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Revitalising Growth in Southern China

Guangdong is focused on industrial upgrading  

Guangdong is focused on
industrial upgrading (photo:
Xinhua News Agency)

 

 
The Pearl River Delta (PRD) looked as if it was beginning to tire last year as the economic downturn sapped its front-runner status as the world's product workshop and China's engine of growth. The PRD, after all, has been the pacesetter for China's opening up and economic reform for more than 30 years; so all the more devastating was the sudden fall in demand overseas last year for light industrial goods, which spelled trouble for thousands of PRD-based factories. 

Some commentators speculated that the concept of the PRD may even be reaching its sell-by date, as the era of easy credit and massive consumer demand in mature markets came to an abrupt stop. And there were signs that economies of scale would undermine the price competitiveness of the different strata of contractors and subcontractors in the PRD, for example quoting the rise of the more cohesive industrial region of the Yangtze River Delta (YRD). 

But such opinions don't reckon with the intense efficiencies at work in the PRD. True, factories that lost business were consigned to oblivion as the economic downturn began to bite. However, in purely economic terms, the PRD's achievements have been underscored rather than been dissipated. Even in poor business conditions, the PRD's multi-tiered industrial circles and super-efficient supply chains continue to sustain China's most consistent economic centre, not to mention providing the hinterland supporting all of Hong Kong's business sectors. 

More than 80 per cent of Hong Kong manufacturers and exporters continue to produce or source their goods in Guangdong, the driving force for the PRD. Seventy per cent of Hong Kong's service providers with operations on the mainland, meanwhile, continue to have business connections with the PRD, with about 30 per cent of the cargo handled by Hong Kong directly related to the Delta. 

Indeed, there continues to be a close relationship between Hong Kong and the PRD in mutual GDP growth. Economic ties are consistently characterised by the interaction of domestic and foreign supply and demand factors, plus progressive efficiencies inherent in supply chains. 

Blueprint for Cooperation

  Efficient seaports can bring the region together
  Efficient seaports can
bring the region together (photo: Xinhua News Agency)
The Outline Programme for Reform and Development of the Pearl River Delta, published by the National Development and Reform Commission at the end of last year, proposed that the PRD should continue its mission of serving as a testing ground for nationwide reform, explore pilot schemes and push reform of the economic structure. 

The region is envisaged as generating a well-off society by 2012, according to the Outline Programme, with an upgraded industrial structure and greater scope for independent innovation. 

The Programme also calls for closer cooperation, integration and mutual development with Hong Kong and Macau, to build what is seen as the most dynamic and internationally competitive city cluster in the Asia-Pacific region. 

Efforts by the PRD include deepening Closer Economic Partnership Arrangement (CEPA) opportunities, conducting pilot projects with Hong Kong and Macau and introducing Hong Kong services to Guangdong that have a competitive advantage. The PRD is also engaged in developing service-industry sectors to support Hong Kong as an international financial centre. 

Part of the process involves upgrading the PRD so it can become an international centre matching the development of Hong Kong and Macau. As the prime financial and trade centre in the region and a service platform linking the PRD with international markets, Hong Kong is set to benefit from the PRD's economic re-crafting. The Outline Programme expects Hong Kong's services industries will find greater opportunities in the PRD with an increase in demand and implementation of liberalisation measures. 

For the purpose of developing the PRD into a modern services base, the Outline Programme explains that deeper cooperation has to be honed between the Delta and the twin Special Administrative Regions of Hong Kong and Macau, to raise service industries' standards in the region. 

Market Access Limits

Hong Kong’s service industries are set to flourish in the PRD  

Hong Kong's services industries are set to flourish in the PRD

 

 
Guangzhou and Shenzhen have seen rapid growth in their service sectors in the past 10 years, contributing 58 per cent and 50 per cent of their GDP, respectively, in 2007. 

Transportation and logistics, infrastructure construction and real estate, wholesaling and retailing, information and software services, business services and finance were performing particularly well and Hong Kong service providers are becoming more involved in these sectors. 

While some headway has been made on mutual recognition of professional qualifications in Hong Kong and the PRD for such services as legal and accounting, there is still considerable limitation on market access, administrative examination and approval. 

At present, the majority of professional services companies are still not allowed to set up wholly-owned or joint-venture companies on the mainland. Services firms have difficulty recruiting mainland professionals or bringing in independent management or training systems. 

Besides affecting Hong Kong companies' competitive edge by denying professional and all-round services needed by clients, this lack of reciprocity is also not conducive to the upgrade of service personnel, or to the overall level of services on the mainland. If Guangzhou and Shenzhen are truly to become regional financial centres, banks, law offices, accounting firms and relevant professional bodies and intermediary agencies there must aim to meet international standards; it's the only way to win the trust and recognition of domestic and foreign investors.

Going Global

  Chart
   
In fact, the improvement of the PRD's legal and accounting systems is of crucial importance to financial reform. As the Greater PRD further opens itself to the outside world and more enterprises "go global," multinational business transactions can be expected to become more frequent. So there has to be a standardisation and internationalisation of business conduct, requiring codification. 

The Outline Programme mentions the need to strengthen the spirit of contractual obligations, the concept of the rule of law and commercial credit awareness – all have to be present for professional legal, financial and accounting practices to work effectively. 

Hong Kong lawyers have, for a long time, played the part of intermediaries for cooperative trade and investment activities. So they've made important contributions in corporate mergers and acquisitions, financing, investment, trade, drafting of contracts, supervision of funds and protection of intellectual property rights. 

Compared with their mainland counterparts, these lawyers have been much more active in the commercial world, especially in multinational business dealings, and have accumulated valuable experience over the years. 

Respective professional accounting services provided by Hong Kong and mainland firms also have a particularly critical role to play in corporate investment, mergers and acquisitions. 

In the accounting area, the mainland's accountants have made rapid headway, approaching international standards. Just two-and-a-half years ago, the mainland adopted a new accounting system based on international financial reporting standards and required domestic-listed companies to comply with relevant standards in their financial reports. This boosted the prestige of mainland enterprises and gave investors and partners greater faith when using their financial reports. 

Mainland companies not yet listed will also eventually adopt international financial reporting standards. Yet in this transitional stage, the mainland needs more accounting personnel familiar with international practices to provide training and services to local firms and accountants. 

Pilot Opportunities

 


The Greater PRD’s Competitive Edge


 
 

It is indeed the case that the PRD and the YRD provide the dominant – and dynamic – economic and industrial circles on the mainland, despite the fact that the PRD is only half the size of the YRD and has only a third of its population. True, too, that the PRD can't compare with the YRD in GDP and market size, which explains why foreign investors eyeing the mainland market have been turning their attention to the YRD in recent years. 

But despite seemingly insurmountable challenges, the PRD still has managed to maintain a 17 per cent increase in real GDP growth, a 20 per cent increase in industrial production and a 16 per cent increase in exports on average over the past five years, very comparable to the YRD. If anything, these measures of growth underline the competitiveness of PRD industrial clusters in the global supply chain. 

In fact, the Greater PRD economic circle, which covers Hong Kong and Macau, enjoys an excellent advantage in its resources and competitive power. It boasts the world's third largest international financial centre, efficient and reliable international airports and seaports, production and export bases with great cost-effectiveness, advanced technological research and development centres, and excellent convention, exhibition and entertainment services. 

Such a sound economic structure and cluster of industries – not to mention the economic benefits they generate – are not only unmatched by other parts of the mainland, but are rarely seen even in major metropolises in the United States, Europe and Japan. 

Dr Victor Fung, Chairman of the Greater PRD Business Council, notably said that there's going to be a seismic shift in the global economy towards Asia, and north-south flows within Asia will be very critical. 

In fact, the Greater PRD is ideally situated at the centre of the northern and southern ends of Asia. It can therefore expect to become a world-class hub for the flow of people, funds and information. By working in closer cooperation, achieving the integration of resources and sharing competitive advantages, Guangdong, Hong Kong and Macau should be able to provide a greater leading edge for the Greater PRD. 

 
     
Hong Kong accountants are well-versed in international financial reporting standards and are familiar with the workings of mainland companies. But they charge lower fees than big accounting firms. They're in an excellent position to provide services and assistance to small and medium-sized enterprises during the transition. 

To further strengthen cooperation with Hong Kong in legal services, Guangdong may consider letting Hong Kong lawyers set up wholly-owned or Sino-foreign joint-venture law firms in the province in the form of "pilots," and employ mainland lawyers to practice Chinese law. 

In Hong Kong, foreign law firms, including those from the mainland, which have set up representative offices in the territory for three years may register as local firms using their own name and employ Hong Kong lawyers to practice Hong Kong law if one of their partners has acquired Hong Kong legal qualifications. 

It's to be hoped that the mainland could extend the same market-access terms to Hong Kong lawyers and allow Hong Kong firms to register as wholly-owned or joint-venture law firms and to employ mainland lawyers to practice mainland law on the same terms provided in Hong Kong for mainland practitioners. 

Such an arrangement should increase the appeal of Guangdong to Hong Kong law firms. Mainland lawyers who work in law offices in Hong Kong will also gain increased exposure to foreign laws. Hong Kong law firms are much stricter in training and management and have a more meticulous and systematic division of work, so such an approach will help mainland lawyers and law firms improve overall standards. 

As to accounting services, Hong Kong accountants have a problem giving full scope to their advantages on the mainland because only the Big Four firms can meet the high threshold for the establishment of Sino-foreign joint-venture accounting firms. 

Even if Hong Kong practitioners pass the national examination for certified public accountants, they still have to apply for a mainland certified public accountant's licence before they can apply for permission to set up a partnership or an incorporated accounting firm. 

However, mainland authorities have not issued too many licences for certified public accountants in recent years and registration procedures are very complicated. At present, Hong Kong accountants can only provide services on the mainland using a "temporary audit business permit." Hong Kong accounting firms can undoubtedly help raise industry standards in the PRD if they are eventually allowed to establish partnerships or incorporated accounting firms there, bring in Hong Kong management and training methods and employ local accounting personnel. 

The Outline Programme gives the PRD greater flexibility for development of a "pilot scheme." Should this policy be put to good use, and if existing legal and structural limitations be lifted and procedures for foreign investment simplified for Hong Kong professional service providers, then the PRD would be well on its way to establishing a firm base for modern services.

For more on market opportunities, please see the June issue of HKTDC Trade Quarterly, which can be ordered at www.hktdc.com/bookshop.

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