Switching to a services economy from a labour-intensive industrial base won’t be easy, but Guangdong Province has little choice.
Lu Lei, Caijing 21 January 2009
Guangdong Province has been a role model for China’s 30-year economic miracle. But times have changed, and the province’s latest development stage requires a new economic growth model if it wants to maintain its leadership status.
Guangdong’s challenges reflect a contradiction between long-term vision and short-term concerns. Signs of trouble emerged as financial turmoil hit Western economies in late 2007. The vulnerability of Guangdong’s export-reliant economy became apparent as overseas markets declined. The province’s weak side soon became as conspicuous as its success during good times of skyrocketing growth.
The signs became more visible in 2008. Guangdong’s exports in the first 11 months of the year grew only 11 percent from the previous year, about half the pace in the same period last year. Total trade value slowed in the second half of the year, dragging down the export growth rate to 10 percent for the first 11 months of 2008 from more than 20 percent for the first six months.
Similarly, the province’s foreign investment in terms of contract value declined 15.7 percent between January and November 2008, compared with the same period 2007, or 25.8 percent in terms of the number of committed projects.
Companies unable to make ends meet booked total losses of 49 billion yuan for the 11-month period, double the losses posted during the same period 2007.
As Guangdong has always been a bellwether for the Chinese economy, it was not surprising that nationwide industrial sector profits slowed in 2008, growing only 4.9 percent year-on-year during the first 11 months. The trend seemed to point toward negative growth.
But Guangdong is not the only Chinese province affected by the slowdown. Its companies pay an estimated 150 billion yuan annually to migrant workers from poorer provinces. Thus, wages from Guangdong have been an important resource for investment and consumption far beyond its borders. But in the face of shrinking profits, investors may hesitate to provide more capital to Guangdong companies, which in turn would cut the number of jobs for migrants as well as outgoing cash.
The Guangdong government, aware of a need to make the economy more self-supporting, launched a strategy called “double-transfer” last June. The strategy calls for transferring labour-intensive and export-oriented industries from the province’s Pearl River Delta to surrounding areas that are more agricultural. It also involves transferring labour from the agricultural to industrial and service sectors, relocating some skilled labourers to the delta.
The central government backs this type of restructuring and, while stressing Guangdong’s economic significance, has included double-transfer in a reform plan released at the end of 2008. The 12-year plan envisions an evolution leading to a Guangdong economy driven by a modern services industry and technologically advanced manufacturing.
While economic reform is a high priority, the provincial government is also paying close attention to political pressure linked to possible social instability caused by the economic slump. Traditional, low-end manufacturers, although less desirable in the eyes of China’s leaders, can accommodate plenty of workers who otherwise might be unemployed. To keep these industries afloat, the government may require banks to extend financing to low-rung companies, which in turn would lead to higher risk for the banking system.
If this holds true, two outcomes are possible. First, the longer traditional industries produce, the greater excess capacity they will build. Excess supply will depress prices, bringing deflation. Companies failing to market products are at risk of default and could exaggerate losses when reporting to financial institutions. Moreover, the kinds of new industries encouraged by the government’s plan may have a hard time borrowing from banks, since banks usually favour long-standing businesses with credible track records.
Second, as credit risks accumulate, banks may become extremely cautious about lending and prefer to hoard cash. Deposits in Guangdong’s domestic financial institutions grew 656-fold between 1978 and the end of 2007, but lending increased only 246 times. The difference reflects the fact that financial resources were increasingly piling up in banks, rather than being funnelled into businesses and households.
These cash resources could not be used for credit because banks have to increase capital reserves to offset the possibility of a growing number of non-performing loans. China’s financial regulators have tried to raise the floor of capital adequacy for smaller financial institutions, and are closely tracking whether institutions have adequate reserves to cover NPLs on their books. Such careful regulation, while limiting the risk of bank failure, would further reduce the capacity of banks to finance the real economy.
Such a vicious cycle can be a real threat if policy adjustment and financial innovation are lacking. Here are some noteworthy recommendations:
First, a regular mechanism for providing supplemental capital should be established for commercial banks. At the provincial level, it’s advisable to have financial holding companies manage the capital to ensure financial sector security.
Second, the central bank should relax control over foreign exchange reserves so that provincial governments can supplement the capital reserves of municipal banks and rural credit cooperatives. One bold but feasible suggestion is for the central bank to cash in some foreign sovereign debt in its reserves. Those funds could be allocated to each province, according to the size of their foreign exchange settlements.
A third recommendation is to enable financial holding companies and commercial banks to set up joint industry investment and venture funds so that financial resources in banks can be effectively used to develop a services industry and advanced manufacturing, the driving economic force China wants in the future.
Hello Everybody, My name is Ahmad Asnul Brunei, I contacted Mr Osman Loan Firm for a business loan amount of $250,000, Then i was told about the step of approving my requested loan amount, after taking the risk again because i was so much desperate of setting up a business to my greatest surprise, the loan amount was credited to my bank account within 24 banking hours without any stress of getting my loan. I was surprise because i was first fall a victim of scam! If you are interested of securing any loan amount & you are located in any country, I'll advise you can contact Mr Osman Loan Firm via email osmanloanserves@gmail.com
LOAN APPLICATION INFORMATION FORM First name...... Middle name..... 2) Gender:......... 3) Loan Amount Needed:......... 4) Loan Duration:......... 5) Country:......... 6) Home Address:......... 7) Mobile Number:......... 8) Email address.......... 9) Monthly Income:..................... 10) Occupation:........................... 11)Which site did you here about us..................... Thanks and Best Regards. Derek Email osmanloanserves@gmail.com
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Can Guangdong Save Its Role Model Status?
Switching to a services economy from a labour-intensive industrial base won’t be easy, but Guangdong Province has little choice.
Lu Lei, Caijing
21 January 2009
Guangdong Province has been a role model for China’s 30-year economic miracle. But times have changed, and the province’s latest development stage requires a new economic growth model if it wants to maintain its leadership status.
Guangdong’s challenges reflect a contradiction between long-term vision and short-term concerns. Signs of trouble emerged as financial turmoil hit Western economies in late 2007. The vulnerability of Guangdong’s export-reliant economy became apparent as overseas markets declined. The province’s weak side soon became as conspicuous as its success during good times of skyrocketing growth.
The signs became more visible in 2008. Guangdong’s exports in the first 11 months of the year grew only 11 percent from the previous year, about half the pace in the same period last year. Total trade value slowed in the second half of the year, dragging down the export growth rate to 10 percent for the first 11 months of 2008 from more than 20 percent for the first six months.
Similarly, the province’s foreign investment in terms of contract value declined 15.7 percent between January and November 2008, compared with the same period 2007, or 25.8 percent in terms of the number of committed projects.
Companies unable to make ends meet booked total losses of 49 billion yuan for the 11-month period, double the losses posted during the same period 2007.
As Guangdong has always been a bellwether for the Chinese economy, it was not surprising that nationwide industrial sector profits slowed in 2008, growing only 4.9 percent year-on-year during the first 11 months. The trend seemed to point toward negative growth.
But Guangdong is not the only Chinese province affected by the slowdown. Its companies pay an estimated 150 billion yuan annually to migrant workers from poorer provinces. Thus, wages from Guangdong have been an important resource for investment and consumption far beyond its borders. But in the face of shrinking profits, investors may hesitate to provide more capital to Guangdong companies, which in turn would cut the number of jobs for migrants as well as outgoing cash.
The Guangdong government, aware of a need to make the economy more self-supporting, launched a strategy called “double-transfer” last June. The strategy calls for transferring labour-intensive and export-oriented industries from the province’s Pearl River Delta to surrounding areas that are more agricultural. It also involves transferring labour from the agricultural to industrial and service sectors, relocating some skilled labourers to the delta.
The central government backs this type of restructuring and, while stressing Guangdong’s economic significance, has included double-transfer in a reform plan released at the end of 2008. The 12-year plan envisions an evolution leading to a Guangdong economy driven by a modern services industry and technologically advanced manufacturing.
While economic reform is a high priority, the provincial government is also paying close attention to political pressure linked to possible social instability caused by the economic slump. Traditional, low-end manufacturers, although less desirable in the eyes of China’s leaders, can accommodate plenty of workers who otherwise might be unemployed. To keep these industries afloat, the government may require banks to extend financing to low-rung companies, which in turn would lead to higher risk for the banking system.
If this holds true, two outcomes are possible. First, the longer traditional industries produce, the greater excess capacity they will build. Excess supply will depress prices, bringing deflation. Companies failing to market products are at risk of default and could exaggerate losses when reporting to financial institutions. Moreover, the kinds of new industries encouraged by the government’s plan may have a hard time borrowing from banks, since banks usually favour long-standing businesses with credible track records.
Second, as credit risks accumulate, banks may become extremely cautious about lending and prefer to hoard cash. Deposits in Guangdong’s domestic financial institutions grew 656-fold between 1978 and the end of 2007, but lending increased only 246 times. The difference reflects the fact that financial resources were increasingly piling up in banks, rather than being funnelled into businesses and households.
These cash resources could not be used for credit because banks have to increase capital reserves to offset the possibility of a growing number of non-performing loans. China’s financial regulators have tried to raise the floor of capital adequacy for smaller financial institutions, and are closely tracking whether institutions have adequate reserves to cover NPLs on their books. Such careful regulation, while limiting the risk of bank failure, would further reduce the capacity of banks to finance the real economy.
Such a vicious cycle can be a real threat if policy adjustment and financial innovation are lacking. Here are some noteworthy recommendations:
First, a regular mechanism for providing supplemental capital should be established for commercial banks. At the provincial level, it’s advisable to have financial holding companies manage the capital to ensure financial sector security.
Second, the central bank should relax control over foreign exchange reserves so that provincial governments can supplement the capital reserves of municipal banks and rural credit cooperatives. One bold but feasible suggestion is for the central bank to cash in some foreign sovereign debt in its reserves. Those funds could be allocated to each province, according to the size of their foreign exchange settlements.
A third recommendation is to enable financial holding companies and commercial banks to set up joint industry investment and venture funds so that financial resources in banks can be effectively used to develop a services industry and advanced manufacturing, the driving economic force China wants in the future.
Hello Everybody,
My name is Ahmad Asnul Brunei, I contacted Mr Osman Loan Firm for a business loan amount of $250,000, Then i was told about the step of approving my requested loan amount, after taking the risk again because i was so much desperate of setting up a business to my greatest surprise, the loan amount was credited to my bank account within 24 banking hours without any stress of getting my loan. I was surprise because i was first fall a victim of scam! If you are interested of securing any loan amount & you are located in any country, I'll advise you can contact Mr Osman Loan Firm via email osmanloanserves@gmail.com
LOAN APPLICATION INFORMATION FORM
First name......
Middle name.....
2) Gender:.........
3) Loan Amount Needed:.........
4) Loan Duration:.........
5) Country:.........
6) Home Address:.........
7) Mobile Number:.........
8) Email address..........
9) Monthly Income:.....................
10) Occupation:...........................
11)Which site did you here about us.....................
Thanks and Best Regards.
Derek Email osmanloanserves@gmail.com
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