Is China ready to ‘empty the bird cage’?

By Tom Miller

When the global financial crisis began to batter China’s exports, some Chinese officials saw it as a useful opportunity to dispense a large dose of bitter, but necessary, medicine.

Wang Yang, the Communist Party boss of Guangdong province and a confidant of China’s president Hu Jintao, clearly relished the chance to fulfill the province’s long-held ambition to replace low-end manufacturing with something bigger, more advanced and more “modern”.

“Without the current serious economic situation, it would be much more difficult for Guangdong to accomplish economic restructuring,” Mr Wang informed the local press.

Mr Wang called the plan to dump labour-intensive manufacturers and replace them with higher-value heavy industry and services “emptying the bird cage for new birds to settle down”. It sounded like a fine idea – so long as the new birds were ready.

Even before the export slump arrived last autumn, a combination of rising costs, tough government policies and evaporating profits had battered local confidence. Many traditional light manufacturing businesses were barely profitable, requiring huge output volumes to sustain paper-thin margins.

Nowhere was this felt more keenly than in Dongguan, Guangdong’s low-end manufacturing hub. A patchwork of grey factory towns reminiscent of Charles Dickens’s monstrous Coketown, Dongguan’s sole function is to snap together as many widgets as possible, in the quickest possible time, for the cheapest possible price.

Block after block of concrete dormitories, clustered around identikit square factories, house the hordes of migrant workers who power this workshop of the world. So when millions of factory workers failed to return after Chinese New Year, commentators were quick to pronounce the death of the “Dongguan model”.

Yet these pronouncements are likely to prove unfounded. Many of the missing workers have since returned, and some businesses in Dongguan are even reporting an end to the slump.

Exports of light manufactured goods – Dongguan’s bread and butter – have held up better than many higher-value exports. Official data suggest that, while things are still bad, the Pearl River Delta (PRD) is bottoming out ahead of its rival, the Yangtze River Delta.

This does not change the fact that the PRD needs an industrial makeover. The region still accounts for 40 per cent of China’s export processing – the low-value business of snapping together imported semi-finished goods and exporting the finished products overseas – which means that the PRD’s industrial value added is only one-eighth of the Yangtze River Delta’s.

But it is highly unlikely that the traditional export processing trade will vanish. Dismantling the sophisticated web of supply chains that feeds the processing business is both unrealistic and pointless.

Moreover, since the export slump grabbed local officials by the short and curlies, erstwhile reformers have begun to realise that labour-intensive industry is a valuable source of employment. If all the PRD’s light manufacturers go bust, there could be nothing to replace them.

Many former supporters of Mr Wang’s tough economic reforms now feel the party chief’s harsh medicine needlessly pushed valuable job-providers to the brink. In Dongguan, the city government is helping to prop up tottering employers by temporarily relaxing mandatory environmental protection and social insurance requirements.

Even party secretary Wang appears to be taking a softer line. For the time being, saving jobs has trumped squashing dead birds.
 

 

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