General Background

The Pearl River Delta economic zone (PRD) is one of China's leading economic regions and a major manufacturing center. It occupies the low-lying 41,698 sq km area alongside the Pearl River estuary where the river enters the South China Sea. The zone is formed by 9 cities, namely Guangzhou (the provincial capital), Shenzhen, Foshan, Zhuhai, Jiangmen, Zhongshan, Dongguan, four districts and counties of Huizhou and four districts and counties of Zhaoqing.

PRD in Numbers

Since China started opening up in 1979, PRD has been one of the most vibrant economic regions. In 2004,

• The PRD accounted for 12.4% of China's gross industrial output
• The PRD accounted for 30.7% of China's total export
• The PRD accounted for 8.3% of China's total retail sales of consumer goods
  
  

Major Economic Indicators (2004)

Cities Land area (sq.km) Population (mn) GDP (US$bn) GDP growth (%) Per Capita GDP (US$) Gross Industrial Output (US$bn) Retail Sales (US$bn) Export (US$bn) Actual FDI (US$bn) Guangzhou 7,434.4 7.38 49.73 15.0% 6,799 60.94 20.24 21.47 2.40 Shenzhen 1,952.8 1.65 41.36 17.3% 7,161 78.65 11.06 77.84 2.35 Zhuhai 1,687.8 0.86 6.60 13.8% 5,056 15.26 2.17 9.04 0.47 Foshan 3,848.5 3.51 20.01 16.3% 5,758 40.25 6.55 13.83 0.69 Jiangmen 9,451.0 3.86 10.08 12.2% 3,720 15.98 4.70 5.08 0.51 Dongguan 2,465.0 1.62 13.96 19.6% 8,699 31.21 2.16 35.19 0.97 Zhongshan 1,800.1 1.39 7.37 18.7% 5,317 20.48 2.57 10.01 0.51 Huizhou 11,158.0 2.93 8.28 15.1% 2,857 13.53 1.36 8.74 0.63 Zhaoqing 14,856.0 3.94 6.63 13.2% 3,198 6.51 0.70 1.24 0.48

*At current price and statistical coverage includes all state-owned and non-state-owned enterprises with an annual sales revenue over 5 million yuan

PRD as a Manufacturing Base

The PRD started producing labor-intensive consumer goods such as food and beverages, toys and clothes in early 1980s. After 1985, industrial relocation, mainly from Hong Kong, accelerated the growth of light industry in PRD until early 1990s, following which heavy industry featuring hi-tech electronic equipment and machinery, chemical products and autos etc. played a leading role in industrial output and export.

As a manufacturing base of the world, the region is playing a leading role in some industries. Some categories of the toy industry in the PRD have a world production share in excess of 60%. And watches produced just in Shenzhen in 2003 accounted for more than 40% of the global market. Other products include footwear, lighting fixtures, furniture etc, to name but a few.

In short, PRD has formed a diversified industry profile featuring 9 pillar industries:

Performance of the 9 Pillar Industries in 2004

Industrial Output Value of 9 Industries Gross Output (US$ bn) Proportion (%) in the Gross Industrial Output above Designated Size Nine Industries 242.4 75.1 Three Fresh Industries 170.0 51.4 Electronic Information 90.1 27.9 Electric Equipment and Special Purposes Equipment 46.3 14.3 Petroleum and Chemistry 29.6 9.2 Three Traditional Industries 53.7 16.6 Textile and Garments 22.2 6.9 Food and Beverage 18.6 5.8 Building Materials 12.9 4.0 Three Potential Industries 22.7 7.0 Logging and Papermaking 7.7 2.4 Medicine 2.9 0.9 Motor Vehicle 12.1 3.8

* At current price and statistical coverage includes all state-owned and non-state-owned
enterprises with an annual sales revenue over 5 million yuan
Sources: Guangdong Statistical Yearbook of 2005

Foreign capital plays a major role in PRD's industrial development. In 2004, the region's utilized FDI reached US$10 billion, 16.5% of the national total. Foreign enterprises, most of which from Hong Kong, Taiwan and Macau, accounted for 68% of total industrial output in the 9 cities, and accounted for 64% of PRD's total exports. Shenzhen, Dongguan and Guangzhou, thanks to their proximity to Hong Kong, are the 3 cities in PRD that attracted the most FDI. An estimated 61,000 Hong Kong enterprises engaged in manufacturing in Guangdong. Foreign enterprises may take the form of processing and assembling plants, and were instrumental in the development of local enterprises by bringing in technology know-how.

As a bridgehead of China's reforms, Guangdong has relatively less developed SOEs. In recent years, when private enterprises are formally allowed and recognized in China, private enterprises mushroomed in the PRD. For instance, taking Guangdong as a whole, from 2000 through 2004, private enterprise exports skyrocketed from US$6.14 million to US$187.76 million.

Industrial Clusters
PRD's broad range of industries has developed in clusters. The two banks of the delta present different industry profiles. The east bank focuses on electronics and IT products while the west bank is famous for household appliance products. In fact, Business Magazine once attributed China's success in manufacturing to the cluster effect, whereby industries obtain competitive advantage by concentrating geographically. In PRD, a supply chain has taken shape, where it is convenient to source all parts, components and accessories of a product, so that orders could be completed quickly. When upstream and downstream industries are clustered, resources are consolidated and specialization is deepened. Thus, efficiency is enhanced and cost reduced. Clusters emerged in PRD include the following: -

Clusters in PRD Cities

City Clusters Guangzhou Autos and parts, transport equipment, electrical products, electronics, chemicals, garments, textiles, business services, software, toys Panyu* Sports goods, textiles, garments, jewellery, toys, electric supply equipment, shipping containers Shenzhen Electronics, computer products, telecom products, ICs, toys, plastics, watches, clocks, oil paintings, port services, logistics, finance, printing, artificial trees Dongguan Electronics computers, components, peripherals, garments, furniture, shoes, toys, watches, clocks, cutlery, kitchen tools, soldering machinery, angling equipment Huizhou Laser diodes, digital electronics, CD-ROMs, telephones, batteries, circuit boards, precision machinery, plastics, chemicals Zhongshan Lighting fixtures, lamps, metal products, motorcycles, casual wear, locks, audio equipment Foshan Industrial ceramics, ceramic artwork, needlework, textiles, childrens garments Chencun* Flower farming, ornamental fish, turf farming Nanhai* Textiles, aluminium products, motorcycles, underwear Shunde* Electrical appliances, woodworking, shipping containers, furniture, machinery, bicycles Jiangmen Textiles, garments, paper, batteries

*Panyu is a district of Guangzhou. Chencun, Nanhai and Shunde are districts of Foshan Source: Michael J. Enright, Edith E. Scott, Ka-mun Chang, "Regional Powerhouse: the Greater Pearl River Delta and the Rise of China" John Wiley & Sons (Asia) Pte Ltd, 2005

To attract more FDI, PRD has set up several special purpose zones where foreign enterprises enjoy tax deductions and exemptions. Now 4 Economic and Technological Development Zones, 6 New- and High-tech Development Zones, 6 Tariff Free Zones and 2 Export Processing Zones exist in this area.

Industrial Restructure
Guangdong offers a favorable business environment. A government survey in 2004 showed that enterprises are generally satisfied with Guangdong's infrastructure, supporting industries and administrative efficiency. However, shortages of raw materials and energy do exist. In addition, there are reports that enterprises in PRD are facing shortages of labor. These prompted Guangdong's initiative to restructure its industries.

Despite the mature light industry, PRD is heading the way to shift its emphasis to heavy industry. Guangdong's ratio of light industry to heavy industry has turned from 2.07:1 in 1990 to 0.9:1 in 2004. There are plans to encourage relocation of labor-intensive industries in PRD to peripheral areas, and develop telecom, equipment manufacture, auto and petrochemical industries in PRD. Heavy industries are emerging in PRD, especially in Guangzhou and Huizhou.

Guangzhou is becoming one of the three auto manufacturing bases in China. It has annual capacity of 280,000. The plant set up by Honda in 1998 initiated the autos and parts cluster in Guangzhou, and joined later by Nissan and Toyota, and business cars specialist Hyundai etc.

Many world famous auto parts manufacturers are locating in nearby areas, such as Japan's biggest car parts maker, Denso. Around 320 auto parts manufacturers have been set up in Guangdong. In 2004, the gross industrial value of auto parts in Guangzhou amounts to RMB6.18 billion (engine excluded), up 41.9% from 2003. Moreover, other PRD cities surrounding Guangzhou are developing auto parts industry by establishing development zones e.g. in Foshan, Zhongshan, Shenzhen and Huizhou Daya Bay.

PRD is also progressing in petrochemical industry. Construction works in Guangzhou Royal Dutch Shell, a US$4.3 billion petrochemicals complex jointly set up by CNOOC (China National Offshore Oil Corp) and Shell Petrochemicals Company Ltd, has just been finished at Daya Bay in Huizhou. Once completed, the JV company will produce about 2.3 million tones per year of products, generating up to USD 1.7 bn in products sales, primarily supplying customers in Guangdong and the high consumption areas of China's coastal economic zones. This is not the only petrochemical plant being constructed. Five oil refining plants, five petrochemical plants and five ethylene plants listed in the "Plan of 9 Industries in Guangdong Province during 2006-2010" will be given great weight. Among them, 4 spread in Huizhou and Guangzhou.

PRD as a Market

PRD is one of the mainland's largest and most sophisticated consumer markets. Strong demand for consumer goods is driven by the growing income and influx of tourists. In 2004, PRD enjoys a per capita GDP of RMB 54,639, 3.7 times higher than the national average of RMB 10,561. Per capita disposable income of urban residents hit RMB 17,290, 1.84 times higher than the national average of RMB 9,422.

Retail sales of consumer goods in the region reached US$54.4 billion in 2004, accounting for over 1/3 of the region's GDP. Major consumer markets are in Guangzhou and Shenzhen, accounting for 37% and 20% of PRD's retail sales respectively.

In Guangdong, as in other parts of China, there has been a shift in the consumption pattern towards higher level needs e.g. accommodation and traveling. In 2004, the 5 categories which grew mostly rapidly in sales include mobile phones and telecom equipment, building and decoration materials, petroleum and related products, household electric appliances and audio / visual equipment and autos.

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?1..Niming, <three car parts plant set up in nansha, Guangzhou>, <Guangzhou Daily>, 13/04/2005

Per capita disposable income of urban residents (US$) Per capita GDP (US$) Retail sales of consumer goods(US$ bn) Guangzhou 2,040 6,799 20.24 Shenzhen 3,334 7,161 11.06 Zhuhai 2,217 5,056 2.17 Foshan 1,939 5,758 6.55 Dongguan 2,480 8,699 4.70 Zhongshan 1,913 5,317 2.16 Huizhou 1,670 2,857 2.57 Jiangmen 1,445 3,720 1.36 Zhaoqing 1,119 3,198 0.70

Sources: Guangdong StatisticalYearbook 2005

The retail sector has been developing quickly. In 2005, when China further liberalized its distribution sector in accordance to its WTO commitments, competition between local retailers and foreign giant retailers intensified. PRD's retail landscape is now characterized by diversified modern operations such as department stores, chain stores, supermarkets, warehouse type markets and convenience stores. Major foreign retailers present in PRD include Carrefour, Wal-mart, Watson's and Park'N Shop etc.

Services Industry

Over the past two decades, the composition of economy has experienced a typical change with tertiary industry having increased in share of the economy. Increased affluence on the part of residents fuelled demand for services such as education, recreation, traveling and telecom services. In recent years, business services are also burgeoning in PRD, together with the rapid growth of secondary industry. In fact, in recent years, the pace of foreign investment in services has speeded up, concomitant to China's further liberalization.

PRD Composition of GDP (%)

	1980	2004
Primary Industry (%)	25.8	3.8
Secondary Industry (%)	45.3	53.8
Tertiary Industry (%)	28.9	42.4

Source: www.stats.gov.cn

Tertiary Industry GDP in PRD Cities, 2004

US$ million Transport storage, postal and telecommunication services Wholesale and retail trade and catering services Finance and insurance Real estate Others Guangzhou 7,262 4,759 2,436 1,788 10,126 Shenzhen 3,152 2,948 3,102 2,874 3,637 Foshan 2,226 1,737 572 813 2,100 Dongguan 1,245 733 625 1,404 1,877 Jiangmen 925 1,329 209 295 1,439 Huizhou 662 584 109 183 1,013 Zhuhai 471 731 240 212 959 Zhongshan 496 618 114 265 720 Zhaoqing 523 751 308 180 678

Sources: Guangdong Statistical Yearbook of 2005

In 2005, Guangdong Government issued a No. 1 document vowing to speed up the development of the province's services sector, particularly in PRD. In Guangdong's 11th Five Year Plan (2006-2010), it is stated that metropolitan cities of Guangzhou and Shenzhen would raise the level of development of the services sector.

Modern Logistics
Shenzhen, boasting the 4th largest container hinge in the world, sets itself to be the logistic center. There are over 2,000 companies that have logistic business in Shenzhen. Over 30 companies are labeled as key ones in this industry and 32 have assets exceeding 100 million RMB. Six logistics parks have been set up. Over 50 foreign companies including UPS, Maersk, FedEx, Kerry Logistics etc have registered in the city. MNCs like Aeon, IBM and Wal-Mart etc have set up global or regional sourcing centers there.

Banking
Following China's entrance into the WTO and the signing of "Closer Economic Partnership Arrangement" with Hong Kong, PRD stepped up to welcome foreign bankers and improve it's own banking system. In particular, there were 16 foreign banks in Guangzhou and 27 in Shenzhen as at end-2004. More Hong Kong banks have opened branches in PRD under CEPA. Though foreign banks are not allowed to cover all business areas until 2006 they are allowed to invest in domestic banks.

Intermediary Services
In terms of the number of trade shows, exhibition space, and the scale and influence of the exhibitions, Guangzhou is one of the reputed and leading trade fair centers in China. The city hosted 616 trade fairs in 2004. There are 353 and 236 companies in Guangzhou and Shenzhen respectively that specialize in organizing fairs, of which 90% are private companies. Perhaps CECF, also known as China Canton Fair in Guangzhou, and China Hi-Tech Fair in Shenzhen are the 2 most famous fairs in PRD. The biggest lighting fair in Asia (Guangzhou International Lighting Exhibition + Electrical Building Technology China) is co-organized by Guangya, a private PRD exhibition company and Messe Frankfurt.

Guangzhou's 11th 5-Year Plan (2006-2010) has named (among others) financial, logistics, product design and packaging, legal, accounting and information services as priority development targets in business services. All these area are open to foreign companies. Major foreign companies that have presence in PRD are Gallup, AC Nielsen, Accenture, Savills, and the "Big 4" accounting firms etc.

Domestic and International Connectivity

PRD has built a complete network for water, land and air transportation.

Cities in the PRD are interconnected by highways and railways. PRD is improving its land network to strengthen linkages among cities. In 2005, the "Plan of High Speed Express Ways Network Linking Cities of the PRD" was approved which means the "metropolitan region within one hour drive" will be achieved in 2020. The main frame of the network is formed like an "A shape" by two principal axis (Guangzhou--Shenzhen, Guangzhou--Zhuhai), two subordinate lines (Guangzhou--Zhaoqing, Xiaolan in Zhongshan--Jiangmen, Dongguan--Huizhou) and two minor lines connecting cities on the two banks of the PRD (Shunde--Panyu--Dongguan, Zhongshan--Humen). The total mileage of the expressways is 570 km. The principle axis will be completed in 2010.

As far as connection to Hong Kong is concerned, it takes just 2 hours from Guangzhou to Hong Kong by train now. The Hong Kong-Shenzhen Western Corridor will be put into use as the 4th vehicular land crossing between Shenzhen and Hong Kong at end-2006. It is designed to have a handling capacity of 58.6 thousand vehicles per day, which means half of the vehicles crossing the border will pass through it. Another key project is a new "Y-shaped" bridge connecting Hong Kong, Macau and Zhuhai. Due to open in 2010, it's expected to boost the economy in west PRD by improving its accessibility to Hong Kong.

There are 5 airports in PRD (incl. Hong Kong and Macau). The new Baiyun Airport in Guangzhou, one of the 3 air hubs of China, is hitherto the largest and most advanced airport in China. It operates over 110 international airlines and will serve as a main transport way in the 2010 Asian Games held in Guangzhou.

Ports in PRD play a critical role for transporting manufactured goods abroad. In 2004 the volume of freight handled in coastal ports in Guangdong reached 51.9 bn tones, and container-handling volumn is 17 mn TEUs. Major ports in PRD include Yantian Port of Shenzhen, Guangzhou Port, Shekou Port etc. In particular, Yantian is one of the world's top 10 ports, making Shenzhen the 4th largest port in the world in 2004. Shenzhen is increasing becoming a place where goods from other parts of China are shipped for export.

*All data calculated in current prices