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China Factories Go Central

Squeezed in the south, China Factories Go Central

Reuters – Thursday February 28 2008

By Simon Rabinovitch

ZHENGZHOU, China, Feb 28 (Reuters) – China’s central provinces are vying to wrest the crown of cheap manufacturing heartland from the country’s south, luring factories with tax breaks, inexpensive labour and looser pollution controls.

Reports of smaller exporters, such as textile and footwear firms, buckling under the weight of costlier wages and a stronger yuan have been accompanied by dire warnings that China will lose its manufacturing industry to cheaper rivals such as Vietnam.

But businesses and analysts say the lower costs and incentives that once made the Pearl River Delta so attractive make inland China its best alternative.

Top leaders in Beijing, who convene their annual rubber-stamp parliament next week, are calibrating policy to encourage such a shift to help spread the country’s development more evenly.

“This is only the very early stage of the relocation process,” said Clement Chen, chairman of the Federation of Hong Kong Industries, which represents thousands of medium-sized businesses with plants just across the border in mainland China.

And it’s not only small companies making the trek.

To cut costs by as much as 30 percent, Unilever opened a factory in the central province of Anhui in 2003 that is on course to become its biggest manufacturing site in Asia.

It is hard to pin down how many factories in China’s southern manufacturing hub are actually closing.

The upper range of industry estimates is 15,000, or roughly 20 percent of factories there, though the Guangdong trade bureau has said fewer than 300 are shutting up shop. Most are smaller outfits owned by Hong Kong and Taiwanese investors.

“As far as our (albeit limited) evidence tells us, the large majority of companies are moving inland rather than offshore when their coastal production base becomes prohibitively expensive”, Stephen Green, head of China research at Standard Chartered Bank in Shanghai, wrote in a report.

Firms in the south are now unable to fill up to 11 percent of jobs because the flow of migrant workers has tapered off, the Guangdong government said last week. Those moving to central China have fewer staffing worries: they have gone straight to the source of labour.
“All the workers in coastal areas come from outside provinces. But here, there’s 100 million locals,” said Zhou Bin, manager of a medical equipment factory in the central province of Henan owned by Huacheng Yuanyi group headquartered in Hong Kong.

Zhou, with the eager smile of a salesman, presses glossy pamphlets into the hands of potential recruits at a busy job fair in Zhengzhou, capital of Henan.

“It’s getting more competitive to attract good people with more factories coming here, but we’re still in a better position than down south,” he said.


The central government, always keen to coin pithy slogans, launched its “rise of central China” campaign in 2004. In concrete terms that has translated into business incentives, many of which have only been unveiled in recent months.

Tax breaks given to exporters for capital investments and imports of material have been scrapped in coastal provinces but maintained in inland China, Chen said.

“Privileges that enterprises had enjoyed over the past 20 years will continue to be enjoyed in the central provinces,” he said. “And the provinces are competing against each other to attract existing enterprises.”

Relocating to the centre may also give manufacturers a reprieve, albeit an illegal one, from China’s new labour contract law, which exporters say has soured their business prospects.

The law, which gives workers more collective bargaining rights, may add 10 to 25 percent to wage costs, according to industry estimates.
But the vast labour pool in central China, where good work has been scarce, means job seekers there are still leaping at opportunities without demanding formal contracts from employers, the Dahe Daily in Henan reported earlier this month.

Foreign direct investment (FDI) figures are beginning to tell a tale of catch-up between the regions.

The six central provinces of Anhui, Henan, Hubei, Hunan, Jiangxi and Shanxi attracted 46.2 percent more FDI in the first nine months of last year than in the same period of 2006.

That easily topped the 20.2 percent increase in flows to Guangdong through October, though central China is admittedly starting from a much lower base.


Critics say luring businesses to locales thousands of miles from the coast is not the ideal development strategy.

The government should instead encourage migration to urban centres by reforming the hukou, or household registration system, which makes it tough for rural families to move to the city, said Ran Tao, an economist at the Chinese Academy of Sciences.

“Labour is cheaper in inland China, but it is far from the international market and would be more efficiently used in coastal areas,” Ran said.
The government, though, has been loath to overhaul the hukou system for fear of massive population flows swamping big cities.

In the meantime, companies will look to keep costs down by breaking new ground far from the coast.

At a construction site near Xinxiang in Henan, a building manager, surnamed Zhao, offers a simple explanation for why his southern company, Guangzhou Senshi Fashions, chose the central province for a new clothing factory.

“There’s a lot of labour here,” he said. “And it’s cheap.” (Editing by Jacqueline Wong)

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