Going Upstream

The explosion of cross-border manufacturing that began the capitalist revolution in China’s Pearl River Delta almost 30 years ago appears to be a victim of its own success. Guangdong authorities are seeking to drive out a large proportion of the 70,000-odd small manufacturers that crossed the border in the wake of China’s historic 1978 opening to the west under late paramount leader Deng Xiaoping.

Local news reports have focused on attempts to control the Delta’s notorious air pollution, but the authorities are pursuing a bigger goal. Guangdong wants to emulate Hong Kong, moving on to a new era of service industries and leaving behind the vast sea of dirty, labor-intensive, factories that have enriched the province and driven China’s transformation into an economic powerhouse.

Although the manufacturers are fighting back, contacting Hong Kong and southern China manufacturers’ groups to ask for relief, they are not making a lot of progress. Up to 20 percent of them have been forced to suspend operations or close, according to the Hong Kong Economic and Trade Office in Guangdong, particularly those in dyeing, chemicals, leather and papermaking.

After an early August meeting between Guangdong and Hong Kong officials, it was announced that more than 100,000 individual enterprises were under surveillance by the Guangdong Environmental Protection Bureau. Nearly 800 SMEs (small and medium-sized enterprises) have been inspected by authorities in recent months and more than 100 are being closed because they fail to meet environmental standards.

Guangdong has also announced it would halt approvals for new oil- and coal-fired power plants in the Pearl River Delta and is forcing energy providers to install gas desulphurization systems and use cleaner natural gas for energy generation.

Guangdong’s leaders believe their province is about where Hong Kong was in the 1970s in terms of the mix of service industries and manufacturing. But Guangdong’s GDP is now twice Hong Kong’s and by 2010 the authorities expect it to equal Taiwan’s. Today, they regard the SMEs as more nuisance than asset. They are trying to force them to leave for other parts of China, or even other countries, through pollution crackdowns and a rising series of “fees” that amount almost to blackmail although many, particularly in electronics and garment-making are not vulnerable to environmental regulations although they are to labor regulations. There are fees to pay for planting trees, fees for excess energy consumption, fees to pay for employee health, fees for training employees, fees for everything they can think of. And the authorities are not bashful about enforcing these laws.

Hong Kong companies across the border are also vulnerable because for the most part they don’t own their factories, they lease them. At the time of the original surge north, factory owners were still suspicious of the fearsome Communist government in Beijing. They leased factories, mostly on 20 to 25-year terms, figuring they could flee if the authorities cracked down on property owners.

Now those leases are coming due, and the authorities are exerting pressure to not renew them, sources in China say.

The dialectical justification for what is happening to the light industries, particularly textiles in Guangdong Province, stems from a speech to the National People’s Congress by Premier Wen Jiabao in March, in which he spoke about his vision of a “Harmonious Society and Balanced Development,” in which environmental degradation, labor excesses and other issues would be balanced against growth. The slogan appears to be setting the tone for China in much the same way “Stability and Development” did for the administration of Jiang Xemin.

Guangdong authorities are thus using Wen’s edict to get at Guangdong’s light manufacturers. In his report to the National People’s Congress, he set a target of cutting industrial energy use by 4 percent per unit of Gross Domestic Product per annum. To produce 10,000 yuan of GDP, China now generates the energy equivalent of 2.6 metric tonnes of coal. That is two to three times the world average and 20 times the average of Japan. Wen’s goal is to reduce energy use per unit of GDP by 20 percent over the next five years.

Environmentalists are skeptical of Guangdong’s commitment. However, the most tangible evidence of the tough new attitude was a sudden clampdown on Dongguan Fu An Textile Co., a subsidiary of Fountain Set Holdings, on allegations that it had laid a secret pipe to dump 20,000 tonnes of waste water a day into a nearby river. The Hong Kong-listed Fountain Set is no fly-by-night company. Its website describes it as the world’s largest manufacturer of circular knitted fabrics. Worldwide sales were HK$6.64 billion in 2005 to such industry stalwarts as Adidas, Tesco, JC Penney, J Crew, Liz Claiborne, Wal-Mart, Victoria’s Secret and many others.

“We don’t have a figure on how many factories actually have closed because of the pollution laws,” said Florence Chik, the principal information officer for the Hong Kong Economic and Trade office in Guangdong. “But because of the new environmental protection measures implemented by the government, many can’t meet the requirements and they are having to close their businesses.”

Chik, however, says that of 18 factory owners cited in Dongguan, 16 have already shut down.

“We are discussing with them to see if there are other remote areas in Guangdong where they can go,” Chik said. “We are discussing with them new terms to see how they can implement more environmental protections. Maybe they can move northward a little bit.”

Certainly, any commitment to cleaning up southern China’s environment would be welcomed in Hong Kong. An increasing drumbeat is coming from top financial services firms and others about pollution, particularly air pollution, which flows over the border from China and about which Hong Kong has been able to do very little despite a recent cross-border cooperation agreement. Top management of these firms are decamping for Singapore and other cities, cutting into the Hong Kong’s ambition to remain Asia’s top financial center.

The manufacturers face more problems as well, from the rise of the yuan against the US dollar. The currency has risen nearly 10 percent against the Hong Kong and US dollars and is approaching parity. The combination of these developments has reduced most textile manufacturers’ annual margins to around 5-6 percent. To factory owners used to margins of twice and three times that, and a government formerly sympathetic to their labor and environmental requirements, these are parlous times indeed.