Pearl River Delta economy: an opportunity for all

Before 1979, China's Pearl River Delta region was mostly agricultural land. By 2015, according to World Bank figures, it had become the world's largest urban area in both size and population. How did it achieve this growth and what does it have to offer UK businesses?

The phenomenal rise of the Pearl River Delta (PRD) region, located in the province of Guangdong, can be attributed to China's economic reform and 'open-door' policy. In the 1980s, Special Economic Zones, including those in PRD, were used to test the water further, focusing on the development of manufacturing and exports. Success saw PRD not only become the most populous centre but also one of the most productive, assuming a role as a major manufacturing location for the world.

The PRD is ripe for a variety of UK businesses to explore. This is especially so as Guangdong features as a part of China's experimental Free Trade Zone (FTZ) programme, set up in 2013 to ease cross-border trade and investment flows, whilst boosting growth in domestic services and innovation.

Guangdong's FTZ consists of three regions: Guangzhou Nansha, Shenzhen Qianhai Shekou, and Zhuhai Hengqin New District. It plays a key role in deepening economic cooperation with Hong Kong and Macau and includes two-way RMB financing between the FTZ and the two offshore centres.

Guangdong is also aiming to move beyond the purely industrial, adding a services oriented model. To this end, since 2015, the province has worked to establish free trade with Hong Kong under the Closer Economic Partnership Agreement (CEPA) framework. This will liberalise cross-border trade in 53 sectors which the Mainland has fully or partially opened up to the Hong Kong services industry.

Building infrastructure

Progress to this status has been rapid but has been achieved in stages. Infrastructure development has been key, particularly in attracting foreign investment. In 2008, China announced plans to connect the nine key PRD cities of Guangzhou, Shenzhen, Dongguan, Zhaoqing, Foshan, Huizhou, Jiangmen, Zhongshan and Zhuhai into a single `megacity'. This set in motion a series of massive infrastructure projects, merging transport, energy, water and telecoms networks, further boosting economic development.

PRD now has a complete network for air, land and sea transportation. The entire region is covered by a rail network and by 2018, an express rail link will connect Guangzhou, Shenzhen and Hong Kong. PRD also has some of China's key sea and inland port facilities, one of which, Shenzhen, became the world's third busiest container seaport in 2015, after Shanghai and Singapore.

This activity has seen Guangdong positioned by the Chinese Central Government as the Strategic Maritime Hub and Economic & Trade Cooperation Centre in the country's Belt and Road economic development initiative, officially making it a key link to world trade.

Investment sources

Foreign Direct Investment (FDI) has played a huge part in PRD's development. By 2014 FDI utilisation reached USD24.9bn, or 20.8 per cent of the national total. In 2015, Hong Kong, Taiwan and Macau together contributed over 31 per cent of Guangdong's trade (Hong Kong contributing 24.6 per cent). Hong Kong is also the largest source of FDI in Guangdong, accounting for 65 per cent of Guangdong's GDP. From 2000 to 2014, private enterprise exports rose from USD4.1bn to USD222.3bn.

Evolving manufacturing base

In the early days of its industrial development, PRD mostly engaged in the labour-intensive manufacture of consumer goods. Following a spate of industrial relocation from 1985 onwards, mostly from Hong Kong, light industry expanded. According to the Hong Kong Trade Development Council (HKTDC), PRD still leads the world in a number light industrial sectors. Its world production share in parts of the toy industry, for example, exceeds 60 per cent.

In the 1990s, heavy industry arrived, bringing hi-tech electronic equipment and machinery, chemical production and automotive manufacture. Guangzhou is now one of three major automotive manufacturing bases in China.

With a widening sweep of sectors entering the region, industrial clusters such as these have naturally formed in PRD. Clusters are well-defined at city-level but all can take advantage of the supply chain that inevitably gravitates towards them. By sourcing components and even end-users locally lead times fall and costs are reduced.

The petrochemicals complex at Daya Bay Huizhou Economic and Technological Development Zone demonstrates this effect, attracting oil refining and ethylene production companies from the US, the UK, Japan, the Netherlands and South Korea amongst others. It has created industrial end-user clusters for synthetic rubber, surfactants, synthetic resin, chemical intermediates, and fine chemicals.

Consumer PRD

As the population and affluence of PRD has expanded so too has the consumer market. PRD's retail sector has developed quickly with its major consumer markets of Guangzhou and Shenzhen featuring every kind of retail outlet from shopping mall to street vendor.

According to HKTDC, retail sales of consumer goods in PRD reached RMB2,065.6bn in 2014, its citizens enjoying a per capita GDP of RMB100,448 - or 2.2 times the national average.

In parallel with this development, the region's tertiary sector has expanded too. Services such as education, recreation, travel and telecoms have all increased their share of the economy, many driven by the demands of PRD's flourishing middle class.

Building the future

PRD has one more ace up its sleeve. The Shenzhen-Hong Kong Stock Connect programme, expected to launch in December 2016, will allow global investors access to this USD3.2trn, tech- and pharma-heavy exchange. Not only will it complement the Blue Chip-focused Shanghai-Hong Kong Stock Connect, the new stock-trading link will unlock access to Shenzhen's 1,790 listed companies and a whole wave of opportunity to invest in and develop Chinese technology firms.

Shenzhen itself is now China's de facto `Silicon Valley', playing host to major ICT companies including the nationwide ISP, Tencent, and global players such as ZTE and Huawei. In November 2015, PRD National Independent Innovative Demonstration Zone (PRD NIIDZ) was approved by the State Council as the first and only region-wide NIIDZ, promoting independent innovation and high-tech industry development.

In addition, Guangdong has published its `Intelligent Manufacturing Development Plan: 2015-2025' to develop more innovative and advanced industries. A wave of new investment will see the region's reinvention pull in yet more wealth. For UK companies in a range of sectors including retail, services, technology and industry, PRD is an opportunity waiting to be taken.

Pearl River Delta: The numbers*

Foreign Direct Investment (FDI) has played a huge part in PRD's development. By 2014 FDI utilisation reached USD24.9bn.

PRD still leads the world in a number of light industrial sectors. Its world production share in parts of the toy industry, for example, exceeds 60 per cent.

Guangzhou is now one of three major automotive manufacturing bases in China.

According to HKTDC, retail sales of consumer goods in PRD reached RMB2,065.6bn in 2014, its citizens enjoying a per capita GDP of RMB100,448 - or 2.2 times the national average.

Company spending on R&D as a share of GDP is greater in Guangdong than anywhere else in the country. Shenzhen is leading investment with an estimated 4 per cent of the city's GDP, a ratio that brings it close to tech leaders like South Korea and Israel.

The Pearl River Delta is moving towards a high-tech-oriented exporting region.

  • PRD now known as a hi-tech innovation centre due to its successful transformation from a processing trade manufacturer
  • “Pearl River Delta National Independent Innovative Demonstration Zone (PRD NIIDZ)” - approved by the State Council in November 2015 as the first and only region-wide NIIDZ
  • Guangdong has formulated “Intelligent Manufacturing Development Plan: 2015-2025” to develop more innovative and advanced industries

*Source: Week in China

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