Anxiety and hope in Guangdong, China

A large number of export-oriented processing firms have already closed in Guangdong, the heart of China’s export machine. Image credit: lylevincent at Flickr under a Creative Commons license.

I visited the Pearl River Delta in Guangdong this week, the heart of China’s export machine. A large number of export-oriented processing firms have already closed in Guangdong in sectors such as toys and footwear. Of course, firms close all the time in market economies, while others start up. This churning is part of the normal cycle in a market economy and is one of the key sources of productivity growth. Less productive firms die off while the successful new firms have especially rapid productivity growth. As the global economic crisis hits China, it is hard to keep track in real time of the balance of closings and openings.

Entrepreneurs and local officials here are certainly aware that demand for China’s exports has dropped sharply, and they wonder when the global economy will pick up again. Still, at the same time I was impressed at how many see this as an opportunity for China to pursue its rebalancing agenda. These discussions took place at a workshop in Jiangmen on Investment Climate, Innovation, and Industrial Transfer. The phrase “industrial transfer” refers to the fact that the most labor-intensive activities are moving away from the highly successful coastal cities, either to inland China, or other countries (Vietnam, Bangladesh) with lower wages.

A few of the interesting points made by officials, entrepreneurs, and scholars: The weakening of external demand creates an opportunity to increase public spending, which has been restrained in recent years because of the over-heated economy. This spending could: finance expansion of the public transportation system, both inter-city rail and urban public transport; expand basic health and education, as well as university education -- essential for the knowledge economy; and support environmental clean-up and the development of cleaner technologies. There was also broad consensus for public programs that would support ordinary people to buy apartments.

Most participants thought that on balance, the decline of the processing industries in coastal cities was a good thing. Firms can move inland where there is more labor supply. That frees up space and entrepreneurial talent to focus on higher value-added activities. One local mayor noted that tourism is now growing faster than manufacturing in his city. He sees tourism as a cleaner industry based primarily on Chinese demand that is likely to be more reliable than foreign demand for the next few years.

The overall tone is cautious optimism. One professor noted that in the old global environment, Chinese cities competed fiercely to create good investment climates to attract foreign investment and produce for export. In the new global environment the cities will now compete to meet domestic demand, create good innovation environments, and clean up their natural environments.

The transition from export-led to domestic-oriented will no doubt be bumpy. No one can know for sure how much transitional unemployment will arise and to what extent the balance of closings over openings may prevail for a time. We will be getting some new data in the next couple of weeks that will provide a clearer picture of the overall trends. Our new macro quarterly will come out on Nov. 25, and we will hold an online discussion a few days later. In the meantime, I found both anxiety and hope in the production centers of the Pearl River Delta.