Nobody is worried about South China anymore

Over at The Economist, Vijay Vaitheeswaran has a special report on the Pearl River Delta that is almost unrelenting in its enthusiasm. The conventional wisdom on South China now seems to have come full circle–there’s not a lot of stress anymore about its manufacturing being hollowed out by competition from low-wage manufacturers. Instead, South China’s future looks solid (at least, as long as it can hold off rising sea levels). There are some nice examples in the piece:

When wages shot up, many pundits predicted a bleak future for the delta, with factories decamping en masse to cheaper places in Asia. … Many firms have considered leaving, and those in highly labour-intensive industries (such as low-end textiles or shoes) have indeed left. But most firms have stayed, keeping the bulk of their operations in the delta but hedging their bets by investing in cheaper regions. Some have set up factories in cities in China’s interior, others in South-East Asia.

Tommi Laine-Ylijoki, who manages the supply chain for the consumer business at Huawei, a Chinese multinational based in Shenzhen, emphatically rejects the idea that rising costs might force him to shift manufacturing out of the PRD. He says he did look into moving inland, but found that the cost differential was only 20-30%—and his entire supplier base is in the delta. He also wants his factories and suppliers to be close to his R&D team because he believes that “collaborative manufacturing” promotes innovation. Huawei outsources the production of most smartphones, but keeps about a tenth in-house to maintain the “touch and feel” of mass manufacturing. Given the PRD’s outstanding logistics, manufacturing and supply chain, he says, “I can’t think of a better place to be in the world to do this.”

Wong Chap Wing, a native of Hong Kong, runs a factory in Dongguan, an industrial city north of Shenzhen. Hip Fai, his privately held firm, stamps metal parts for things like printers and copiers. The energetic septuagenarian started dye- and mould-making in 1966, and recalls a time when migrants were grateful for a job. “There are not enough technical workers now,” he complains. Young people turn up their noses at factory work. He used to pay 600 yuan a month, but now they demand 5,000.

The future is not bright for workshops that cannot upgrade. Mr Wong looked into shifting to a cheaper location inland but decided that the savings were too small. He says that many low-end subcontractors in his area are closing down. Looking at the antiquated equipment and the throngs of workers in his factory, it seems this greasy and noisy place, too, may face extinction.

Turn a corner, though, and you spot the future: a hybrid assembly line where shiny Japanese robots are mingling with human workers. Mr Wong spent 200,000 yuan on each robot but expects to get his money back within three years because his reconfigured assembly line is much more productive. Looking back, “I could not imagine my factory full of robots,” he reflects. “I came here for the cheap labour.”

The reasons the interviewees give for this continued strength are by now familiar ones: the potential labor cost savings in other places are small relative to the advantages from Guangdong’s network economies, and those labor cost issues can anyway be dealt with through technological upgrading and automation. Vijay also makes some of the same points Dan Wang did about Shenzhen’s manufacturing base increasingly becoming a hub for hardware innovation.

But if these factors are good news for South China, they are not really such great news for the rest of the country. The downbeat view that South China would find its advantages competed away over time was at the same time an optimistic view that other regions would be able to rise. If other regions can’t effectively compete away South China’s advantages, then it’s going to be harder for them to replicate South China’s path to prosperity.

Vijay’s piece asks “what the country can learn” from the Pearl River Delta, but doesn’t really answer the question other than to issue one of his magazine’s usual exhortations for government to “stay out of the way” of entrepreneurs. Aside from the fact that that’s not what the government actually did, it’s not very helpful. The usual hands-off policies are just a recipe for entrenching developed regions’ existing advantages. China is generally not very interested in hands-off policies anyway, and is doing a lot to try to help its disadvantaged regions–but it’s not obvious the current approach is the right one either.

With its entrenched regional disparities, it seems like China could be suffering from some of the same issues as the eurozone–but in reverse. In the currency union, the prosperous core dominates the setting of monetary policy, which means it has generally been too tight for the troubled periphery. In China, nationwide monetary policy is easy in order to aid troubled inland provinces, which means it is probably too loose for the prosperous coast. Indeed, one of the main macro risks in China at the moment is the overheating of property markets in prosperous coastal cities, which with decent fundamentals do not really need all that much stimulus.

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