Worst Summer Rains In 60 Years Lash Southern China

SOUTHERN CHINA HAS been seeing its heaviest summer rains for 60 years, bringing floods, widespread destruction of crops and more disruption to supply chains.

Hundreds of thousands of Guangdong and Guangxi residents living around the Pearl River delta have been evacuated after a week of persistently high rains. State media have aired footage of people being rescued with ropes and rubber dinghies, and cars floating down streets. Several cities in Guangdong have raised their flood alerts to the highest level.

The rain has disrupted manufacturing and shipping, already suffering under strict anti-Covid measures. Particularly in the more mountainous north of the province, where the flooding is most severe and landslides have happened, businesses were ordered to close temporarily, and public transport was suspended as rising waters approached dangerous levels. The direct economic loss so far is estimated at more than 1.7 billion yuan ($250 million).

To the north of Guangdong, Jiangxi province has also raised its flood warnings. Officials report direct economic losses already reaching 470 million yuan, with 43,300 hectares of crops inundated.

In neighbouring Hunan province, 21,607 hectares have been damaged, and there are reports of landslides and building collapses.

China’s National Meteorological Center warned that downpours could continue for another week, although the heaviest rains are expected to move northwards across central China from mid-week.

In recent years, climate change has made the south wetter and the north hotter and drier.

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.

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.

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.