Since 1978 when China opened its door to foreign investment, Guangdong has helped to trans-form Hong Kong from an Asian sweat shop to a regional business and financial centre. Hong Kong moved its low-end manufacturing to the province, but retained higher value-added services such as banking, shipping, insurance, design and packaging in the territory. This so-called 'shop at the front, factory at the back' arrangement served both places well. Guangdong earned much-needed foreign exchange while Hong Kong got an abundance of cheap land and labour.
Lately, however, the successful partnership has become strained, as the needs and expectations of both places change. Hong Kong wants to upgrade its industries and services to beat grow-
ing competition from neighbouring countries, but low-tech Guangdong does not have enough skilled labour to meet the city's needs. Worse, the province is getting expensive, making it a less attractive place for small-time Hong Kong industrialists to set up shop.
Another problem is deteriorating law and order in Guangdong. Located next to the richest city in China, the province has become a haven for smugglers, prostitutes, kidnappers and other criminals. Some even sneak into Hong Kong to commit crimes.
With more business and social issues involved, Guangdong and Hong Kong need to redefine their relationship to meet the needs of the new century, economists say. "A new mode of multi-
facet and multi-dimensional co-operation is needed," says Tsang Shu-ki, professor of economics at the Hong Kong Baptist University.
Hong Kong businessmen should view Guangdong not only as a place for light industry process and assembly plant, but as a market as well, economists argue. The province, meanwhile, has to invest more in infrastructure and human re-sources to ensure that it will remain competitive. There should also be more government-to-government co-operation to solve social issues that affect both places.
Before China opened its door to foreign investment, the Guangdong-Hong Kong relationship was simple and straightforward. Guangdong was a poor rural neighbour, where many Hong Kong's residents originally came from. It was famous for supplying Hong Kong with water, foodstuffs and a less welcomed product, illegal immigrants. A new era set in when Hong Kong businessmen rushed in to set up factories in the 1980s.
Hong Kong is now the biggest investor in Guangdong, accounting for 70-80 per cent of the province's foreign investment, followed by Macau, Japan and the US.' Most of Hong Kong's investment is in the Special Economic Zone of Shenzhen; Dongguan, the town famous for processing half-finished goods from Hong Kong, is the second favourite destination. Most of these are low-cost assembly industrial operations, although non-industrial projects have been on the rise too. Between 1993 and 1995, Hong Kong invested an annual average of US$4bn-5bn in industries in Guangdong and another US$1.3bn-1.5bn in property development, public utilities and consulting industries. Some 3m-5m Chinese work for Hong Kong companies in the Pearl River Delta ?
a pool of labour that is bigger than the city's own workforce.
Success at a price
While Hong Kong's manufacturing production expanded in southern China, factories and chimneys disappeared from the city. Between 1980 and 1995, the share of manufacturing in Hong Kong's GDP dropped from 23.7 per cent to 8.8 per cent, while that of services grew, from 67.5 per cent to 83.8 per cent. Blue-collar workers have taken up new jobs in banking, insurance, telecommunications, warehousing, consulting and other businesses needed to support the expanded trade.
Without Guangdong, Hong Kong's growth would have been slower and less powerful. A study by Hong Kong General Chamber of Commerce shows that Hong Kong's GDP grew an annual average of 6.6 per cent between 1980 and
1995, while Hong Kong and Guangdong collectively grew nine per cent during the same period.
There is however a price to be paid for Hong Kong's economic integration with southern China. Hong Kong industrialists would have been forced, as a matter of economic survival, to up-grade their labour-intensive operations into high-technology, value-added ones were Guangdong not available as a low-cost manufacturing option.
So, while Hong Kong's rivals, Tai-wan, South Korea and Singapore, have moved on to produce cars, computers and other high-end products, the territory is still producing toys, textiles and low-end electronic items. Hong Kong continues to rely on competitive pricing, rather than technology and productivity to compete.
Meanwhile, Guangdong has become heavily dependent on Hong Kong, with an industrial structure strong in processing cheap consumer durables for export but weak in basic and heavy industries.
These problems, shrugged off when times were good, surfaced recently when both economies began to grow more slowly. Since the early 1990s, Guangdong no longer led the country in economic growth. Hong Kong's per capita GDP grew an annual average of 3.8 per cent between 1990-95, compared with 5.5 per cent between 1980-89.
New industrial focus
As Hong Kong starts to focus on ways to revitalise its industries, there is a suggestion that the city should look beyond the Pearl River Delta's low-tech, low-productivity base for help.
"There are two options for Hong Kong investors ?move to northern Guang-dong, where costs are still low, or move out of Guangdong entirely," comments Professor Tsang of the Hong Kong Baptist University.
Already many Hong Kong companies operate as transnational entities, sourcing labour, capital and market worldwide. It is the world's fourth largest in outward foreign direct investment in 1994-95, and the largest foreign investor in ASEAN.
Guangdong, of course, is not Hong Kong investors' only choice. Increasingly, this province of 68m people is more attractive to Hong Kong companies as a market than a manufacturing base. The Cantonese are among the most affluent in China and the most receptive to Hong Kong-made goods.
For its long-term survival, Guangdong needs to broaden its links with the national market, economists say. Now, one-third of Guangdong's GDP goes to foreign trade, one-third to internal provincial consumption and one-third is sold to other Chinese provinces. "Guangdong can't rely on Hong Kong as the only engine of growth. Times have changed," says Mr Edward Leung of the Hong Kong Trade Development Council.