Fri, Jun 02, 2017 - Page 9 News List

The promise of China’s Pearl River Delta cities

Chinese policymakers recognize the benefits of ‘city clusters,’ but they must work to address the risks of rapid urbanization and specialization

By Andrew Sheng and Xiao Geng

July 1 will mark the 20th anniversary of Hong Kong’s return to China after more than a century of British colonial rule. It comes at a moment when China’s leaders are increasingly promoting Hong Kong’s unique role in advancing the nation’s economic development.

Two months ago, Chinese Premier Li Keqiang (李克強) described China’s intention to deepen economic cooperation across the “Guangdong-Hong Kong-Macau Bay Area” — which Hong Kong analysts have called the Pearl River Delta (PRD) — in order to reinforce its role as a major driver of sustainable development.

The region includes Guangdong’s nine key cities — including Guangzhou, Foshan and Shenzhen — plus Hong Kong and Macau, and is the southern pillar of the three Chinese coastal growth clusters. Last year, the PRD’s population stood at 68 million and its GDP was US$1.3 trillion.

In the middle is the Yangzi River Delta, which includes Shanghai and has a population of 130 million and GDP of US$2 trillion, while to the north is the Beijing-Tianjin-Bohai corridor, covering 10 key cities; it has a population of 100 million and GDP of US$1.3 trillion.

Taken together, these three clusters account for 21 percent of China’s population and just less than 40 percent of its GDP.

The PRD has the lowest population of the three, but the highest income per capita, and it forms an important link between China and global supply chains. It gains a distinct advantage from the free-trade, low-tax and highly globalized cities of Hong Kong and Macau; both are “special administrative regions” under China’s “one country, two systems” principle.

Another major asset is Shenzhen, a highly innovative “special economic zone” boasting a dynamic capital market and a tradition of experimentation with private-sector-driven job creation and integration into global supply chains.

The PRD’s competitiveness is no accident. Former Chinese leader Deng Xiaoping (鄧小平) used the region as a kind of public-policy laboratory, allowing different legal and institutional arrangements to exist concurrently, while China figured out how to approach globalization. The system clearly works, but it does suffer from a fundamental contradiction related to economist Ronald Coase’s concept of transaction costs.

Thanks to China’s geographic, demographic and economic scale, “reform and opening up” — in Deng’s phrase — and technological progress naturally drive down transaction costs, improving markets’ capacity to allocate resources. This process often fuels specialization, with regional or municipal economies focusing on their own competitive advantages to maximize their gains from the decline in transaction costs.

Such specialization can be seen clearly in the PRD. Hong Kong is becoming a hub of international finance and services, while Macau establishes itself as a global gambling and entertainment center. Meanwhile, Shenzhen is focusing on technological innovation, Guangzhou is a global trading hub and Foshan and Dongguan are major manufacturing bases.

While each city appears to be imbalanced in its economic structure, the city cluster as a whole is well balanced and highly competitive.

However — and herein lies the contradiction — massive numbers of transactions could raise financial, social and security risks, which can fuel systemic volatility and contagion across regions and sectors.

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