As has been well-documented by now, the Greater Bay Area has been hit harder by the US-China trade war than the rest of China. This is simply because it was more exposed to external trade when the tariffs began to be imposed; the higher you are, the further you have to fall. However, the region has certain strengths that are holding up, and it looks increasingly like it will recover quicker and be in better shape once the inevitable upturn in the country’s credit cycle begins again.
The most important of these strengths are Guangdong’s longer history of international trade, and its greater weighting toward private enterprise. These enable the province’s leadership, in politics and business, to pivot more quickly when external circumstances change. That is what seems to be happening now, as companies trim costs and refocus their sales teams on domestic consumers while exploring new overseas markets along the Belt and Road Initiative.
The results are showing up in industrial profits. As SCMP reported two days ago, the National Bureau of Statistics released national numbers for October that were horrible, the worst year-on-year decline since 2011. Yet while Beijing continues to hold tightly to the credit reins, refusing to allow another round of binge-spending like it did in 2010 and, to a lesser extent, 2016, Guangdong is finding its feet again. Industrial profits have been outperforming since August, when they returned to positive YoY growth after most of the past nine months spent deeply in the red.
October’s provincial numbers are not yet out – they always lag the national data release – yet the trend is clearly heading upward again. In the nine months to September, Guangdong’s industrial profits rose 3% YoY to 638 billion yuan. This was up from the 0.4% growth of August. The rest of the country, meanwhile, is continuing on its downward trajectory. In other words, Guangdong is starting to zig while China zags.
This is not due to a change in external conditions – the trade numbers haven’t improved – but rather due to the province’s industrial-upgrading plans starting to take root, and its commitment to building large-scale infrastructure projects. Fixed-asset investment levels have remained well above the national average for the past two years since the government’s belt-tightening began and the trade war set in.
It also helps that Guangdong’s finances are in better shape. Loan growth continues to run at above the national average. Savings, meanwhile, have been taking off again recently – probably the result of the trade war and the broader slowdown in the economy, as households and companies grow more cautious in their outlook. This can become a problem if it persists for too long and starts to affect both consumption and investment levels, but at the moment, it doesn’t appear to be setting off any alarm bells.
Altogether, the Greater Bay Area is better positioned than anywhere else in the country – Greater Shanghai and Greater Beijing included – to take advantage of the central government’s plans to drive more credit into the private sector and liberalize the economy. Shenzhen has had a hiccup recently, slowing sharply in Q3, yet the manufacturing powerhouses of Guangzhou, Dongguan and Foshan are picking up, with a sharp rise in services, too, while the smaller cities of Zhongshan, Jiangmen, Zhuhai, Huizhou and Zhaoqing are retooling their traditional industries with an infusion of investment and technology.
This is not to say the region doesn’t face significant challenges ahead. The single biggest of these is that one of its key engines, Hong Kong, is spluttering. Yet even in Hong Kong, it should be kept in mind that the city’s most important contribution to the region is as a financial center. And the taps, so to speak, are still wide open as international investment pours in, despite nearly six months of chaos on the city’s streets. This will be examined more closely in a future update.
Across in Macau, meanwhile, all eyes are on the new Chief Executive, Ho Iat Seng, who takes office in a month’s time, and the new Hengqin Railway Station, which opens the next day, December 21. Will a new man and a new game-changing train station be enough to arrest the casino industry’s recent softness? Most likely.
It’s probably going to be another 12 months before the Greater Bay Area can crow again. The country’s credit cycle needs time to work, the trade war needs time to be resolved, and Hong Kong needs time to figure out how to cope with its governance crisis. But the foundation is there. The rest is up to the actors on stage.