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Pressure on Pearl River Delta Manufacturers

Feeling the squeeze

Stricter controls and a labour shortage are putting pressure on Pearl River Delta manufacturers

Joseph Cheng – Updated on Mar 22, 2008 – SCMP

Industrial upgrading is the natural path of economic development. Since the mid-1990s, Guangdong’s leaders have been according top priority to upgrading industries in the Pearl River Delta, to maintain the province’s domestic and international competitiveness. The provincial authorities look to Japan and the “four little dragons of Asia” – Hong Kong, Taiwan, Singapore and South Korea – as models for Guangdong’s gradual development of hi-tech, high-value-added industries.

The growth of Guangdong’s exports has indeed been impressive, but the total value is relatively small: of every US$100 in exports, only US$16 is retained in the province.

Two years ago, the Guangdong authorities began to impose limits on factories that were inefficient consumers of energy or produced a lot of pollutants. They were told to close or move out of the delta. At that time, the Hong Kong government and industrialists did not take this warning seriously.

In recent years, the Hong Kong government has lobbied central and provincial officials to seek a longer transition period for the city’s factory owners in the delta. This lobbying, however, is not a solution to the long-term challenge.

Even in the absence of any concrete plans by Guangdong for the removal of industries, low-value-added, export-led processing operations in the delta have faced difficulties. Many Hong Kong taxi drivers used to own such factories.

At this stage, the Chinese leadership is emphasising sustainable development and environmental protection. These are important indicators on local cadres’ report cards. If they don’t perform as expected in these areas, they will have no chance of promotion, and may even lose their jobs.

Then there are the irresistible market forces: the rise in wages and the devaluation of the US dollar (that is, the appreciation of the yuan) are the two key factors.

With the improvement in rural incomes and inflation hitting the cities, a shortage of migrant labour has emerged in the past two years across the delta and in most coastal cities. Manufacturers have had to raise wages to recruit workers: 800 yuan a month is no longer attractive; 1,000 yuan a month is acceptable, depending on circumstances; 1,200 yuan a month will solve all recruitment problems. After all, wages for migrant workers had been stagnant for about a decade.

The yuan appreciated about 7 per cent against the US dollar in 2007; and by another 3 per cent so far this year. With profit margins as low as 5 per cent at some export processing factories, it was no surprise that many had to close.

The options are: moving up the value-added chain or moving out of the delta. Cheaper labour is available elsewhere in Southeast Asia, for example in Vietnam and Cambodia, or the central Chinese provinces such as Hunan and Jiangxi . The metal-producing city of Chenzhou in Hunan attracted much attention in Hong Kong even before the Lunar New Year snowstorms.

A less conspicuous aspect of “building a harmonious society” on the mainland has been the improvement in labourers’ working conditions and basic rights. The implementation of the Labour Contract Law in January led to some sudden dismissals in delta factories. But, in the foreseeable future, regional shortages of senior technicians and other workers will remain the trend in the Chinese labour market. This adds to the impetus of manufacturers moving to the interior provinces.

These trends constitute a severe challenge to the Hong Kong economy. Trade and logistics services are two of the city’s economic pillars. In 2006, they provided about 840,000 jobs. The upgrading of some delta factories, and the relocation inland of others, will generate new demands on these services. They must adapt to these new demands to maintain their comparative advantage.

On the other hand, the Chinese leadership has been trying to shift the momentum for economic development from exports to domestic demand. Some of the factories moving to the central provinces from the delta may also choose to adjust their business strategies to reduce their dependence on overseas markets and turn their attention to domestic sales.

If a severe economic slowdown emerges in the US, this adjustment may accelerate. This will be another new challenge to Hong Kong’s business and logistics services.

Joseph Cheng Yu-shek is a professor of political science at City University of Hong Kong

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