Pearl River Delta Economic Zone Facing Crisis

December 14, 2007 Updated: December 14, 2007

The Pearl River Delta (PRD) Economic Zone, once the wealthiest and most economically dynamic area in China, is experiencing a serious recession. Over 1,000 factories have closed down, and many others had to move out of the PRD Economic Zone.

Located in southern Guangdong Province in south coastal China, the PRD is China's first special economic zone since China opened its gate to the world in late 70's. Since then enormous foreign investment has flooded in the area and has turned it into a major manufacturing base, providing nearly five percent of the world's goods in 2001. Though the area occupies only 0.4 percent of China's total area, it accounts for over eight percent of the nation's economy.

But in recent years a series of blows have cast shadow over the once-fast-pacing economic legend. In addition to continuous shortages of labor, electricity, and oil in the last few years, the PRD is now suffering from large increases in cost of land, labor and energy, as well as the impact from the trade protection of other countries. The recent Renminbi appreciation has made things even worse for the area's export-reliant economy.

Abundant low-pay migrant workers in PRD used to be the greatest attraction for investors, but now cheap labor is no longer easily available. Almost every factory in PRD now has employment notices posted on their door all year round. Even though salary has been raised significantly in the past five years, it is still hard for companies to find employees.

Pressure also comes from the continuously rising costs of raw materials, water, electricity, and factory rental expenses, to name a few things. For example, a garment manufacturer complained that the price for copper used in making copper buttons has tripled since 2004, but product prices have not followed suit.

As a result, manufacturers in PRD are generally having a hard time. The once-flourishing shoe making business, for example, is now among the most stagnant. According to Li Peng, Secretary General of the Asian Footwear Association, among the 5,000 to 6,000 footwear manufacturers in Guangdong, over 1,000 large and medium factories have shut down. He said that in Huidong City, a major footwear manufacture base with over 3,000 shoe factories, 400 to 500 small and medium factories were closed within two or three months.

According to a recent report by China Central Television, other labor intensive industries in PRD such as clothing, toy, and electrical appliances manufacturing are facing similar situations.

The PRD's crisis reflects the current state of the entire manufacturing industry in China. So far the Chinese manufacturers are mostly low cost, low profit, and labor intensive factories. Owning neither recognized brands of their own nor core technology, such businesses are vulnerable to market changes. Once losing the advantage of low cost, they have little to cling to.

Many businesses are looking outside the PRD for ways to survive. According to statistics of the Asian Footwear Association, among the footwear companies in Guangdong, about 25 percent have set up factories in Southeast Asian countries like Vietnam, India and Myanmar, and about 50 percent have set up factories in China's inland provinces such as Hunan, Jiangxi, Guangxi and Henan.

But moving out is no royal road either. Companies who are used to the conveniences of the PRD are often discouraged by problems such as under-equipped facilities and increases of transportation costs in inland areas. As Li Peng said, many footwear companies are “at a loss as to what course to follow.”