, reforming the rural land system, improving basic education and medical services in rural areas, and, most intriguingly, pairing poor villages and households with agencies and enterprises in the richer parts of the province so each village and household will get a customized development plan. The aim is to equalize the provision of public services between urban and rural areas of Guangdong by 2020. Even more ambitious is to change fundamentally the situation of the province’s 3,400 poor villages and lift its 700,000 poor households out of poverty within three years.

Achieving those goals will be no easy matter, and particularly not by those deadlines. It is simply a huge undertaking, as the report acknowledges, although none the less necessary for that. Beyond the reordering and expansion of the provision of public services, it will require a reordering of the bureaucracy, whose officials have been judged and rewarded on their ability to promote local industry and infrastructure development, not the provision of public services, and of the public finances. China’s local government at all levels is a monumental supertanker to turn.

The other huge challenge is the other side of that coin: striking the appropriate balance between the role of government and the role of the market. Policymakers can decree that capital and labor has to relocate to poor rural areas, but they can’t decree that the resulting businesses will be a success. Guangdong officials say they will follow a principle of “government guidance and market-led operation” and obey the fundamental rules of the market when it comes to increasing employment opportunities for rural residents. But that is easier said than implemented.

The need to address these development challenges is urgent.  As the report says:

Experience suggests that inequality, which tends to constrain domestic consumption, may ultimately hurt economic growth. As a result, GDP growth is forced to follow an unbalanced path, with an increasingly high reliance on investment and exports, until it becomes unsustainable.

The province and the World Bank have provided a play-book for what may be China’s most crucial pilot scheme in economic development. Now they have to execute it, we hope, successfully.

*Reducing Inequality for Shared Growth in China, Strategy and Policy Options for Guangdong Province, The World Bank. ISBN 978-0-8213-8484-8.

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More Torrential Rains Raises Disaster Fears In Northeast, North Korea

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Shipping on the Yalu River (above, looking towards North Korea), which marks China’s border with its reclusive neighbor, has been suspended following more torrential rain that has swollen the river to critical levels, and prompted fears of further devastating flooding on both sides of the border. More than 40,000 residents from Dandong at the mouth of the river in Liaoning have been evacuated to higher ground. The Tumen River, which borders North Korea in Jilin, where flooding has already killed at least 74 people and affected 4 million, is similarly swollen, with another round of heavy rain expected imminently.

Red Cross workers in North Korea have reported heavy damage by floods in the east of the country, with buildings, bridges and roads destroyed. North Korean state media reported earlier this week that widespread damage had been caused by this summer’s exceptionally heavy rains that are falling across Asia, with 36,700 acres (14,850 hectares) of farmland destroyed. Flooding in North Korea in 2006 and again in 2007 brought on by torrential rains caused extensive loss of life and damage, particularly to farmland, and raised the prospect of widespread food shortages and a repeat of the famine of the mid-1990s that is said to have caused hundreds of thousands of deaths.

The latest official figures put China’s death toll from flood-triggered disasters across the country so far this year at more than 1,450 with another 669 missing. More than 2 million hectares of farmland have been destroyed and 13.5 million hectares of crops damaged. Nearly 1.4 million houses have been destroyed. The total economic loss is now put at more than 275 billion yuan ($40.6 billion), according to the Ministry of Civil Affairs. Beijing has allocated 195 million yuan for relief work to local governments in the five provinces worst-hit by the rains and typhoons, Jilin, Guangdong, Sichuan, Shaanxi and Guangxi Zhuang.

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High-Tech Moves West, Taking Export Jobs With It

There are many aspects to China’s inexorable move up the economic development ladder. We can only take snapshots along the way. We noted recently in this regard the implications of the current labour shortages at the export factories along the coasts, particularly in Guangdong, as the Go West policy has created competing jobs in the inland and western provinces, encouraging the development of higher-value added manufacturing in the east.
Steffen Dyck  and Hannah Levinger of Deutsche Bank point out in a statistics-laden report on China’s provinces:

There are also signs that some inland provinces are trying to leapfrog the stage of cheap manufacturing, moving directly into higher value-added segments. Science and high-tech parks in municipal economic zones of the South and West, for instance in Chengdu, Chongqing, and Xi‟an, are aiming to attract more foreign investors looking to take advantage of the lower wage levels and escape the coast‟s increasingly competitive labour markets.

Encouraging high-tech manufacturing in Sichuan and Yunnan could change the structure of China’s exports. The two provinces are gateways to Central Asia and Vietnam respectively, with the potential to sell electronics and information technology into both markets.

What will need to go hand-in-hand with that is a shift of educational spending from the coasts. Many of China’s top universities are in the east. Provincial government spending per capita is twice as high in the east as it is in the inland and southern provinces, where some like Guizhou and Yunnan are not yet meeting the required national standard of six years of compulsory primary schooling. As Dyck and Levinger point out. “migrant workers‟ families are especially vulnerable as their ability to provide education to their children is strongly dependent on the business cycle.” That dependency is now being broken.

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Labor Shortages Will Hasten China’s Inevitable Economic Change

For a long time there has been a striking difference between the way China and Japan expanded their economies through export-led growth. Japan made its goods cheaper by taking labour costs out through systems and automation. China did so by putting low-cost labour in. The low-cost labour model was always going to be unsustainable if China was to move up the development ladder towards higher-valued manufacturing. Labour shortages now showing up in the Pearl River delta and other coastal manufacturing heartlands — and noted by Prime Minister Wen Jiabao in his web chat on Saturday — may be the trigger for this and it could also be one of the unintended consequences of last year’s massive stimulus spending combining with Beijing’s moves to narrow the income gap between coast and country.

The money flowing to the inland has created jobs and opportunities closer to home for the 150 million migrant workers who before the global economic slowdown had flocked to the export factories of the coasts. They were dispatched home when exports slumped. Now exports are growing again, they have chosen not to come back, despite employers offering better pay and conditions and provinces raising minimum wages. We are now seeing signs of export manufacturers reorganizing to lower unit labour costs through more efficient production and to move up the value chain with their products as has been happening for a couple of years. The timing could not be better. A growing domestic market provides them with alternative customers. Rising wages will fuel that domestic consumption, so it is a virtuous circle as well as being part of the cycle of economic development that all economies follow.

Manufacturers would anyway have to do that because of underlying demographic changes. The population is aging in a way that will change the country from being inherently a surplus one into a deficit one. The fall in world trade, the slump in China’s exports and now the shortage of hands at the workbenches of the Pearl River delta is only hurrying forward the inevitable.

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Drought Persists In South and East China

The hot dry weather in the south and east is causing drought to linger in both regions. Xinhua reports low reservoir levels in Guangdong where rainfall in the first ten months of this year has been 14% below normal. Water levels are also low in neighboring Jiangxi to the east after a month without rain and in southeastern Fujian the situation seems worse with reservoirs dry and more than 110,000 people left short of water. Meanwhile in Shandong, on the eastern edge of the arid North China Plain, 330,000 hectares of cropland are reported drought-stricken with no break to the dry spell in sight.

The bigger picture is that the slow desertification of the North China Plain is not being reversed quickly enough. Artificial rain-making is only ever an emergency response. The grand plan to divert the waters of three rivers to the region will take years to come to fruition, and may have unintended environmental consequences of its own, just switching part of the problem elsewhere. Demand for water has to be tackled as well as supply. That not only means switching to low-water irrigation methods on farms across China’s wheat-growing heartland but also stepping up conservation efforts in the big cities at the eastern end of the plain. It is the rapid growth of places like Beijing and Tianjin that have been a primary reason that the water table has fallen so far and so fast over the past 20 years. Producing water-conservation technology would also make useful work for idle hands in the export factories of the south.

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China’s Provinces Throw Billions Into Stimulus Pot, Nicely Cooking The Numbers

The muddied details of China’s 4 trillion yuan stimulus measures announced earlier this month became no clearer with reports by state broadcaster CCTV that projects planned by provincial governments will add 10 trillion yuan to the pot. Among stimulus measures announced in the past week, CCTV said, were 3 trillion yuan to be spent by Yunnan and 2.3 trillion by Guangdong, the money earmarked for infrastructure.

As with central government’s proposed spending plans, it is difficult to distinguish between already budgeted and new monies, and there is little detail on specific new projects. Much of this 10 trillion yuan may be for wish-list projects, see below, that will never see the light of day. Throwing around big headline numbers seems to be part of a propaganda drive to encourage domestic consumption and bolster confidence as economic growth slows.

Another report on CCTV may throw some light on the big numbers being thrown around by the provinces. The broadcaster interviewed Qiu Yunyang, chief of the Development and Reform Bureau of Hubei’s Zaoyang City, about Beijing’s plan to spend 100 billion yuan of its stimulus package in the fourth quarter.

“That means an upcoming investment boom. but it’s not easy to secure central finance. Only those who have a good reserve of projects will have a better chance,” Qiu said.

Qiu said he and his colleagues have been putting in extra hours to find a long list of suitable projects to get a slice of the newly available pie. They’ve already found a 100. CCTV goes on to list province after province where officials are doing exactly the same. Doesn’t take long to get to 10 trillion yuan that way, even if much of it is pie-in-the-sky.

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Pearl River Delta’s Silver Lining

If the Pearl River Delta were an emerging sovereign economy, there would be reason to believe that it was moving up the development ladder despite the global slowdown being caused by the global financial crisis.

The delta is the heartland of southern China’s manufacturing industry and many small and medium sized labor intensive light manufacturers are suffering horribly. In the first half of the year, 15% of all firms with Hong Kong investment closed down, including half of shoe manufacturers and toy makers. Official figures show that 50,000 enterprises closed down in the first three quarters of this year, although provincial officials have said an offsetting number of new businesses have registered (those may be mostly mom-and-pop operations of the newly unemployed).

However, larger machinery and electronics companies are still showing robust growth with export orders holding up. Provincial GDP grew 10.7% in the first half of the year. Slow by recent standards but still above the national average.

The pattern emerging: low-end consolidation and a move to higher value production as the region’s price advantages are eroded. Classic emerging markets development.

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