• To encourage the relocation of processing trade activities from China's coastal region to the central and western regions, the Ministry of Commerce (MOFCOM) has selected nine cities as the first batch of key alternative destinations. They are Chenzhou in Hunan, Wuhan in Hubei, Xinxiang and Jiaozuo in Henan, Hefei and Wuhu in Anhui, Taiyuan in Shanxi, and Nanchang and Ganzhou in Jiangxi.
  
  
• Most of the Hong Kong processing trade operators with plans to relocate would only do so by expanding their production lines, shifting part of their production activities to areas outside the Pearl River Delta (PRD) region while maintaining close ties with their existing production base in the PRD to leverage on the advantage of complementarity. As such, preferred alternative destinations for relocation are primarily places in the vicinity of the PRD. Apart from Ganzhou and Chenzhou which are designated by MOFCOM, Beihai and Yulin in Guangxi (which lies adjacent to Guangdong and is part of the Pan-PRD region) are also good choices as processing trade under the restricted category is still allowed there.
  
  
• Labour supply and cost are among the key considerations of Hong Kong companies planning to relocate. In Ganzhou in Jiangxi, an estimated 2 million out of its 8.6 million people are working and living outside the city. To help enterprises recruit workers, Ganzhou has proactively stepped up promotions to attract the return of its natives who are working and living in other provinces. Apart from Ganzhou, other cities with large populations, large numbers of outbound workers, or large surplus labour include Chenzhou in Hunan, Nanchang in Jiangxi, and Yulin in Guangxi.
  
  
• The minimum wage levels of Nanchang and Ganzhou in Jiangxi, Chenzhou in Hunan, and Yulin and Beihai in Guangxi are slightly higher than those of Jiaozuo and Xinxiang in Henan but lower than those of Anhui, Hubei and Shanxi. Generally speaking, the minimum wage level is around RMB 400-500 a month in cities in the central and western regions, which is significantly lower than that in PRD cities.
  
  
• In terms of export routing, Ganzhou in Jiangxi, Chenzhou in Hunan, and Yulin and Beihai in Guangxi rely more on the PRD and Hong Kong as the distances between these cities and the two regions are shorter. Hefei and Wuhu in Anhui primarily use Shanghai, and Jiaozuo and Xinxiang in Henan, and Taiyuan in Shanxi mostly export via Tianjin and Qingdao. As for raw materials for the production of industrial goods, the PRD is the key source for Nanchang and Ganzhou in Jiangxi, while the other cities are less reliant on the PRD.

Background

Changes in the PRD's investment environment are driving Hong Kong investors to consider options such as expanding their production lines or relocating to places outside the PRD. According to the findings of a survey conducted by the Hong Kong Trade Development Council (HKTDC)¹, 37.3% of the responding Hong Kong-invested manufacturing enterprises plan to relocate their production facilities away from the PRD over the next three years.

Meanwhile, the Central Government encourages the relocation of industries from the coastal region to the central and western regions. In April 2007, MOFCOM issued a decision designating nine cities as key alternative destinations for relocating processing trade activities. The nine cities are: Chenzhou in Hunan, Wuhan in Hubei, Xinxiang and Jiaozuo in Henan, Hefei and Wuhu in Anhui, Taiyuan in Shanxi, and Nanchang and Ganzhou in Jiangxi.

In addition to the nine cities in central China selected by MOFCOM, Guangxi is also a good choice for the relocation of processing trade due to several factors. First, many Hong Kong investors considering relocation have indicated their preference for places outside Guangdong but within the Pan-PRD region, and Guangxi is part of Pan-PRD lying adjacent to Guangdong. Second, Guangxi is also part of the western region where processing trade under the restricted category is still permitted. According to the observations of HKTDC's Guangzhou Office, the Guangxi authorities tend to recommend Yulin and Beihai as alternative destinations for the relocation of Hong Kong-invested factories.

To assist Hong Kong companies in making the right choice for relocation, HKTDC's Research Department has carried out a preliminary assessment of the investment environment of the nine cities in the central region as well as Beihai and Yulin in Guangxi. The assessment was made based on the following three major factors:

(1) Preferences and operation modes of Hong Kong investors;
(2) The local investment environment;
(3) Links with Hong Kong as a business centre.

The main sources of information about these cities' investment environments are as follows:

(1) Local foreign trade and economic relations offices through HKTDC offices in the mainland;
(2) Official websites and printed materials of the various cities.

Preferences and Operation Modes of Hong Kong Investors

Preferences of Hong Kong Investors for Relocation

The HKTDC Survey² found that the majority of the respondents who plan to relocate would only move part of their production facilities to other regions. In other words, the majority of the Hong Kong companies prefer to expand by setting up production footholds outside the PRD region to complement their existing facilities. Thus, the new footholds will maintain close ties with their existing production bases in the PRD.

Table 1: Relocation Plans of
Hong Kong-invested Production Enterprises in PRD in Next 3 Years

Operation Mode of Hong Kong Investors with Relocation Plans

As understood from Hong Kong investors who have already relocated from the PRD, they have maintained the original scale and operation of their production bases in the PRD. The new production footholds (or satellite factories) established outside the PRD are in effect extensions of their PRD operations. These satellite factories carry out processing taking advantage of the local labour supply and lower production cost.

Sourcing of raw materials is still handled by the main factory in the PRD in a centralised manner. Product development and design are generally conducted in the PRD as well. Most of the Hong Kong-invested satellite factories would deliver the finished goods back to their production bases in the PRD where arrangement is made for export shipment via Shenzhen or Hong Kong. This is done partly due to the need for combining cargoes to make a full container load. It is understood that a substantial portion of the raw materials and semi-finished goods transfers between the production bases in the PRD and the satellite factories is conducted in the form of deep processing transfer.

Jiangxi, Hunan and Guangxi: Preferred Destinations

Based on the above operation mode, locations near the PRD are more suitable for the majority of Hong Kong investors with relocation plans. The survey has found that most of the Hong Kong investors plan to relocate from Guangdong to other provinces in Pan-PRD. Among all the Pan-PRD provinces, in addition to Fujian which is located in the coastal region, Jiangxi, Hunan and Guangxi in the central and western regions are also closest to Guangdong. Hence, among the 11 key alternative destinations, Ganzhou, Chenzhou, Beihai and Yulin possess the best advantages.

Table 2: Preferred Alternative Destinations
for Relocation of Hong Kong-invested Production Enterprises in PRD

Take Dongguan in Guangdong as an example. Table 3 below shows the time required for cargo transportation between the PRD and the various cities. It can be seen that the distances between the PRD and the cities of Nanchang and Ganzhou in Jiangxi, and Yulin and Beihai in Guangxi are shorter than the other cities. And among the four cities, the distance between Ganzhou and Dongguan is the shortest, and it only takes four hours by car to travel between the two cities. The transport costs from Dongguan to Nanchang and Ganzhou in Jiangxi, and Yulin and Beihai in Guangxi are also lower than those of other cities in the central region.

Table 3: Time and Cost Required for Transporting Cargo to Dongguan

Investment Environments of the Cities: A Comparison

Labour Supply

Labour supply and cost are one of major difficulties facing Hong Kong investors amid changes in the PRD's investment environment. The survey confirmed that labour cost and labour supply are among Hong Kong investors' key considerations in relocation. As shown in Table 4 below, an estimated 2 million out of Ganzhou's 8.6 million people are working and living outside the city. Besides, Chenzhou in Hunan, Nanchang in Jiangxi and Yulin in Guangxi also have relatively large populations, large numbers of outbound workers, or large surplus labour.

While labour recruitment is not necessarily hassle-free in these cities, one can assume that outbound workers are an important source of labour supply as they (especially those working in the PRD) should be happy to return and work in their hometowns. As shown in Appendix 4, different cities have different policies to attract workers. For instance, the government of Ganzhou is proactively providing assistance in labour recruitment by stepping up promotions to lure the city's natives who currently work in other provinces to return and work in Ganzhou.

In terms of labour cost, the minimum wage levels of Nanchang and Ganzhou in Jiangxi, Chenzhou in Hunan, and Yulin and Beihai in Guangxi are slightly higher than those of Jiaozuo and Xinxiang in Henan but lower than those of Anhui, Hubei and Shanxi. Among the five cities of Nanchang, Ganzhou, Chenzhou, Yulin and Beihai, minimum wage is the lowest in Yulin.

Table 4: Labour Resources and Wage Levels