New Growth in China's Pearl River Delta?

Down in southern China, in the Pearl River Delta, the world's biggest manufacturing hub, everyone is trying to figure out how to move beyond manufacturing (at least, the dirty low-end kind). This region is more dependent on foreign trade than any other; a quarter of Chinese exports come from here, and the majority of them go to the U.S. But those exports have fallen off a cliff in the last year. In some areas, one out of every ten factories has closed. Most of the officials I've spoken to are betting that it will take 3 to 5 years for their exports to the US to get back to where they were in 2007. In the meantime, folks are hurting. Pretty bleak stuff.

So the race is now on to come up with a new way to grow. "Growth is China's religion," as a Beijing official once told me, and with good reason. In order to keep people from rioting in the streets or overthrowing the autocratic government, they need to maintain between 6-8 percent a year GDP growth – no mean feat in this environment.

One way they are trying to keep that up is by selling to each other. A number of high level government officials were unable to meet up with me this week because they were off hawking their wares in neighboring provinces like Hunan and Sichuan. The vice mayor of Shenzhen, the richest town in this region, told me he'd recently been able to sell nearly $2 billion worth of jewelry, electronics, and other locally made products to other Chinese buyers out West. But the truth is, no matter how buoyant the domestic sales, they can't make up for the U.S. market anytime soon. The average income in China is about 1/10th of what it is in America.

The other strategy is to go up-market, trying to do back office call center stuff – the sort of thing India already does – or logistics and higher end manufacturing (producing finished goods rather than just assembling cheap goods). Again, Shenzhen, the slickest of the area cities, has made some progress here, and even has a few budding internet companies. The city is trying to attract more educated workers necessary for this sort of scene. They're building up-market housing and planned communities designed to look like Portofino, complete with clanging bell tower and terracotta tiled condos (which retail for $30-50K, a small fortune over here).

That also has some gaps. The vice mayor of Shenzhen today told me that his economy was now 60 percent services. But when I drilled down into what services really meant, it included things like printing magazines for Hong Kong publishers – not exactly knowledge work. Craig Simons, an old China hand here reporting a story with me, says he thinks it's more likely that Shenzhen is still 60 percent manufacturing. The fact that its trade to GDP ratio is a whopping 280 percent would seem to back that up.

Where does that leave the Pearl River – and China? Still dependant on exports, for sure, but also in a much better position to handle the global downturn than during the Asia crisis over ten years ago. Back then, China was a lot poorer. Now, government coffers are full from a decade of rich trade, and officials say the province will continue to grow 8.5 percent this year. It's a believable story, but only because they'll be able to pump investment into the area, even if Americans keep their wallets zipped tight. What happens if and when those coffers run dry is another story.