Downturn hits China’s manufacturing heartland

January 12, 2009

John Kemp Great Debate— John Kemp is a Reuters columnist. The views expressed are his own —

The global slowdown is hitting China’s modern manufacturing base in Guangdong province especially hard. Deputy governor Huang Longyun on Thursday warned a news conference “the situation is grim” and the manufacturing hub around Pearl River Delta is bearing the brunt of China’s slowdown.

Guangdong’s burgeoning factories have supplied most of the cheap manufactured items flooding world markets in the last five years. They have also been the source of most of the marginal demand for crude oil, refined products and other raw materials. The province’s slowdown will therefore have profound effects on global markets and prices in 2009.

More than any other province, Guangdong has been a showcase for modernization and an export-led growth and development strategy. Its modern export-oriented factories, many organized as joint ventures with foreign companies, have given it some of the fastest growth rates in China.

Guangdong has consistently outperformed traditional industrial centres in the north-east around Heilongjiang, Jilin, Liaoning and Shandong. Central government leaders have urged the north-eastern provinces to follow the south’s strategy: reform struggling industries focused on producing industrial materials and low value items for the domestic market, and re-orient them towards producing lighter, higher-value industrial products for export.

But the reliance on exports that powered Guangdong’s transformation over the last decade and made it the new “workshop of the world” have left it more vulnerable than any other of China’s regions to the global slump.

According to deputy governor Huang, Guangdong’s output growth has already fallen from 14.7 percent in 2007 to just 10.1 percent in 2008. It could tumble as low as 7 percent this year, according to an economist with the province’s Academy of Social Sciences,less than half the thirty-year average. Growth in exports has slowed from 22.3 percent in 2007 to just 5.6 percent in 2008.

The slump may be hitting the formerly fast-growing provinces along the southern and eastern coasts disproportionately hard, while the north-east experiences a much milder slowdown. If this is confirmed, it would reverse the traditional pattern of growth and social development that has characterized China since the country began to open up in the early 1980s.


In some ways, Guangdong has fallen victim to its own success. Deregulation policies pioneered in the Shenzhen special economic zone have spread out to the rest of the Pearl River Delta and the wider region, making it the most liberalized and dynamic part of China’s economy.

The province’s manufacturers have responded by unleashing a torrent of exports onto global markets. While some of these items have been fairly high-value added items such as semiconductor chips, made in foreign-invested factories with high technology, most have been much more basic plastics, semi-fabricated construction materials and cheap bulk goods.

The export flood has stoked tensions with foreign governments, as overseas producers complain about the phenomenal surge in low-cost products onto world markets.

It has also strained the capacity of the region’s power generation and distribution systems to the limit, particularly in the summer months, when rapidly expanding manufacturing activity competes directly with peak demand from air conditioners in homes, schools and offices.

Finally, huge demand for labor has sucked in millions of migrant laborers, putting upward pressure on wage rates and real estate prices. Guangdong’s super-heated economy has suffered some of the worst inflation rates in the country, losing industry to cheaper locations inland or in Vietnam to the south.

Guangdong is a microcosm of wider problems in China’s economy. The flood of cheap manufactured items onto the world economy has depressed global prices and revenues from them, while the huge quantities of energy and other raw materials needed to make them, and which China has to import, have sent global oil prices and other commodities soaring.

In effect, rapid industrialisation has shifted the terms of trade against China. Guangdong’s huge export base with its voracious demand for power and other raw materials lies at the heart of China’s trade problems, as well as global pricing trends over the past decade.

The central government has responded by making the province a test-case for shifting China’s export base up the value chain towards more value-added and less energy intensive products.

Under central direction, the provincial government has been raising industrial power prices and curbing supplies to energy intensive users in the summer months, allowing wage rates to rise, and encouraging businesses to shift their output to higher value-added items.

The problem is that this shift may have come at the wrong moment. The rising value of the RMB against the dollar and other major currencies, coupled with rising local wage rates, was already adversely affecting the competitiveness of local manufacturers.

Even before the downturn intensified in September, there were widespread reports of business closures and relocations. Now that export markets have started to shrink, the pressures are set to become intense.


The province’s slowdown is set to have dramatic effects on global pricing:

(1) China’s northern industrial base is powered by domestically produced coal, but the southern and eastern coastal provinces rely heavily on hydroelectric resources, as well as imported fuel oil and diesel to meet peak summer demand.

Guangdong’s thirst for power over the summer has provided much of the marginal demand in global markets for fuel oil and diesel over the last five years. The province is a major buyer during the later winter and early spring months, as it attempts to stockpile fuel. But as growth slows and power demand falls, the province is likely to emerge as a much smaller purchaser in spring 2009.

(2) Guangdong’s rapid growth has also provided much of the marginal demand for a whole host of other raw materials, ranging from tin and lead to rubber and plastics. In some sense, Guangdong has been the key “load centre” in most global commodity markets. If growth there is now slowing sharply, and output in some industries is beginning to fall, it will cut global consumption for a broad swath of commodities in 2009 and keep prices under pressure.

(3) On the positive side, slower growth will ease pressure on China’s electricity grid. Even before the onset of the economic crisis, power availability was improving owing to the completion of the Three Gorges dam and the installation of the last of the massive generating turbines at Sandouping.

During the autumn, the reservoir administration began raising the water level behind the dam towards the target of 175 metres. A record volume of water is now being held in the major hydro reservoirs on the Changjiang (Yangtze) river and its tributaries. But with the crisis, the risk of summer power shortages next year, already falling, has now disappeared.

Crucially, the slowdown in Guangdong and elsewhere along the east coast should remove the threat of regional power shortages until the government-owned State Grid Corporation of China (SGCC) can open new long-distance ultra-high voltage (UHV) transmission lines in 2010 and 2011.

The new UHV lines are the first of 10 which SGCC plans to bring into service by 2015, bringing power from massive new hydroelectric projects in the south-western provinces of Yunnan and Sichuan to relieve power shortages in Shanghai, Guangdong and other fast-growing industrial load centers along the eastern and southern coasts.

Until the onset of the downturn, it seemed likely southern China would suffer an acute “power gap” in 2009 and 2010 before these lines became operational, with widespread shortages and rationing. The slowdown means that gap has now disappeared and with it the need to enter world markets for large volumes of diesel and fuel oil.

For previous columns by John Kemp, click here.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

Good. I hope this puts an end to Red Chinese manufacturing dominance. Let the Chinese go back to growing rice. I don’t buy their cheap cr@p. End “Free Trade” and perhaps give US manufacturers a chance to recover somewhat; before the next Red Chinese manufacturing onslaught.

Posted by RFL | Report as abusive

11 Feb 2009 RFL you seem to be correct. I’m NOT accusing
or alleging anything but merely asking reuters readers:-
1) do you think rising unemployment is good for members of congress and president etc? In that they will push for
more and larger stimulus packages and take under the table bribes thru lobbyist of the stimulus beneficiaries
amounting to ten percent or more, that will make them ten times billionaires overnight??
And the beneficiaries like banks etc will be glad too
because bulk of the remaning ninety percent is likely to be pocketed by banks’ management etc. Once the current
stimulu gets depleted, they will return for more only
to find that members of congress and president are
more than willing to oblige in return for bribes???

Does it seems that stimulus beneficiaries, banks etc have got the smell of whole thing??

Posted by jjmk4546 | Report as abusive