Down but Not Out in the PRD Economy

June 03, 2011

Funny how little things catch your attention… but there it was, right in the middle of an SCMP article: “Sources close to the Hong Kong Economic and Trade Office in Guangdong said the number of Hong Kong factories (in the Pearl River Delta) dwindled to about 35,000 at the end of last year… from a 2007 peak of 80,000”.

Pardon? The number of Hong Kong factories in the PRD has genuinely more than halved in the past four years? Yes, I know Hong Kong’s manufacturers have seen bad times in the recent past as the PRD governments have begun to favour high-value adding, non-pollutive industry, at the same time lifting labour costs – but so bad? And if the claim is true – and sourced to Hong Kong’s official Government presence in Guangzhou, why shouldn’t it? – why is this story not shouting at us from the front page?

But I thought I should explore. Since Hong Kong invested factories used to account for around two thirds of all foreign invested factories in the PRD, and a similar share of the region’s exports, then closure of more than half of these factories ought to show in export data, and in industrial output numbers – and should leave us puzzled at the acute power shortages being claimed in recent weeks by the region’s manufacturers.

But other data seems to tell a different story. Between 2009 and 2010, Guangdong’s industrial output value added jumped by 27%; Shenzhen’s by 16% and Dongguan’s by 7%. Guangdong’s exports jumped by 21% over the same period, while Shenzhen’s and Dongguan’s jumped by 26%. In the period since 2007, Guangdong’s GDP has continued to grow steadily, and was up 43% by the end of 2010. Meanwhile, Shenzhen’s GDP has climbed by 40% and Dongguan’s by 34%.

The first sniff of blood came in export processing exports, which were up 19% between 2009-10 for Guangdong as a whole. But in Shenzhen, export processing trade is 30% down from the peak in 2008, while in Dongguan, after a 20% fall in 2009, it has recovered to the 2008 peak level. Guangdong government data says that industrial output from Taiwan-, Hong Kong- and Macau-invested companies is down 18% from the 2008 peak in Shenzhen, and 9% down in Dongguan from a peak in 2007. Clearly, this is blood on the floor… but enough to account for the carnage that is implied by a halving of the number of Hong Kong factories in the PRD? Surely no.

Calls to the Hong Kong Federation of Industries and the Trade Development Council, both of which have been tracking PRD developments with reasonable care, concluded that there had indeed been a contraction in the number of Hong Kong invested factories, but a fall of 5-10% is more in line with their own estimates – and from a lower original base too: neither believed the PRD ever hosted as many as 80,000 factories.
So what does all of this muddle tell us?

  1. That we are dealing with some very approximate guesstimates when we are talking about Hong Kong factories in the PRD, but that there has indeed been a contraction in the total. Since policies began to shift in 2007 – and in combination with the global recession that hit us at the end of 2008 – our PRD manufacturers have suffered very lean times.

  2. If ever there were 80,000 Hong Kong-invested factories in the PRD, then a proportion of these were “paper” companies, and will have closed with insignificant economic impact.

  3. Of those that have closed down, many must have been struggling “zombie” companies with low revenues and low profits. As a result, closure will have had little impact on the broad health of the PRD economy, or the region’s export performance.

  4. Anecdotally, it is clear that many Hong Kong companies transferred their manufacturing operations to Mainland-owned companies, in part to improve efficiency in dealing with the labour bureau, and in part to improve opportunities selling into China’s fast-growing consumer market. Remember that many of Hong Kong’s export processors were historically barred from selling into China’s domestic economy, and have become increasingly focused on escaping from this constraint as Mainland spending power has risen.

  5. Similarly in response to growing opportunities to sell into China’s domestic economy, some Hong Kong manufacturers do indeed appear to have responded to Beijing’s calls to transfer operations to interior provinces. This transfer appears to have been modest, and has clearly had no influence on the PRD’s capacity to continue growing.

From the vantage point of Beijing and Guangdong, all of this suggests that the calculated risk to squeeze out pollutive, low value-adding, export processing companies from the PRD, and to build instead on the back of higher value-adding, innovative companies prioritizing the domestic consumer economy, appears to have worked successfully so far. Even though wages have been lifted significantly, and the RMB has been allowed to strengthen by more than 5% over the past year, the region’s exports – and overall growth – has remained respectably strong.

It seems that some of the slack created by the closure of Hong Kong factories has been taken up by Mainland companies: foreign-invested companies accounted for just half of the region’s manufacturing value added at the end of 2009 (the latest year for which data is available), compared with a peak of 67% in 2006. But this does not point to a halving of the number of Hong Kong companies operating in the PRD.

What are our key lessons? First, we should not take at face value some of the more breathless and panicky claims coming from Hong Kong’s PRD industrialists. Second, that the PRD economy looks to be operating as buoyantly as ever, with Hong Kong companies still playing a significant role. And third, that the restructuring of the regional economy appears to be progressing as planned. More is being sold to consumers in China’s interior provinces. A growing proportion of factories are focusing on higher-value-adding output, with some of them also moving inland but much still needs to be done to improve energy efficiency, and reduce pollution. Above all else, the PRD’s “factory to the world” appears to be alive and well, with Hong Kong companies still valuably at the heart of it. Long may it remain so.


* The translated Chinese version was published in Ming Pao on June 3, 2011.

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