.Las year was a time of celebration and sadness in the Pearl River Delta, China’s industrial belt in the south. It celebrated the 30th anniversary of the policies that have made this former rural backwater both rich and a major export hub. The 43,000-square-kilometre region, however, is also experiencing its worst year since the Asian financial crisis a decade ago, due to stricter labour laws and the economic downturn.

In early January this year, the central government published an ambitious blueprint for the next 12 years, which aims to transform the region into a base for advanced manufacturing, innovation and heavy industry. The grand plan brings little immediate relief to the depressed delta, but will provide it with a much-needed vision and a strong commitment from Beijing for help in the future.

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Export growth in Guangdong province, where the delta is located, fell to 5.6% in 2008, down from 22.3% in 2007, and GDP growth slipped to 10.1% from 14.7%. More than 62,000 companies closed, nearly 5000 more than in 2007, leading to 600,000 migrant workers returning home.

Of all regions in China, the delta has been the worst hit by the global financial crisis, because it depends more than any other on exports. Provinces that focus more on the domestic market have fared better.

Worst hit was Dongguan, the industrial heavyweight of the delta and where the suppliers of Nike, IBM and other international brands are located. In the first 11 months of 2008, its exports grew by an annual 9.3%, compared to 25.9% in the same period in 2007. The growth will slow further this year. Thousands of factories closed, many without paying staff the wages and bonuses due to them. The result was protests, demonstrations and a rise in crime by laid-off workers. Other neighbouring cities such as Guangzhou, Shenzhen and Zhongshan have had similar problems.

For the delta, the troubles began before the financial crisis. A stronger renminbi, the rising prices of raw materials and a new labour contract law that came into force on January 1, 2008, all combined to cause profits in the region to slim. Companies making high-volume, low-margin items such as toys, garments and plastics were hit the hardest. Some investors closed their plants and relocated them to Vietnam, Cambodia, Indonesia or inland provinces in China that offered cheaper land and labour costs.

 

Closing down

“This year, 100 to 200 Taiwan firms, in different sectors, have closed in Dongguan,” says Chao Wei-nan, secretary-general of the Dongguan Taiwan Investors Association. “Some firms are evaluating other investment sites, in the interior or abroad. If you make shoes or furniture, it is easy to move; but not if you are in IT or telecommunications.”

Foxconn, the Taiwan-based firm that is the world’s largest manufacturer of electronics and computer components, employs 450,000 people in China and is one of its biggest exporters. It is gradually moving its production away from the delta , where it began in 1988, to bases in Wuhan city and Shanxi province.

In December, Shenzhen mayor Xu Zongheng said that 682 factories had closed in the city in 2008, costing 50,000 jobs. But he remained upbeat. “The financial crisis is our best chance to upgrade our industrial structure, find better business partners and encourage mergers and acquisitions – just as people who buy stocks in bad times will earn money,” said Mr Xu. “Closures happen even without a financial crisis. Many companies closed because of poor management.”

This is the spirit of the 2008-2020 blueprint, published with much fanfare on January 8 by the National Development and Reform Commission in Beijing. “The further development of the whole Pearl River Delta area is facing grave challenges,” says the commission’s vice-chairman Du Ying.

The blueprint calls for production of toys, shoes and textiles to be replaced by high-end industries, such as automakers, petrochemical firms, and high-tech and service companies.

The target for 2012 is per capita output of $11,700, compared to $7000 in 2007, with 53% coming from the service sector and more than 80% of the inhabitants living in cities, up from 60% today. By 2020, the province will have 10 China-based multinationals with annual sales of $20bn, and it will be home to two or three big automakers with output worth more than $14.6bn each, according to the blueprint.

 

Into infrastructure

The plan includes spending of more than 100bn yuan ($14.7bn) on railways and light rail systems to cut travel time between Guangzhou and any major city in the delta to less than one hour. This includes lines to Shenzhen, Huizhou, Qingyuan and Zhuhai which are due to open in 2015. A light rail system to Zhuhai is due for completion by 2010. Guangdong has also budgeted 220bn yuan for expressways, including 3000 kilometres by 2012. Work starts this year on a bridge between Hong Kong, Macau and Zhuhai.

The spending is, in part, to offset the impact of the financial crisis and also to spread wealth by enabling people to live in a place where housing is cheap and it is easy to commute to work.

Mr Du says cities in the delta must develop modern services to meet the needs of Hong Kong as an international financial centre, in trade, logistics, meetings and exhibitions, tourism and centres of innovation, while avoiding duplicate projects. “We are giving more power to Guangdong and allowing it to do experiments,” he says. These include allowing qualified firms the right to issue bonds and conduct foreign trade in renminbi, and setting up a renminbi and foreign exchange derivatives market.

Scepticism abounds about the region’s capacity to move upmarket. According to the Hong Kong Economic Journal, the regulatory system in the Pearl River Delta remains far behind that in Hong Kong, with a heavy reliance on personal connections with officials, a low quality of administrative efficiency and civil servants, and complicated approval procedures: “Guangdong’s investment in education is low, its science and technology undeveloped and base of scientific innovation weak. There is much that needs to be improved.”

In 1978, the central government offered Guangdong opportunities to develop a new economic model that it gave to other provinces. By doing this it created an economic miracle in the delta. Now the producer of one-eighth of China’s total GDP, Guangdong is too important to be allowed to fail. So Beijing is giving it a second chance, but the transition from a sweat shop to a high-end producer will be a huge challenge, even for a region as resilient as the delta.