Guangdong as the World’s Factory: Challenges, Opportunities, and Future Prospects

Op-ed: Guilherme Campos

On January 28, 2023, the Guangdong High-Quality Development Conference was held in Guangzhou, which was participated by more than 1,000 government officials and businessmen. Huang Kunming, the Guangdong Communist Party Chief made a speech on the conference, three months after being appointed as the top dog of Guangdong in October 2022.

As the name of the conference suggests, the key subject of the conference is the “high-quality development” of Guangdong in the years to come. According to Huang, the “crisis” of Guangdong’s economy comes from the lack of high-quality development, and the “opportunity” can only be firmly grasped by high-quality development.

Guangdong has long served as China’s southern powerhouse but in recent years, Guangdong’s advantage over other cities such as Suzhou and Chongqing is fading, and it’s impossible to continue competing on land, price, and labor for continuous growth. High-quality development is the only way for Guangdong to overcome its risks and consolidate its “world factory” status.

To better understand the message delivered at the conference, we will look into why Guangdong can become a “world factory” in the past, the increasingly prominent risks Guangdong faced, and Guangdong’s proposed solutions.

Why can Guangdong grow to be the “world’s factory”?

Many wonder why this region and the country have gained this status. There are reasons that are common throughout the whole country, but in Guangdong, they are especially preeminent and naturally, foreign investors are attracted to the region, due in part to its historical ties in trade with foreign powers.

So, as a summary, the main reasons for this moniker as the world’s factory were due to China and Guangdong’s:

Business ecosystem: Industrial production in China does not take place in isolation and has the support of networks of suppliers, component manufacturers, distributors, government agencies, and customers who are all involved in the process of production through competition and cooperation, and which has evolved greatly in the past 40 years.

Easier compliance: Even though China has strong laws concerning labor, labor contracts, and social security, historically many companies did not follow these rules and the authorities turned a blind eye and many foreign companies got advantage of this and benefitted from factories where there are long shift hours, no social insurance is provided and many other customs that are now falling out of fashion Some factories even have/had policies where the workers are paid once a year, a strategy to keep them from quitting before the year is out.

Taxes and incentives-The export tax rebate policy was initiated in 1985 by China as a way to boost the competitiveness of its exports by abolishing double taxation on exported goods. Exported goods were subject to no value-added tax (VAT), which means that they enjoyed a VAT exemption or rebate policy. China also used to provide multiple incentives to businesses based on their size, type, industry, etc. These tax reduction measures helped to keep the cost of production low, enabling the country to attract foreign investors and companies looking to produce goods at low costs.

Currency: For years, the Chinese yuan has been valued quote low, as a way to provide an edge for its exports against similar goods produced by U.S. and European competitors. China keeps a check on the appreciation of the yuan by buying dollars and selling yuan.

And finally…

Lower wages: China used to be the most populous country in the world. Given that the supply of workers was historically greater than the demand for low-wage workers, wages have stayed low. Moreover, the majority of Chinese were rural and lower-middle-class or poor until the late 20th century when internal migration turned the country’s rural-urban distribution upside-down.

Challenges that dampen Guangdong’s growth outlook

This has been the picture for the past decades, but now slowly, as China’s wealth and its citizen’s wealth grow, this status of low costs, and low wages are no longer applicable, with salaries and costs, in general, appreciating considerably.

Moreover, increasing legislative and regulatory production makes the China of today a more Compliance intensive place with considerable procedures to navigate, despite the government’s attempts to make it easier to do business.

Finally, there is also competition from other Asian economies, particularly Thailand, Vietnam, and the Philippines, to where Chinese and foreign companies have been relocating, due to lower costs, wages, and bureaucracy.

Now, fully aware of the past, and coming back to the words of the Party Chief, he says, for the reasons explained above that the region of Guangdong can no longer compete on land, labor, and price, considering that other economies in the region can offer more attractive conditions.

However, this lack of competitiveness appeal does not necessarily mean that Guangdong will lose favor with local and foreign investors and the downfall of the region is not inevitable. To avoid this, Guangdong must harness “high-quality development” if it is to overcome risks and its limits on growth, according to its Communist Party chief.

“The risks to Guangdong’s economy stem from a lack of high-quality development, and the opportunity could only be tightly grasped by high-quality development.”

“Guangdong has a large population, limited resources, and a heavy burden to balance and coordinate development [resources],” he stated, mirroring comments also made by previous Chinese Premier Li Keqiang on a previous occasion. He also added, as mentioned earlier about the impossibility of competing on land, price, and labor and stressed that the whole Guangdong region needs to acknowledge this issue.

Huang also stated that following a philosophy of  “lying flat” – a reference to a recent social movement of giving up and accepting a dark fate – was not an option and the only way to respond to external competition and uncertainties was to modernize and aim for quality, rather than low-cost goods, something that the government has been focused on, ever since the Greater Bay Area was created.

Guangdong is China’s largest regional economy and it grew at 1.9 percent to a record 12.91 trillion yuan (US$1.9 trillion) in 2022, according to official figures, a value that is above the gross domestic product (GDP) of other powerful economies such as South Korea, Canada or Russia.

For many years the Guangdong province has been ranked at the top in China. However, due in part to the measures imposed in reaction to the pandemic, the region failed to achieve its growth target of 5.5% in 2022 and it also grew below the national average, which was 3%.

High-quality development is the only solution for Guangdong

On this matter, other voices have made themselves heard concerning solutions to the issue. Peng Peng, executive chairman of the Guangdong Society of Reform, a think tank affiliated with the regional government, called out the need for Guangdong to be at the forefront of the development value chain, considering its status as the leading provincial economy in China.

Mentioning the fact that Guangdong‘s economy is open, he called out for modernization within the Greater Bay Area and to make sure that the business model of the region moves from manufacturing-based to innovation based.

He then also commented on the fact that the manufacturing industry is the cornerstone of Guangdong’s economic growth and development and that it should consolidate its status as a world factory by upgrading its industrial structure and promoting digital transformation., something that the region and the central government have been focusing on too. Digital transformation to modernize and diversify the economy.

The role of Hong Kong in Guangdong’s high-quality transition

To help solve this matter, Hong Kong will also be an important piece, as defended by Billy Mak Sui-Choi, an economist at Hong Kong Baptist University, who stated that Hong Kong had a role to play in helping Guangdong move up the value chain, saying the notable accomplishments the city’s universities in bioscience and finance had driven advanced manufacturing across the border.

Witman Hung Wai-man, principal liaison officer for Hong Kong at the Shenzhen Qianhai Authority, agreed that Hong Kong still had an important role to play in fundraising by mainland businesses, due to the city’s consolidated financial sector.. He pointed out some measures drawn up by Hong Kong and Shenzhen authorities in September, allowing start-ups in Guangdong to more easily access venture capital through the Qianhai region in Shenzhen and Hong Kong.

Future prospects of Guangdong

In the past three years, due to the pandemic, China has been in a difficult situation and economic growth has been below expectations. However, since the government decided to pursue a more relaxed stance on the pandemic, business and the economy, in general, seem to be booming again.

In fact, the International Monetary Fund (IMF) raised its estimate for China’s GDP growth this year to 5.2 percent from a 4.4 percent projection made in October, citing a faster-than-expected recovery.

The expected rebound will moderate in 2024 however, with the pace of expansion slowing to 4.5 percent before settling at under 4 percent over the medium term amid shrinking business dynamism and slow progress on structural reforms, the IMF said in its latest quarterly update to the World Economic Outlook (WEO) released Monday.

Naturally, Guangdong aims at pursuing and going beyond this growth, and in fact, according to state media, officials from more than 20 Guangdong cities pledged to expand economic activity significantly this year, with party officials from both Guangzhou and Zhuhai vowing to grow GDP in those centers by six percent in 2023.

Only time will tell if this growth will also be coupled with measures that will enable growth based on High- quality development and if China will continue to dominate the manufacturing landscape.

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