Guangdong: It’s what comes next that counts

A closer look at data comparing the Greater Bay Area to the rest of the country might give cause for concern: although the economy here is growing faster than the national average, it is largely due to rising investment levels rather than industrial output (i.e., we are spending more than we are making). 

Manuf
Guangdong’s manufacturing output saw a steep drop (well, steep by Chinese standards) in Q2 as the trade war began to bite.

 

It doesn’t take a rocket scientist to figure out why. The province’s industrial machine has for decades been heavily geared toward foreign trade. Now, exports and imports are falling here at a rate faster than the national average because Guangdong is more exposed to the loss of demand from its traditional trading partner. 

However, none of this should come as a surprise, and it should not be cause for alarm, either.

First, it is impossible to imagine how this story could have played out any differently, to date. Guangdong has always – for millennia, not just centuries – been the Middle Kingdom’s primary trade hub. The moment US President Donald Trump tweeted that he was going to teach China a trade lesson by imposing tariffs, Guangdong was going to bear the brunt of it. 

Trade
The entire country has been affected by the trade war, but Guangdong more than most.

The question is not what is happening, but, as Marcus Aurelius or Sun Zi might have asked, what Guangdong is doing about it. That is the interesting part. Because Guangdong has the most to lose, it has been quickest to respond.

There are two things going on that we can see, based on data going back to a few months before the trade war started last year. The first is what any prudent businessperson would do: pursue a policy of diversification in their customer base. We won’t go into much detail on that here. Suffice to say that the external trade slowdown would have been a lot worse by now if Guangdong had not pivoted toward the EU, ASEAN, and, more importantly, countries along the Belt and Road Initiative routes – Russia, Central Asia, Eastern Europe, Middle East, Africa, and South America. 

This pivot was never going to make up for the sharp drop in China-US trade, but it has helped offset the worst effects. The BRI, in particular, holds potential. It is clearly a national priority for a reason beyond what some call “economic imperialism”: to secure (and stoke) demand for Chinese goods and services across a wider stretch of the planet, i.e., getting more eggs out of its US basket. This will take time to materialize, however. It is a long-term plan.

The second policy directive, which was years in the planning, was to implement a bold program of industrial upgrading. Not every part of the GBA is benefiting from this yet, but if we look at stories from Guangzhou, Shenzhen, Dongguan and Zhuhai (yes, once-sleepy Zhuhai), it becomes clearer in technology and finance districts that are growing at several percentage points above the provincial average. The plan, as we understand it so far, is to build a Science and Technology Corridor, as well as establish Science Cities (more on this to come), to turn the GBA into the spearhead of the country’s technological charge toward middle-income Nirvana. 

Investment
Guangdong has been running investment levels far above the national average since before the trade war began, and this is clearly being allowed by Beijing to continue.

We wouldn’t call this another Great Leap Forward. Chinese tech is not rising out of backyard smelters; it is coming back with “talents” from Silicon Valley and it is being built on a foundation of big data that only a place like Guangdong could harvest, with unique consumption patterns across a region of 80 million digital citizens. This is why Lee Kai-fu is so focused here. It is why robotaxis, unmanned aerial vehicles, and many other industrial breakthroughs are likely to happen here first. Guangdong has the most 海龟 (sea turtles) returning from the US to juice the tech industry, and it has the richest consumers in China, all of whom have smartphones glued to their hands. 

Indeed, this time around, the focus of this industrial machine-retooling effort is not only so that Guangdong can cater to demand from its trading allies. It is also so that it can boost demand for domestic consumption. This is the obvious reason why there is such a rush on 5G development. It’s not so much to take over the world, one telecom network at a time, as it is to unleash a new wave of consumption domestically as hundreds of new applications and industries are born out of 5G. The same goes for AI, robotics, biotech, and all the other “new strategic industries” getting their own dedicated clusters around the Greater Bay Area. Guangzhou and Shenzhen were chosen as pilot cities for 5G testing, and are now rolling it out faster than the rest of the country.

At the moment, Guangdong’s consumers are not exactly holding up their side of the deal. Retail sales are growing slower here than the national average, although they are starting to catch up again after falling off a cliff (in relative terms) at the start of the year.

Retail
Consumer spending tanked at the beginning of this year, but is gradually catching up.

However, the good story behind the headlines is what is happening to the composition of output: services are growing faster here than the rest of the country. That’s pointing toward a new class of consumers emerging in Guangdong who are more into white collar jobs than the traditional type.

Services
Finance and tech are driving the creation of jobs and output in services.

There is a second reason why Guangdong is pouring bank loans, private equity and corporate reserves into projects at a rate well above the national average. The best way to stimulate an upgrade in both production and consumption is to put people in closer touch with each other. WeChat, sorry to say, Pony Ma, doesn’t do enough. This is why the province, with Guangzhou as its central terminus, is building the world’s most advanced high-speed transportation infrastructure network. 

Next month it will start showing greater fruit for its recent efforts, as new lines open, linking cities more efficiently. These include the key Intercity Railways linking Shenzhen, Dongguan, Guangzhou, and Foshan, the region’s biggest economies. (More to come on this.) 

There is much more to be built, with faster trains running across the province linking not only its cities to each other, but also connecting the province to the rest of the country. The airports, too, are getting a major boost, with two new ones planned for Guangzhou/Dongguan and Foshan/Zhaoqing, and the two heavies of Guangzhou Baiyun and Shenzhen Baoan getting massive upgrades. Even Zhuhai is pouring huge investment into its “aerotropolis”. 

The priority being given to these twin engines of investment-led growth should not be underestimated. While the rest of the country’s local governments are being held in check under the “de-risking” program, it’s clear that Beijing is giving Guangdong the green light to open its financial spigots wider. And it is being allowed to open up to more foreign investment.

It needs to. When the trade war kicked in, its first effects were not on trade. It spooked investors. Guangdong has had to cede its crown of most-favored destination for FDI to Shanghai in recent years, and it is struggling to catch up again. But this is where the central government is likely to be experimenting more boldly with the Greater Bay Area’s reforms in the coming years. Expect this chart to start being inverted soon. Hong Kong, willing, of course.

FDI
Monthly numbers shouldn’t be taken as gospel when it comes to FDI, because boig projects can skew the. Nevertheless, it’s clear that Guangdong needs to woo foreign investment better again.

Will it work? That depends on what the measure of success is. The GBA masterplan is farsighted, setting goals for 2035. It would be foolish to try to judge current efforts by what the numbers are showing at the moment. Much of the plan’s success is predicated on Guangdong further opening and reforming its economy, which takes time. Yet it does appear to be on track, notwithstanding the trade war, as well as the crisis in Hong Kong. This was made clear by Guangdong Governor Ma Xingrui recently. Reform and opening is not slowing, from what we can see. It’s accelerating, with legal experiments in Shenzhen being particularly interesting. (More on this in an upcoming interview with the Shenzhen head of China’s biggest law firm.) 

It’s just getting going, in fact. The international community is understandably concerned by what is happening in Hong Kong at the moment. But this would be the wrong time to take one’s eye off the bigger picture.  Stay tuned.

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