GUANGZHOU and DONGGUAN, China – In slightly over 10 years Guangdong province, China’s “factory of the world,” will achieve “modernization,” according to a report by Niu Wenyuan of the Chinese Academy of Sciences. The report defines “modernization” as a level of economic development, social progress, living standards and sustainable development similar to that of a “medium-level developed country.” This roughly means that even without the help of a European Union-like structure, Guangdong by 2016 is set to become a Chinese Spain or Ireland.

This is the Beijing view. The Guangdong provincial government is even bolder: it wants modernization as early as 2010 for the Pearl River Delta – the jewel in the crown of the factory of the world. And for the booming city of Shenzhen, the year is now, 2005.

In 2001, former Guangdong governor Lu Ruihua was already boasting that the province’s economy was larger than that of Singapore, South Africa or Greece. Guangdong is indeed a powerhouse compared with the larger ASEAN (Association of Southeast Asian Nations) countries and the four original Asian tigers. In a 2001 table compiled by the South China Morning Post, Guangdong’s economy was already 53% larger than that of the the Philippines and 270% larger than that of Vietnam. The forecast was that it could surpass Thailand, Indonesia and Hong Kong by 2010.

According to Joseph Cheng, professor of political science at the City University of Hong Kong, a specialist in Guangdong and editor of the recent book Guangdong: Preparing for the WTO Challenge (Chinese University Press, 370 pages, 2003), “If the average annual growth rate can be maintained at 10.3% … and taking population growth into consideration … per capita gross domestic product in the region will reach US$7,000 by 2010.” Guangdong’s GDP went up the usual staggering 14.8% in 2004 to reach more than $160 billion. It may reach $240 billion or more by 2006. Everything seems to be on track. Spain and Ireland, watch out.

The calculus of nine-plus-two

The myth of China as the world’s biggest market disguises the fact that it’s really a cluster of small markets. Historically, each Chinese city has always been self-sufficient. The Maoist model, the commune, was not that different. When the model was transplanted to the city, the result was the state-owned enterprise (SOE). Maoist cities were aggregations of industrial communes. In terms of economic production, Maoist cities were like mini-countries. Deng Xiaoping’s reforms changed all that. Its consequences – a web of good airports, roads and railways, more efficient production, the rise of Chinese domestic brands – spelled the end of the mini-country syndrome.

The next inevitable step is integration. In July 2003, Guangdong Communist Party secretary Zhang Dejiang proposed the creation of a Pan-Pearl River Delta, or nine-plus-two, plan, expanding and decentralizing trade and investment by linking nine provinces (Guangdong, Fujian, Jiangxi, Hunan, Guangxi, Hainan, Guizhou, Yunnan and Sichuan) with the two special administrative regions (SARs), Hong Kong and Macau. So nine plus two, if implemented, will mean no trade or tariff barriers, and totally free movement of labor. In a nutshell, a powerful “mini-China” – 20% of the land mass, 450 million people (more or less like the 25-member European Union), and a GDP of $630 billion, representing at least 40% of China’s economy.

But can it possibly work? As far as the party commandments are concerned, the timing could not be better: for the fourth generation under President Hu Jintao and and his reformist ally, Premier Wen Jiabao, the No 1 priority is the development of China’s domestic market.

But competition will be fierce. Guangdong and the Pearl River Delta are locked in a battle for investment with Shanghai and the Yangtze River Delta, which sells itself as having better access to China’s huge domestic market. While exports from the Pearl River Delta are doubling, those from the Yangtze are quadrupling. Shanghai already gets more foreign investment and is leading China in technology and heavy industry. But Guangdong is also moving up. The middle class in a province of almost 90 million numbers more than 20 million. Guangzhou is becoming China’s “Japanese Detroit,” hosting Honda and Toyota, and is promoting heavy and chemical industry. The Beijing view is that the Pearl River Delta should position itself as the prime processing center for the “factory of the world.”

The special economic zones (SEZs) Shenzhen and Zhuhai were also created by a party commandment – in their cases by Deng Xiaoping himself. In the current climate of tremendous competition among Chinese provinces, towns and even local districts, the Communist Party Politburo is certain to convince them of at least not competing too much. As for the Pearl River Delta, Premier Wen’s recent visit to Shenzhen reinforced the message: Guangdong should “aim for sustainable development” and Shenzhen “should work closely with Hong Kong in economic, science and technology and cultural areas.”

Shenzhen, according to Professor Cheng of the City University of Hong Kong, aims to become the model Chinese information-technology (IT) city. “In 2005, for every 100 people, there will be 85 mobile phones; cable TV will reach over 95% of the city’s population; over 50% of its residents will have access to digital TV; for every 100 households there will be over 80 computers; for every 10,000 people there will be 4,600 subscribers to the Internet; over 50% of schools will have broadband connection and will use multimedia facilities; e-commerce will amount to 5 billion yuan [$609 million] a year; over 50% of enterprises will have home pages; 50% of the city government’s public services will offer electronic service delivery … the Shenzhen authorities hope that by 2005 they will have completed an advanced education network platform covering all courses offered by Shenzhen’s educational institutions.”

Contradicting a recent report by the Guangdong Academy of Social Sciences that warned that the province may even be losing out to Fujian, Liu Pinan, the director of the Academy’s Institute of Macroeconomic Studies, says that Guangdong is not dependent of foreign investment anymore and is now driven by domestic companies. According to the academy, only 20% of Guangdong’s GDP comes from foreign-owned companies – with 90% of the export-led production concentrated on the Pearl River Delta. Liu insists that both the Pearl River Delta and the Yangtze River Delta have their own comparative advantages.

The Taiwan factor

A previous report by the Guangdong Academy of Social Sciences already stated that the future for Guangdong is integration – not only with Hong Kong and Macau but also with Taiwan. From Hong Kong’s point of view – with its wealth of capital, management and sophisticated financial services – the Pan-Pearl River Delta will be essential for thousands of small and medium Hong Kong producers who cannot export in enormous quantities and thus must concentrate on the Chinese hinterland, with its masses of cheap labor and plentitude of natural resources. Yunnan province, for instance, has tin, Guizhou province coal, and Guangxi province has aluminum, tin and manganese.

Hong Kong is the biggest foreign investor in China, followed by the Virgin Islands (because of their fiscal-paradise status), Japan, South Korea, the United States and Taiwan. But most of the real investment, as it is widely acknowledged in Hong Kong, comes in fact from Taiwan. Taiwan built China as the second-largest producer of IT hardware in the world, only behind the US, as well as the world’s biggest exporter to the US. More than 60% of these “made in China” exports are in fact made by Taiwan companies.

Dongguan, with its sea of factories, is practically a mainland extension of Taiwan, and conveniently close to Hong Kong, which means direct flights to Taipei. The investments started in the early 1990s, mainly in low-tech industries, and profiting from cheap labor. Now most of it is in high tech – but, in a worrying trend for Guangdong, moving north toward the competition, the Yangtze River Delta. More than 70,000 Taiwanese companies are established in China – a very potent reason to deter any cross-strait turbulence.

Taiwanese investors established in Guangdong and dependent on cheap labor are moving inland or to Vietnam, while no fewer than 300,000 Taiwanese – and counting – live in the Greater Shanghai area, with some tracts replicating Taiwan’s high-tech industrial zones. Already more than 30% of China’s exports are electronic and IT products. But Taiwanese investors are interested in targeting not only exports but the new, affluent Chinese consumer. An extra incentive is the 2010 free-trade area between China and ASEAN – which will be the largest in the world.

The right guanxi

Guangdong’s development has been nothing short of exceptional, considering that Mao Zedong relegated the province to the dustbin of history and it was only opened in the early 1980s, finally profiting from its status as China’s southern gate, close to Hong Kong and the overseas Chinese. The Pearl River Delta undertook not only a revolution in agriculture but an industrial revolution as well, fueled by joint ventures with “foreign” (Hong Kong and Taiwanese) capital. The poor parts of Guangdong migrated to the Pearl River Delta as well as workers from Hunan, Sichuan, Jiangxi and Guangxi. According to Cheng, the political-science professor, “in Dongguan the indigenous population of 1.5 million is only a fraction of the total population … which is now estimated at close to 7 million.” He sums it all up: “The important question in the coming decades is both the relationship that Guangdong will have to its hinterland … and the relationship that Guangdong’s economic core (the Pearl River Delta including Hong Kong, Macau and the SEZs) will have to the province, and to the world beyond.”

Both Cheng in Hong Kong and a number of businessmen and media professionals in Guangzhou put things in perspective. The future of Guangdong’s interests is bright inasmuch as the province’s former Communist Party secretary, Zhang Dejiang, is now a regular member of the 16th Politburo. The first two generations in the province were township leaders, with strong local roots, respected by the party hierarchy because they did a good job as far as economic development was concerned: they are resident party elders Ye Xuan Ping and Ren Zhong Yi, the first-generation leader who opened up Guangdong. But they are not close to Beijing, and are not interested in further promotions.

Corruption was very much a part of the breakneck development of Guangdong: if you had the right guanxi to the party secretary, you’d be rich. The provincial party secretary before Zhang was Li Changchun, a protege of Jiang Zemin who today is a powerful member of the nine-member Politburo Standing Committee. According to the inestimable Disidai (“The Fourth Generation”), the book published by Zong Hairen (a pseudonym) in late 2002, Jiang Zemin sent Li to take over the province from a group of local leaders known as the “Guangdong gang” (curiously, Jiang was the leader of what was formerly known as the “Shanghai mafia”). In political terms, Li put the house in order: Jiang had no hope of controlling the unruly province until Li turned it into one of Jiang’s favorites. Jiang launched his Three Represents doctrine in Guangdong in 2000: this is the doctrine that preaches a more bourgeois, middle-class, consumer-driven Communist Party.

Li Changchun is not the current Chinese premier in great part due to a Guangdong-related scandal. Huang Li Man, a woman secretary of Jiang Zemin, was promoted to party secretary in Shenzhen, where her family had a lot of business interests, thanks to Li. Beijing party elders didn’t like it one bit. Li anyway is described by Disidai as being much more competent than President Hu Jintao: his only rival in terms of understanding China’s Cheng in Hong Kong considers the nine-plus-two plan “a think-tank idea.” He adds that “Hong Kong businessmen don’t think in such a grandiose manner.” But the idea is a natural one considering the competition from the Yangtze Delta and the necessity for Guangdong to cultivate a big hinterland to enlarge its economic base. Besides, good relationships with neighboring provinces have been going on for more than a decade (for instance, Guangdong buys electricity from Guangxi province).

Guangdong realized its limitations by the second half of the 1990s – with Jiang Zemin and the “Shanghai mafia” heavily privileging the Yangtze River Delta. In order to upgrade, Guangdong party officials realized that links only to Hong Kong were not enough, so by the end of the 1990s a group of advisers and businessmen started thinking more boldly. Hong Kong and Guangzhou now agree that Guangdong needs to capture the domestic market and invest all over China. With the strategic support of Li Changchun and Zhan Dejiang in Beijing, “mini-China” may be unstoppable.