The resurgence of Guangzhou

5 May 2011

By  Thomas M. H. Chan (*)

(*) China Business Centre, The Hong Kong Polytechnic University

The 21st century will see the resurgence of Guangzhou. First, it was eclipsed by Hong Kong for most of the 20th century and then Shenzhen, the largest special economic zone in China which has risen from a small border village to become one of the major cities in the nation.

Before the 1950s, Guangzhou was more developed than Hong Kong; it was the gateway of China, linking the prosperous Middle Kingdom with the rest of the world for over 1,000 years since the Tang Dynasty. During the Ming and Qing dynasties, Guangzhou was not just a port but also a major trading centre of Asia; it was one corner of a triangle of trade in East Asia and across the Pacific and Indian Ocean, linking with Macao, Nagasaki and Manila. Orders from overseas, as far as from the Spanish imperial household, were received in Guangzhou; they were then forwarded to a centre in Jiangxi for making porcelain, where they were produced, with further processing done according to the patterns specified by the foreign customers in Foshan, next to Guangzhou. The finished china was then shipped overseas from Guangzhou and Macao.

This export-oriented industrial processing was different to that of the late 20th century in the Pearl River Delta region (PRD), mostly in Shenzhen and Dongguan, in that it involved a complete value chain with Guangzhou as the centre and the processing of products reliant on the unique technology and design skills of the Chinese, which was highly valued. Product innovation was based on the value chain that was controlled by Guangzhou, whose merchants set the prices. By virtue of its great production, trading and innovation,  not only in porcelain but also other products like silk, ironware and even daily necessities, the world’s silver — from the New World and to a lesser extent from Japan — all converged in China through different trade routes around the globe. This is similar to the convergence in the late 20th century of the world’s U.S. dollars in China as trade surplus and foreign exchange reserve.

Stagnation for four decades

The relative stagnation of Guangzhou between the 1950s and 1990s was the result of its being incorporated into China’s national economic system, which subordinated its interests and local development to the policy of the central government in Beijing. First, it was the centrally planned system which diverted resources from the coastal regions to the interior and from the consumer goods industry, the traditional strength of Guangzhou and its industrial value chain, to producer goods industry. Even worse, the central government restricted foreign trade and monopolised it in the hands of trading firms in Beijing. Guangzhou had political, social and economic stability during these 30 years of socialist construction (1949-79) that it had never enjoyed since the 19th century, but its dynamism and trade entrepreneurship were almost completely killed. Second, in the early years of the reform and open door policy,  Shenzhen and other special economic zones received all the policy privileges from the central government.

The whole PRD region and even China for a time was geared to Hong Kong, carrying out overseas orders for industrial processing and legitimate and illegitimate imports from the then colonial city. In fact, the take-off of Hong Kong took place in these years, built on the huge profits from industrial processing in and trade with and through Shenzhen and the towns of Dongguan and Panyu, sidelining Guangzhou. The modernisation of infrastructure, especially in the form of highways, shifted the centre of the transport system in the PRD region from Guangzhou to Hong Kong (via Shenzhen), serving the exporting ports and airports in Hong Kong and Shenzhen. Guangzhou faced challenges from both Hong Kong and Shenzhen and even minor towns in the PRD region, which had all gained their economic independence through export-oriented or foreign-invested local industrialisation. Guangzhou was losing its role and functions as the central city in the region.

New century, new transformation

The arrival of the new century has also brought a new determination of Guangzhou and, behind it, the Guangdong provincial government to revive and restore the regional and national importance of the city. They realised that being passive could not help to develop the city and, through the city, the province within and outside PRD and that, through decades of industrial relocation, Hong Kong seemed to have exhausted its contribution to local industrialisation and development.

The resurrection of Guangzhou has been based on a two-pronged strategy.

First, it had to upgrade the local economy; it has successfully attracted massive investments from Japan automakers, such as Toyota and Nissan, in addition to the existing Honda, which had been reluctant to expand before the arrival of its competitors. With the auto industry, a whole chain of production of parts and components and supporting industries has emerged, inclu-ding even a large steel mill and extensive special purpose logistics facilities for the export of autos. In just  a few years, Guangzhou has become one of the largest auto production bases in China and the world; at one stage recently, it even overtook Shanghai as the largest auto producer in the nation. There are other large-scale foreign and domestic investments in the city which have enabled it to compete more favourably with Shenzhen; but the auto industry is the most important, in changing the image of the city into an aggressive competitor in the domestic and international markets and the building of a whole series of related industries and services. The new industrial and service foundation could also support other industries – physically in terms of parts and components supplies but more importantly in transfer of know-how — in the region, including the dynamic local automaker, BYD, based in Shenzhen.

Secondly, Guangzhou has re-established its centrality in the region by merging with neighbouring cities like Panyu and Foshan, which had earlier incorporated nearby cities like Shunde, Nanhai and others; this has directly expanded the metropolitan region. It has built up a regional network of metros, inter-city fast railways and inter-provincial high-speed railways with the aid of the provincial government. The latter has helped to increase the accessibility of Guangzhou to other cities in the PRD and beyond and vice versa. This greater accessibility means that the urban functions that Guangdong has accumulated and developed for decades, if not centuries, can be used better and more cost-effectively; these include human, social and cultural capital and the economies of agglomeration, clustering and diversity that are the basis for increasing economic returns and innovation. Compared with  major cities in neighbouring provinces, including Changsha, Nanning, Xiamen and Fuzhou, Guangzhou is far more advanced in its urban functions and international connections – the  so-called degree of metropolitanisation. Linking them up within a three-to-four-hour high-speed rail network, Guangzhou can offer directly to their wealthy citizens its advanced and high-quality metropolitan services and incorporate them into its hinterland. In so doing, it greatly expands the demographic, economic, social and cultural support to improve its urban functions and services.

Guangzhou to surpass Hong Kong

Already Guangzhou has caught up with Hong Kong, because of much faster economic growth rates in recent years. Hong Kong suffered negative economic growth in the two financial crises, while Guangzhou took the opportunity to expand and upgrade its economy without any significant impact on its rapid growth. In terms of GDP, Guangzhou is still smaller than Hong Kong despite its larger population of over 10 million. But, with Foshan added to Guangzhou, its economic size is bigger than Hong Kong. If the lower cost of living in Guangzhou is taken into account, so that GDP is calculated not on nominal exchange rates but on the basis of purchasing power parity, Guangzhou has already a larger economy than Hong Kong. If other major cities within the radius of three to four hours travelling time from Guangzhou are included, the central city of the PRD will  incorporate a much larger population and market and the high purchasing power of millions of the new urban middle classes from these cities. At this stage, Hong Kong is still struggling with the construction of a high-speed railway link with Shenzhen and Guangzhou; if it proceeds smoothly, construction will only be completed in 2015. In contrast, the Guangzhou-centric PRD and regional rapid mass transit system will be basically completed by 2012, with some of the lines already in operation in 2010. The great advantage of this much improved accessibility for Guangzhou will be the main factor to enable it to out-perform Hong Kong and regain the central position in the urban and economic hierarchy of the PRD and the region of China south of the Yangtze River. It will also lay the foundation for the resurgence of Guangzhou as the great gateway city of China. Together with China as a whole, Guangzhou will return to the glory of the Middle Kingdom during the past centuries.

International city, heart of high-speed transport web
Two major trends are expected.

First, Guangzhou will become more international. Already Guangzhou has a larger foreign population than Hong Kong and the international network of Guangzhou is more extensive than Hong Kong’s. For example, over 200,000 merchants from Africa and the Middle East reside in the city, reminiscent of its trade links with the Arabian world since the Tang Dynasty. Its airport has more flights to emerging markets and the developing world than Hong Kong. In recent years, Guangzhou has developed closer ties with Japan and Europe, while Hong Kong has focused more on the narrow circle of financial elites, based mainly in the US and the UK. With ASEAN, Russia, Brazil and India expanding their role in the world economy and Africa in the process of an economic and social recovery, Guangzhou is very well positioned to benefit from the coming great changes in the global system. Unprepared and very much locked into a dependence on its previous path of development, Hong Kong will face even greater challenges in the coming years than the structural problems it faces now.

Second, with the arrival of the intensive high-speed network of local, inter-city and regional mass-transit railway systems similar to those of Greater Paris and Greater Tokyo – the goal set by the Guangdong planning authorities – services will expand exponentially in the centre of the system, Guangzhou, in particular in the nodes and hubs of the urban areas. The demand from the population of the PRD, 40 to 50 million, and from the over 20 million of wealthy people who travel frequently to the city from other regional centres, will give Guangzhou the numbers to grow its service sector to the scale of Greater Paris and Greater Tokyo.

When Shenzhen was established, no one expected it to grow into a vibrant city of over 10 million people and a centre of high-tech industries exporting to the world. Today people, especially those in Hong Kong, still doubt the resurgence of Guangzhou. One should not forget history, however. The rise of Hong Kong has been at the expense of Guangzhou and the reasons why Guangzhou failed to compete with Hong Kong for the past 60 years were not of Guangzhou’s own doing; they were the result of national political and economic policy. With these policies returning to normal – no preparation for war, no blind worship of the west and no more birth pains of the market economy — Guangzhou can now exploit its economic, social, and cultural advantages to the full. Perhaps Guangzhou cannot compete with Shanghai and Beijing but is definitely capable of becoming once again the ‘capital’ of South China — and probably ASEAN as well – and the great gateway of China, not just for trade, but also for knowledge.