Healthy as ever

Trade has always managed to find its way to Guangzhou, the teeming metropolis at the mouth of the Pearl River in Guangdong province. The city has been a commercial hub for more than two millennia, and, possibly as a result, its people seem to have business savvy in their blood. In the last 27 years it has been the controlling center of the Pearl River Delta (PRD), one of the busiest and most productive regions on Earth.

During this period, Guangzhou's economy has grown by leaps and bounds, easily outpacing the country's overall growth each year. Last year's economic census – China's first – revealed Guangdong's GDP to have been undervalued by 17.6%, making it the country's richest by an even wider margin than was originally thought. In terms of per capita income, the city comes second only to Shenzhen.

So far, growth has come mainly in the form of manufacturing, through the investments of foreign as well as Hong Kong and Taiwan companies. The PRD's thousands of factories, many of them in Guangzhou itself, have churned out everything from toys and candy to steel and automobiles, and dispatched them out all over the globe. The busy ports of Hong Kong and Shenzhen (the world's busiest and fourth-busiest in the world by container volume, respectively) are just next door, and Guangzhou's own port (the seventh-largest in China) is no slouch either.

For hundreds of years, going through Guangzhou was the only way for the West to gain access to China's tantalizingly massive markets, and it has been China's only continuously open port. Arab and Persian traders first came in the 10th century and played an important part in the city's commercial life. When the Portuguese arrived in the 1500s, the Chinese authorities confined them to Guangzhou, as well as Macau. The British received the same treatment when they came two centuries later to trade balls of opium for porcelain and silks. Shamian Island, in the center of the city, remains an oasis of late 19th century European charm with Chinese characteristics.

Guangzhou – once called Canton in English, a misunderstanding derived from the name of the province – declined in importance when the country was forced open in the 1840s, with foreign trade being dispersed amongst the string of China treaty ports along the coast. But after the Communist victory in 1949, China's business links with the outside world were once again focused on Guangzhou.

Cutthroat competition
Today, however, there are more options. Guangzhou and the PRD are facing stiff competition from Shanghai and the booming Yangtze River Delta (YRD), and increasingly from the Bohai Sea Economic Zone, which includes Beijing, Tianjin and Qingdao. Despite the PRD's ostensibly healthy economic situation, leaders are worried about staying on top.

"In the 27 years of opening up and reform, Guangdong has accumulated a lot of manufacturing assets, economic power and experience of success," said Huang Huahua, governor of Guangdong, at the recent Provincial People's congress. "All these are advantageous to our future growth, but at the same time, brother provinces are growing rapidly, our strengths are weakening and some profound problems have not been resolved."

The "profound problems" the governor spoke of are social. While Guangdong may be China's richest province in aggregate, it also contains some of the country's poorest areas. The relatively small PRD area accounts for 80% of Guangdong's overall GDP. Rural unrest has been most intense in the province, and several recent heated land disputes have resulted in tragic outbursts of violence. It seems like these incidents have highlighted the importance of addressing the stark inequality between urban and rural areas.

Among the "weakening strengths" is the perceived decline in the PRD's competitiveness. New foreign direct investment in Guangdong fell last year, prompting concerns that labor costs have become too high. "After about 20 years' rapid development, every sector [in Guangdong] is now relatively saturated in terms of attracting foreign investment," commented one academic. In other words, foreign-funded manufacturing is only a short-term way to maintain growth.

The long-term plan for the PRD, then, is to push manufacturing into less-developed areas while moving its own economy up the value chain. Of Guangdong's new foreign investments in 2005, manufacturing still made up the largest share, but was down 17.5% from the year before. Investment in the service sector, on the other hand, rose by as much as 35.5%.

Marketing, logistics, law and financial firms are pouring in – especially to Guangzhou, which planners want to develop into the financial center of south China. The city has earmarked US$6.2 million to attract financial institutions to its central business district. Not that it's necessary – foreign financial firms are practically lining up around the block to buy stakes in Guangdong's banks, hoping to restructure them as WTO reforms take effect at the end of the year.

Authorities have talked about the creation of a "Pan-PRD" super-region, made up of the nine Mainland regions of Fujian, Guangdong, Guangxi, Guizhou, Hainan, Hunan, Jiangxi, Sichuan, and Yunnan, plus the two special administrative regions (SARs) of Macau and Hong Kong, which would eliminate tariffs and trade barriers and allow free movement of labor. The so-called "9+2" scheme, first proposed by Guangdong Party Secretary Zhang Dejiang in 2003, amounts to a gigantic restructuring of south China. In practice, it would develop the poorer interior provinces by integrating the region's relatively isolated economies into the PRD machine. Since the YRD already gets good mileage from its convenient access to east China's 200 million people, linking up the 450 million people in south (and west) China would seem the logical way to compete.

Innovative edge
One of the buzzwords of the newly instituted 11th Five-Year Plan is encouraging "independent innovation" – that is, a more domestically driven economy with local companies making local investments and paying local taxes. Guangdong is currently spending more than any other province on science and technology. But aside from Shenzhen, the PRD is still not known for high-tech business.

Given the choice between opening up a high-tech factory in the PRD or the YRD, Lucent Technologies Guangzhou General Manager Cary Zhou would opt for Suzhou in the YRD stronghold of Jiangsu, despite admitting that costs might be slightly higher there. "We need skilled workers, engineers – it's easier to hire them around the Shanghai area," he said. "Guangzhou has manufacturing, but not exactly in our field."

But to hear Guangdong American Chamber of Commerce President Harley Seyedin tell it, the PRD's future has never looked so bright – and he would seem to have numbers on his side. AmCham recently completed a survey of 151 US businesses in the PRD area whose overwhelmingly positive responses are enough to shock the region's persistent doomsayers.

Seyedin said that of the companies polled, 76% were already making profits, 88% expected to be profitable within the next year, and 91% expected to be in the black within three to five years. These are not all veteran operations, either. "Twenty-four percent of these companies have been in China for less than three years," Seyedin said. He expects the majority of companies to spend upwards of US$50 million over the next three to five years on expanding operations in the region.

"When we look at [new investment], it seems that half of the new money is going to be reinvested in southern China, and only about 15-20% will be aimed at the Yangtze River area," Seyedin said. "We hear about Shanghai beating out the PRD. I think the numbers show that to be more hype and advertising than reality."

He has also noted changes in the profiles of new companies setting up in Guangzhou. "Naturally there's a shifting of the types of businesses that are being established down here, simply because the value of land is going up, and more labor-intensive industries are more likely to go farther out to other places."

Logistics hub
Part of the plan for Guangzhou's future is to further develop its role as a global logistics base. Over US$25 billion has been set aside to improve the city's transportation infrastructure, most notably the second phase of Baiyun International Airport, which will turn it into a major international passenger and air freight hub by 2010. New international routes are opening all the time to Guangzhou, and FedEx will be moving its Asian distribution center from the Philippines to Guangzhou in 2008. A high-speed railway linking Guangzhou and Hong Kong should be ready in 2013.

The city also hopes to build on its image as the world's window on southern China. The semi-annual Canton Trade Fair, which showcases products manufactured in the region and brings in piles of export orders, will be held for the 99th straight time this month. A new convention and exhibition center will be the biggest in China, second only to Frankfurt's in size.

"Exhibitions will be a major business for Guangzhou," said Stephen Chung, general manager of the city's Marriott-owned China Hotel. The city hopes to boost its visibility on the world scene when it hosts the 2010 Asian Games and Chung expects more international hotels to locate in Guangzhou, looking to cater for the large influx of foreign visitors. Sofitel, Westin and Four Seasons are likely to be represented in the city by next year.

For all the competitive fire between the two deltas, their respective buildups do not seem to amount to a fight to the death between east and south. China has grown to the point where it can accommodate multiple centers of enormous growth. "People realize that Shanghai is Shanghai, and the southern part of China is the southern part of China," said Chung. The ambitious revamps taking place in Guangzhou and the PRD suggest a region in rude health, not one facing a downturn.