Vibrant, ambitious, fiercely independent and maddeningly congested. This is Guangzhou, southern China's commercial metropolis, capital of Guangdong province and home to 6.5 million of its residents. Guangzhou, above all else, embraces the extremes of China's recent quest for modernisation. It is the Mainland's wealthiest city, with average monthly household income reaching Yn2,600 (US$313), surpassing even that of Shanghai. However, it is also a city screaming for renewal. Only in recent years have municipal leaders decided the City of Rams would, indeed, evolve as a city, boasting the physical infrastructure that should guarantee Guangzhou's progress well into the next century.
Such contradictions stem in large part from the laissez faire attitude of Guangzhou's residents, who 20 years ago seized upon Deng Xiaoping's maxim 'To Get Rich is Glorious' and have never looked back. For centuries, Guangzhou shouldered the well-earned reputation of continued from page I being gateway to southern China, or as Ezra Vogel put it, the undisputed centre of Cantonese culture, politics and cuisine.
Following the Communist victory in 1949, however, the new municipal government elevated a policy of ?production first, livelihood later,' favouring the creation of Soviet-styled heavy industry over civil construction. It was a logic that led to Guangzhou's tortured descent into urban decay, crowded roads and dilapidated housing, only reversed nearly three decades later with Deng's reform and opening policies. The new era allowed Guangzhou's residents to return to their former commercial practices and begin the city's current race towards prosperity. Between 1980 and 1996, the city's gross domestic product jumped three-fold, reaching Yn164.3bn by 1997.
China's wealthiest city
Today, the signs of wealth are everywhere, from the ceaseless electronic clamour of cell phones and pagers to the vast numbers of individually owned cars crawling through the streets. Total retail sales of consumer goods in the city topped Yn80bn last year, among the highest in the nation.
"Guangzhou is an increasingly well-dressed city, with people willing to spend money on high quality clothes and eat at quality restaurants that always seem to stay full," comments long-time Guangzhou observer John Dickson, managing director (Asia) for market research company Opinion Research Corp. International. Such wealth, assisted by road and railway building in the Pearl River Delta, radiates throughout the region, attracting capital and talent to the provincial capital.
"Guangzhou has reclaimed its status as Guangdong's central city, home to a variety of wholesale centres and anchor for the province's distribution networks," explains Ms Kitty Tam, Guangzhou director for the Hong Kong Trade Development Council. "Its influence makes Guangzhou the place to promote your products."
The city is also home to a considerable amount of overseas investment numbering some 8,455 Sino-foreign joint ventures at the end of last year – many of which are involved in export trade. Exports from the city's joint ventures reached US$28.88bn in the period between 1992 and 1997.
More than 80 percent of overseas capital invested in the city originates from Guangzhou's most important neighbour, the Hong Kong Special Administrative Region. The majority originates from Hong Kong investors or offshore Mainland shell companies round-tripping funds to take advantage of preferential tax and other benefits originally intended for legitimate foreign investment. Starting in the 1980s with Mr. Henry Fok's financing of the city's premier hotel, the White Swan, Hong Kong businesses have flocked to the city to invest in manufacturing, service and infrastructure enterprises.
"Hong Kong investors feel at home here," explains Leung Shiu Kin, Hongkong & Shanghai Bank's Guangzhou chief representative. "There is a close proximity to Hong Kong culture; and people in Guangzhou move with a similar tone and style." Hong Kong's largest conglomerates, including Lee Ka-shin?s Cheung Kong Infrastructure and Lim Por-yen's Lai Sun Development, have made Guangzhou investments part of their portfolios.
Despite kinship with southern neighbours, the city has also added many of the world's largest multinational companies to its roster of foreign investors. Guangzhou Economic and Technological Development Zone is home to more than a dozen multinational firms that has each invested at least US$ l 0m in manufacturing projects. Among the largest is Procter & Gamble of the US, which over the last decade has invested US$300m in 11 Guangzhou-based joint-ventures, manufacturing everything from shampoo and tooth-paste to feminine hygiene products.
Entrepreneurial drive
Explaining the rationale for locating P&G's Mainland base in the city, associate director for public affairs Yvonne Pei says the immediate access to an advanced consumer market was one factor, but the quality of employees was paramount. "The educational levels attained by our employees and their enterprising nature has been a great benefit," she adds.
It is, indeed, entrepreneurial energy that drives the city forward, pushing the municipal economy to nationwide leading growth of 10.7 percent during the first eight months of this year, despite a sharp decline in foreign trade brought about by the Asian economic crisis.
Guangzhou boasts the Mainland's largest concentration of non-state-owned firms, including private enterprises and individually employed businessmen. Their influence is growing rapidly. In the five years between 1992 and 1997, the non-state-owned proportion of the city's industrial output increased from 34.98 percent to 48.17 percent.
Guangzhou's private sector presently numbers more than 13,600 firms registered in the city's downtown urban districts alone, and that number is growing at a clip of better than 60 percent a year. Many of the newly established companies are engaged in service sector activities, from small printing shops and real estate service companies, in addition to large textile makers and food manufacturers. To support private activity, the municipal government has implemented a variety of preferential policies that include the break-through measure of granting the city's largest private firms rights to conduct trade overseas. According to Chen Heping, deputy director of the private enterprise department of the Guangzhou's Bureau of Industry and Commerce, private enterprise is "very important to the health of the economy."
Municipal leaders are betting that individual economic vitality will drive Guangzhou's economy forward and ease the employment burden caused by restructuring of the city's debt-ridden state sector. Urban unemployment presently stands at about 100,000, with more workers expected to lose their jobs as Guangzhou moves to shutter and consolidate loss-making companies.
Loss-making enterprises
The city's state-owned sector, as a whole, is among the Mainland's worst. Combined losses at 193 of Guangzhou's state-owned enterprises in 1996 stood at Yn1bn.
The municipal government has outlined plans to reorganise its state firms by developing internationally competitive companies in key industrial sectors, including the manufacture of chemicals, steel and metallurgical products, automobiles and light industry. The challenges are huge. In recent years, municipal leaders have failed in their attempt to create competitive heavy industry.
The most glaring example of miscalculation is Guangzhou Ethylene Co., a US$975m ethylene plant completed in August 1997 and effectively shut down three months later. The plant, owned 90 percent by the Guangzhou municipal government and 10 percent by China National Petrochemical Corporation (CNPC), was designed in the early 1990s, when rapid expansion by Pearl River Delta textile manufacturers drove the price of ethylene to Yn10,000 per tonne. The price today stands at about half that level, making the plant's 150,000 tonne-a-year capacity far short of the minimum 300,000 tonne capacity now required to make the facility profitable.
The newly installed Party secretary of Guangdong province, Li Changchun, criticised the project for being far too expensive to build. Meanwhile, city leaders are trying to fashion a bail-out scheme for the plant, most probably by way of an asset transfer to CNPC's subsidiary Guangzhou Petrochemical. However, Guangzhou Ethylene's 90 percent debt-to-equity ratio means the terms of any deal would certainly throw the responsebility for paying off the project's massive debt squarely on the shoulders of the Guangzhou government.
Infrastructure projects
Beyond repairing its crippled state sector, Guangzhou is also in desperate need of investment to shore-up its overburdened road system, rejuvenate housing stock and manage what is fast emerging as one of the Mainland's most environmentally distressed landscapes. Municipal leaders appear to be responding to the challenge. Fixed asset investment this year continues to grow at about 15 percent. Among the many infrastructure projects scheduled for completion in the coming months is Guangzhou's first subway line, built at a cost of Yn12.7bn, as well as several arterial roadways that will allow traffic easier access through the city centre.
In his government work report delivered before the municipal Party congress in June, Guangzhou mayor Lin Shushen outlined an ambitious plan for urban regeneration in the coming years. It will be fuelled by an anticipated average rise in gross domestic product of 13 percent a year over the next five years, to Yn260bn by 2000 and Yn345bn by 2002.
Still, Lin admitted, the challenges remain enormous. "We cannot ignore the low quality of our economy: the pace of economic structural adjustment is slow; our advantage for developing core industries is not obvious; and our purpose as a centrally located city [for Guangdong province] needs further development," he said.
Solving these problems, along with developing a habitable city environment for its residents, is crucial for Guangzhou to realise its 21st century ambitions.
Distribution gateway
For many years, Hong Kong has served as a gateway for international trade to and from the Mainland. Now a Guangdong-based distribution centre is aiming to challenge that role. The US$50m centre, known as Districentre, claims to be the largest of its kind in Asia and is designed to help overseas companies tap into the Mainland's wealthiest consumer market, the Pearl River Delta. Likewise, Chinese manufacturers can use it to access foreign markets.
Based in Panyu, Districentre challenges the Mainland's traditional ban on foreign investment in distribution and transport companies, which for decades has forced foreign manufacturers to dump goods in Hong Kong and rely on traders to channel them to Mainland distributors.
Ironically, Districentre's ambitious aim to replace this model is closely connected with Li & Fung Group, whose chairman Victor Fung is also chairman of Hong Kong Trade Development Council.
LF Distribution Centre, an associate of Li & Fung, has a 70 percent interest in Districentre. The Panyu Foreign Economic Corporation, a local government agency, holds 10 percent and the remaining 20 percent is held by the developer of Panyu Tradetown, where the centre is located.
Districentre has 172 units with combined showrooms, warehouses and offices. Most units have been rented out to manufacturers such as Aiwa, Daiichi Kosho and Mitsubishi and China's top television producer, Sichuan Changhong. The monthly rent and expenses for a 872 sq metre unit amount to approximately US$11,000.
The centre claims to be the first in the Mainland to allow manufacturers to meet local wholesalers and retailers to negotiate cash-and-carry sales. It also offers potential tenants one-stop-shop services, including licences for distribution in Panyu, free business consultation, banking, transport, business registration and help with staff hire.
The centre has focused on attracting Japanese electrical appliance producers and is now concentrating attention on high-technology and telecommunications manufacturers from Europe and the US. About 100 distributors order products at the centre on an average day, a total which the centre is anxious to increase. To this end, it has organised a series of buyers' fairs and distribution seminars for local distributors.
Smuggling crackdown worries investors
China's latest moves to curb rampant smuggling has left many Guangzhou-based foreign investors concerned that stringent customs inspections and zealous enforcement are preventing the import of material vital to business and manufacturing.
The anti-smuggling crackdown was launched in July. In recent weeks, massive seizures by customs officials and frontier police of diesel oil, newsprint, chemicals and cigarettes have been praised by official media as part of the national effort to eradicate what has been described by Premier Zhu Rongji as a Yn100bn-a-year business.
During July and August alone, customs crusaders investigated more than 920 cases in Guangdong province – involving goods valued at Yn630m. Guangzhou Customs, meanwhile, has been credited with bringing high-volume smuggling under control. Rigid enforcement also has been credited with driving up the prices for key raw materials, such as polyester, polypropylene, diesel and edible oils. The price for one tonne of No. 90 petrol, for example, has risen from Yn1,800 to Yn2,150, according to city customs officials.
For domestic manufacturers, already under pressure this year from cut-price goods made by Asian neighbours with weak currencies, the anti-smuggling campaign could not have been better timed. State Councillor Wu Yi, for example, claimed that smuggling was the source of more than Yn3bn in losses to China's petrochemical industry in the first quarter of this year.
The crackdown, however, has many of Guangzhou's overseas investors worried that tighter controls and unannounced factory visits are undermining business. In one case, customs officials on an unscheduled visit to a Japanese-invested home appliance joint venture manufacturer seized import and taxation documents. The aim was to prevent the smuggling of goods not present on import declarations. However, a Hong Kong manufacturer comments: "The crackdown may be correct in principle, but the way they are doing it is causing negative impact on our normal day-to-day operations."
"It doesn't matter whether [companies] are importing in a legal or illegal way, everybody is under stringent inspection," a second Hong Kong businessman observes, adding that inspections were causing delays and added costs to the import of raw materials to the city.
Besides firms requiring the import of raw materials, companies selling computers and other high-technology components have also been hit by the crackdown, with some distributors reportedly running short of stock. One manufacturer said he had reduced his inventory of raw materials for fear that keeping excessive stock could easily be misjudged by customs officials as preparation for illegal resale. "Any company warehousing sufficient stocks of imported materials, as well as importers advertising imported merchandise, are likely to be investigated," the manufacturer says.
For many small companies it has become difficult to survive. "Sales are flat and times are hard," one local diplomat says. "So this kind of activity is really not welcome." Not welcome, but the crackdown is likely to continue through the remainder of the year.
Subway plans delayed by financing problems
In Guangzhou, traffic is seen in much the same way as the weather every-body gripes, but nobody seems to be able to do much about it. That view may be changing. Starting next July, Guangzhou will begin full operation of the city's first subway line.
Guangzhou mayor Lin Shusen said the local government would spend Yn60bn over the next three years on infrastructure and environmental protection projects. The 18.5km Line Number One is the initial leg of a planned four-legged mass transit rail system that should be built over the next decade to alleviate much of Guangzhou's bumper-to-bumper inner-city congestion. The 16-station first route will transport passengers between Xilang in the city's south-west to Guangzhou's new railway station in the eastern Tianhe district. Lines two and three will be built along the north-south axis. A fourth track, scheduled as the city's first light rail line, is also being developed to extend towards the city's eastern suburbs.
Building the Guangzhou metro has taken nearly 40 years to accomplish. The idea of a city subway started as early as 1960, but was shelved for 30 years due to the Cultural Revolution and lack of available funding. The project was revived in the autumn of 1989, when it received municipal government approval. China's State Planning Commission gave its blessing to first phase construction one year later and groundbreaking began in December 1993.
Construction and outfitting of the first line comes at a cost of Yn12.7bn (US$1.53bn), of which 63 percent is being financed by Guangzhou municipality. The remainder, which will go towards buying support equipment, is coming from low interest, long-term loans provided by the governments of Germany, the US, the UK and Japan.
The German government credit agency ?Kreditanstalt fur Wiederaufbau' is providing the lion's share of overseas money in order to facilitate contracts awarded to a consortium of German manufacturers, led by Siemens.
A similar consortium was awarded contracts in Shanghai to provide carriage and maintenance equipment for the city's first two subway lines. In Guangzhou, the German firms will provide a range of equipment: all rolling stock; the signalling, telecommunications, power supply supervisory control system; and the high-medium voltage system, traction power supply system and depot equipment. Line No. One's 21 six-car trains are manufactured and supplied by ABB Daimler-Benz Transportation.
Real estate collapse
The US Export and Import Bank is also providing US$36m, to finance a closed ticketing system using entry and exit gates with recirculating plastic tickets supplied by Cubic Inc. Despite such concessionary financing, the Guangzhou municipal authorities have run into funding difficulty due to the recent dramatic downturn in real estate prices. Authorities had counted on raising billions of yuan through land leasing for commercial and retail development at the metro's downtown station sites. Much of that funding has failed to materialise as property developers have been reluctant to build given the sluggish nature of the city's property market.
According to business sources familiar with the project, the city's financing difficulties have already delayed tender and purchase of the final 16 of 37 trains for the first line. Subway authorities also have indicated their intention to price full-fare tickets on the first line at Yn6, substantially higher than an equivalent journey by bus and more expensive than fares in Beijing and Shanghai. However, a survey of commuters indicated that nearly 80 percent of local residents were willing to pay the minimum Yn2 charge, while more than half thought the full fare was reasonable.
Financing difficulties are also likely to affect the pace of development for the 23.2km, 20-station Line No. 2 (phase one). The line is expected to cost Yn9.96bn-10.67bn. Preparation work on the line was completed in September and civil construction should start by the end of this year.