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TAGS: ECON PGOV ELAB SMIG PHUM EINV CH
SUBJECT: Effort to Move Factories and Migrant Workers from Pearl
River Delta Faces Obstacles
(U) This document is sensitive but unclassified. Please protect
accordingly. Not for release outside U.S. government channels. Not
for internet publication.
1. (U) Summary: He could have called it the "Out with the Old"
policy, but instead Guangdong Party Secretary Wang Yang recently
announced a ?Double Transfer? policy to move both labor-intensive
industries and migrant laborers to less-developed areas of
Guangdong, or out of the province entirely. This is part of the
province's ambitious campaign to upgrade industries in the Pearl
River Delta (PRD). Many municipal governments in the PRD are
opposed to this plan, because they fear the high-tech and service
industries envisioned by Wang will be slow to develop, and the drop
in tax revenues will have an impact on program and welfare planning.
A lack of suitable infrastructure for more advanced industries in
the PRD, the Delta's persistent advantages as a manufacturing base
and certain central government polices - like the labor contract law
and the limitations on foreign investment in service industries
-will also present challenges to the success of the campaign. End
Summary.
?Empty the Cage and Replace the Old Bird with a New One?
--------------------------------------------- ---------
2. (U) The Guangdong provincial government recently announced a
?Double Transfer? policy backed with a budget of nearly 50 billion
RMB (7.3 billion USD). According to press reports, this strategy
will seek to move labor-intensive industries to less-developed areas
at the periphery of the province. At the same time, training will
be provided to unskilled workers, enabling them to work for the
high-tech companies the government seeks to attract to the PRD in
place of departing factories.
3. (SBU) Although the strategy, as reported in the local press, said
nothing about relocating migrant workers outside the province, our
contacts have told us that this is a major goal of the government.
Peter Pak-yan Leung, the Director of Hong Kong's Economic and Trade
Office (HK ETO) in Guangdong, told us that new promotion criteria
for public officials promulgated by Beijing represent a shift from
?quantity to quality.? These criteria, he said, stress per capita
economic statistics, as opposed to the aggregate figures, and also
emphasize social infrastructure. Leung told us that the provincial
government has determined that success under the new promotion
criteria will rely on its ability to reduce the denominator of the
per capita statistics by decreasing the number of migrant workers in
the province. Leung commented that the government is also concerned
about the potential cost of developing social infrastructure for
tens of millions of migrant workers.
4. (SBU) Dr. Zhang Jie, the Dean of the Economics School at Jinan
University, told us recently that the Guangdong government has
determined that the millions of uneducated migrant laborers
currently working in Guangdong factories will have difficulty taking
part in the high-tech service industry the government is trying to
establish in the PRD. He echoed HK ETO's Leung, saying that the
government's concern about per capita GDP growth is leading it to
push many of these migrant workers back to their home provinces.
Zhang suggested that this may be a controversial policy, arguing
that it was not fair to the millions of migrant workers who helped
transform the PRD into an engine of economic growth. According to
an article in the Southern Metropolis newspaper, the Dongguan
municipal government recently scrapped a proposed policy to
"transfer low-quality laborers" from the city after receiving
negative feedback from the public.
Opposition from Local Governments
---------------------------------
5. (SBU) Zhang claims that many of the municipal governments in
Guangdong oppose the Double Transfer policy. He said that most
local governments in the PRD were reluctant to push out
labor-intensive factories, because they worry that the new high-tech
companies promised by the provincial government won't actually
materialize. While Shenzhen and Guangzhou have had some success in
attracting high-tech investment, other cities in the PRD have
struggled. Municipal governments are also concerned, Zhang said,
about how to handle the many workers who would be laid-off by the
departing factories. His colleague, Li Guangming, added that he
sees the Double Transfer policy as a tug-of-war between coastal
GUANGZHOU 00000406 002 OF 002
cities in the PRD and less-developed ones in the interior of the
province. Li commented that municipal governments in the interior
are hopeful that factories displaced from the PRD will resettle in
their cities.
Other Challenges
----------------
6. (SBU) In addition to uncertain support from local governments,
the Double Transfer policy faces a number of other challenges,
including a deficit of necessary resources; central government
policies that discourage such a transfer; and a lack of suitable
destinations for the existing labor-intensive industry. Jinan
University's Zhang told us that it is difficult to shift from
manufacturing to service industries because the required
infrastructures are quite different. Dr. Lu Jun, the Chair of Sun
Yatsen University's Department of Finance, said in a separate
meeting that Guangdong lacks the talented workforce necessary to
establish high-tech operations. Lu commented that for this reason
it is currently very difficult to attract foreign companies to bring
their R operations to Guangdong. Frank Newman, the Chairman and
CEO of Shenzhen Development Bank, recently told the Consul General
that his bank is having difficulty finding people with skills even
in relatively basic areas, such as accounting; this leads to the
intense "poaching" that goes on in banking sectors where good people
are courted and wooed and won away with extra pay and extra
benefits.
7. (SBU) Another obstacle is the reluctance of factory owners to
move away from the massive and efficient supply chains that have
grown up around existing industries. Although many manufacturing
companies have been looking to relocate from the PRD in recent years
due to the appreciating yuan and rising labor costs, highly
developed supply chains, among other factors, continue to make the
PRD very competitive as a manufacturing base. Sun Yatsen
University's Lu told us that he believes Vietnam is far too small to
absorb a significant number of the PRD's factories, and he can't
imagine that other countries, such as Bangladesh and India, would
have sufficient infrastructure to merit relocation. One footwear
manufacturer told us that there currently is no better alternative
to coastal China for shoe factories, due to established supply chain
and transportation infrastructure. (Comment: Rising energy prices
will likely increase the advantage of a compact supply chain,
enhancing the PRD's attractiveness as a manufacturing base for many
industries. End Comment.)
8. (SBU) Certain central government policies also present
challenges, perhaps inadvertent, to the vision of a high-tech PRD.
According to HK ETO's Leung, the new labor law has made it far more
costly for factories to shut down due to new requirements for
severance pay. This may slow the speed at which old industries
depart, as owners seek to delay incurring prohibitive closing costs.
Jinan University's Zhang pointed out that national restrictions on
foreign investment in service industries also present a serious
obstacle to the Double Transfer strategy. In addition, he commented
that Party Secretary Wang's call for a Hong Kong/Macau/Guangdong
Special Economic Cooperative Zone, which would create a larger, more
integrated market that could encourage service industry investment
in the PRD, has yet to win substantial support in the central
government.
Expected to be a Long Process
-----------------------------
9. (SBU) Many of our contacts emphasized that the envisioned
transformation will not be easy. HK ETO's Leung told us that he
sees the shift as a long, drawn-out process. Jinan University's
Zhang pointed out that a similar industrial upgrading took other
Asian tigers (Korea, Taiwan, Singapore, Hong Kong) 15-20 years.
Zhang commented that Guangdong is likely to take even longer than
this, since it has a much larger population and economic scale than
the others.
GOLDBERG