11.2008

General Background

The Pearl River Delta economic zone (PRD) is one of China's leading economic regions and a major manufacturing center. It locates at the Pearl River estuary where the river enters the South China Sea. The zone is formed by 9 cities, namely Guangzhou (the provincial capital), Shenzhen, Foshan, Zhuhai, Jiangmen, Zhongshan, Dongguan, four districts and counties of Huizhou and four districts and counties of Zhaoqing.

Source: http://www.hydrocarbons-technology.com/projects/guangdong/guangdong5.html

PRD in Numbers

PRD is one of the most vibrant economic regions. In 2007,

• Real GDP of the PRD grew by an average of 16.2%
• The PRD accounted for 10.2% of China's GDP
• The PRD accounted for 11.8% of China's gross industrial output
• The PRD accounted for 29.1% of China's total export
• The PRD accounted for 8.8% of China's total retail sales of consumer goods
  

Major Economic Indicators (2007)

Note:
a) the figure in value terms are calculated at current prices;
b) statistics of value-added of industry cover all state-owned and non-state-owned enterprises with an annual sales revenue over 5 million yuan
Source: Guangdong Statistical Yearbook 2008

PRD as a Manufacturing Base

The PRD started producing labor-intensive consumer goods such as food and beverages, toys and clothes in early 1980s. After 1985, industrial relocation, mainly from Hong Kong, accelerated the growth of light industry in PRD until early 1990s, following which heavy industry featuring hi-tech electronic equipment and machinery, chemical products and autos etc. played a leading role in industrial output and export.

As a manufacturing base of the world, the region is playing a leading role in some industries. Some categories of the toy industry in the PRD have a world production share in excess of 60%. In 2007, mobiles produced in Shenzhen alone accounted for about 1/5 of the global market. Other leading products include footwear, lighting fixtures, furniture etc, to name but a few.

In short, Guangdong, especially PRD has formed a diversified industry profile featuring 9 pillar industries:

Performance of the 9 Pillar Industries of Guangdong in 2007

Note:
a) the figure in value terms are calculated at current prices
b) statistical coverage includes all state-owned and non-state-owned enterprises with an annual sales revenue over 5 million yuan
Source: Guangdong Statistical Yearbook 2008

Foreign capital plays a major role in PRD's industrial development. In 2007, the region's utilized FDI reached US$13.1 billion, 17.5% of the national total. Foreign enterprises, most of which from Hong Kong and Taiwan, accounted for 62.9% of Guangdong's total exports. Shenzhen, Dongguan and Guangzhou, thanks to their proximity to Hong Kong, are the 3 cities in PRD that attracted the most FDI. An estimated 57,500 factories with Hong Kong interest are operating in PRD.

In recent years, when private enterprises are formally allowed and recognized in China, private enterprises mushroomed in the PRD. For instance, taking Guangdong as a whole, from 2000 through 2007, private enterprise exports skyrocketed from US$614 million to US$65.2 billion.

Industrial Clusters
PRD's broad range of industries has developed in clusters. The two banks of the delta present different industry profiles. The east bank focuses on electronics and IT products while the west bank is famous for household appliance products. In fact, Business Magazine once attributed China's success in manufacturing to the cluster effect, whereby industries obtain competitive advantage by concentrating geographically. In PRD, a supply chain has taken shape, where it is convenient to source all parts, components and accessories of a product, so that orders could be completed quickly. When upstream and downstream industries are clustered, resources are consolidated and specialization is deepened. Thus, efficiency is enhanced and cost reduced. Clusters emerged in PRD include the following:

Clusters in PRD Cities

* Panyu is a district of Guangzhou. Chencun, Nanhai and Shunde are districts of Foshan
Source: Michael J. Enright, Edith E. Scott, Ka-mun Chang, "Regional Powerhouse: the Greater Pearl River Delta and the Rise of China" John Wiley & Sons (Asia) Pte Ltd, 2005

To attract more FDI, PRD has set up several special purpose zones where foreign enterprises enjoy tax deductions and exemptions. Now 4 Economic and Technological Development Zones, 6 New- and High-tech Development Zones, 6 Tariff Free Zones and 2 Export Processing Zones exist in this area.

Industrial Restructure
Guangdong offers a favorable business environment. A government survey in 2004 showed that enterprises are generally satisfied with Guangdong's infrastructure, supporting industries and administrative efficiency. However, shortages of raw materials and energy do exist. In addition, there are reports that enterprises in PRD are facing shortages of labor. These prompted Guangdong's initiative to restructure its industries.

Despite the mature light industry, PRD is heading the way to shift its emphasis to heavy industry. In terms of gross output value, Guangdong's ratio of light industry to heavy industry (above designated size) has turned from 1.39:1 in 1995 to 0.62:1 in 2007. There are plans to encourage relocation of labor-intensive industries in PRD to peripheral areas, and develop telecom, equipment manufacture, auto and petrochemical industries in PRD. Heavy industries are emerging in PRD, especially in Guangzhou and Huizhou.

Guangzhou is becoming one of the three auto manufacturing bases in China. According to the "Guangzhou Automobile Industry Development Report", the capacity of cars of Guangzhou will reach 955,000 in 2008. The plant set up by Honda in 1998 initiated the autos and parts cluster in Guangzhou, and joined later by Nissan and Toyota, and business cars specialist Hyundai etc.

Many world famous auto parts manufacturers are locating in nearby areas, such as Japan's biggest car parts maker, Denso. Around 450 auto and auto parts manufacturers have been set up in Guangdong.Other PRD cities surrounding Guangzhou are developing auto parts industry by establishing development zones e.g. in Foshan, Zhongshan, Shenzhen and Huizhou Daya Bay.

PRD is also progressing in petrochemical industry. Construction works in Guangzhou Royal Dutch Shell, a US$4.3 billion petrochemicals complex jointly set up by CNOOC (China National Offshore Oil Corp) and Shell Petrochemicals Company Ltd, has been finished at Daya Bay in Huizhou. Once completed, the JV company will produce about 2.3 million tones per year of products, generating up to USD 1.7 bn in products sales, primarily supplying customers in Guangdong and the high consumption areas of China's coastal economic zones.

This is not the only petrochemical plant being constructed. Five oil refining plants, five petrochemical plants and five ethylene plants listed in the "Plan of 9 Industries in Guangdong Province during 2006-2010" will be given great weight. Among them, 4 spread in Huizhou and Guangzhou.

PRD as a Market

PRD is one of the mainland's largest and most sophisticated consumer markets. Strong demand for consumer goods is driven by the growing income and influx of tourists. In 2007, PRD enjoyed a per capita GDP of RMB53,820, 2.8 times of the national average of RMB 18,934. With 3.6% of China's total population, the region accounted for 8.8% of the nation's total retail sales of consumer goods.

Retail sales of consumer goods in the region reached RMB781 billion in 2007, grew by 16.9% from 2006. Major consumer markets are in Guangzhou and Shenzhen, accounting for 33.2% and 24.5% of PRD's retail sales respectively.

In Guangdong, as in other parts of China, there has been a shift in the consumption pattern towards higher level needs e.g. accommodation and traveling. In 2007, the following categories grew mostly rapidly in sales: household electric appliances & audio / visual equipment, autos, mobile phones & telecom equipment and building & decoration materials.

The retail sector has been developing quickly. In 2007, when China further liberalized its distribution sector in accordance to its WTO commitments, competition between local retailers and foreign giant retailers intensified. PRD's retail landscape is now characterized by diversified modern operations such as department stores, chain stores, supermarkets, warehouse type markets and convenience stores. Major foreign retailers present in PRD include Carrefour, Wal-mart, Watson's and Park'N Shop etc.

Services Industry

Over the past two decades, the composition of economy has experienced a typical change with tertiary industry having increased in share of the economy. Increased affluence on the part of residents fuelled demand for services such as education, recreation, traveling and telecom services. In recent years, business services are also burgeoning in PRD, together with the rapid growth of secondary industry. In fact, in recent years, the pace of foreign investment in services has speeded up, concomitant to China's further liberalization.

PRD Composition of GDP (%)

Source: Guangdong Statistical Yearbook 2008

Major Tertiary Industry GDP in PRD Cities, 2007

Sources: Guangdong Statistical Yearbook of 2008

Guangdong is aiming to speed up the development of the province's services sector, particularly in PRD. According to Guangdong's 11th Five-Year Programme (2006-2010), the metropolitan cities of Guangzhou and Shenzhen would strengthen the development of the services sector.

Modern Logistics
Shenzhen, the 4th largest container port in the world, sets itself to be the logistic center. There are over 2,000 companies that have logistic business in Shenzhen. Six logistics parks have been set up. Over 50 foreign companies including UPS, Maersk, FedEx, Kerry Logistics etc have registered in the city. MNCs like Aeon, IBM and Wal-Mart etc have set up global or regional sourcing centers there. During the 11th Five-Year Programme, RMB103 billion will be invested in logistics facilities and related infrastructure.

Banking
Following China's entrance into the WTO and the signing of "Closer Economic Partnership Arrangement" with Hong Kong, PRD steps up to welcome foreign bankers and continues to improve its banking system. There are at least 22 foreign banks in Guangzhou and 31 in Shenzhen. More Hong Kong banks have opened branches in PRD under CEPA. Starting from end-2006, RMB business was opened to foreign banks.

Intermediary Services
In terms of the number of trade shows, exhibition space, and the scale and influence of the exhibitions, Guangzhou is one of the reputed and leading trade fair centers in China. Private companies contributed significantly to this industry. Perhaps CECF, also known as China Canton Fair in Guangzhou, and China Hi-Tech Fair in Shenzhen are the 2 most famous fairs in PRD. The biggest lighting fair in Asia (Guangzhou International Lighting Exhibition + Electrical Building Technology China) is co-organized by Guangya, a private PRD exhibition company and Messe Frankfurt.

Guangzhou's 11th Five-Year Programme (2006-2010) has named (among others) financial, logistics, product design and packaging, legal, accounting and information services as priority development targets in business services. All these area are open to foreign companies. Major foreign companies that have presence in PRD are Gallup, AC Nielsen, Accenture, Savills, and the "Big 4" accounting firms etc.

Domestic and International Connectivity

PRD has built a complete network for water, land and air transportation.

Cities in the PRD are interconnected by highways and railways. PRD is improving its land network to strengthen linkages among cities. In 2005, the "Plan of High Speed Express Ways Network Linking Cities of the PRD" was approved which means the "metropolitan region within one hour drive" will be achieved in 2020. The main frame of the network is formed like an "A shape" by two principal axis (Guangzhou--Shenzhen, Guangzhou--Zhuhai), two subordinate lines (Guangzhou--Zhaoqing, Xiaolan in Zhongshan--Jiangmen, Dongguan--Huizhou) and two minor lines connecting cities on the two banks of the PRD (Shunde--Panyu--Dongguan, Zhongshan--Humen). The total mileage of the expressways is 570 km. The principle axis will be completed in 2010.

As far as connection to Hong Kong is concerned, it takes just 2 hours from Guangzhou to Hong Kong by train now. The Hong Kong-Shenzhen Western Corridor had been put into use as the 4th vehicular land crossing between Shenzhen and Hong Kong. It was designed to have a handling capacity of 58.6 thousand vehicles per day, which means half of the vehicles crossing the border will pass through it. Another key project is a new "Y-shaped" bridge connecting Hong Kong, Macau and Zhuhai. It is expected to boost the economy in west PRD by improving its accessibility to Hong Kong.

There are 5 airports in PRD (incl. Hong Kong and Macau). The new Baiyun Airport in Guangzhou, one of the 3 air hubs of China, is hitherto the largest and most advanced airport in China. It operates over 110 international airlines and will serve as a main transport way in the 2010 Asian Games held in Guangzhou.

Ports in PRD play a critical role for transporting manufactured goods abroad. In 2007 the volume of freight handled in coastal ports in Guangdong reached 803 mn tones, and container-handling volume hit above 31 mn TEUs. Major ports in PRD include Guangzhou Port, Yantian Port, Shekou Port and Chiwan Port of Shenzhen etc. Among the top three container ports in China: Shanghai ports, Shenzhen ports and Guangzhou ports, two of them are in the PRD.