‘What goes around, comes around'

‘What goes around, comes around'

by Pininvest Analysis

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Pin-insights

The success of the 'Open Door' initiated in 1979 has proven irresistible and the teeming millions engaged in this collective effort are creating a new – possibly unforeseen – reality

Testimony of the undomitable Chinese spirit of enterprise, the Shenzhen-Guangzhou Delta region is a wild ride on the global world economy's growth cycle

The Delta's collective ambition to raise the bar again and again in world-beating manufacturing preeminence is on the threshold of still another iteration, the regional development plan for the Greater Bay Area, promoted as 'China's all-round opening in a new era'

But, grounded in the vast country's history, the decisions of the Chinese leadership cannot be understood without a keen sense of impermanence in human affairs...

Anxious to hold on to the vast benefits delivered by international trade, China's trade negotiators will make no more than token gestures, with the keen awareness that the seeds of decay are bound to shape the future

 

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Great water ways have been commanding economic power around the world for centuries, from the Rhine delta (straddled by the Netherlands and by Belgium) to the Nile (immensely fertile source of  domination in Ancient Egypt) and the Missouri-Ohio-Mississippi River system, foundational dimension of the United States as world power

China's Pearl River delta has been a similar magnet for Hong Kong and Macau in past commercial enterprise and the location of both cities has in effect been a blue print for nearby Shenzhen and Zuhai

 

With SEZs, audacity paid

Amongst the 4 original Chinese Special Economic Zones (SEZs) – an experiment of the ‘Open Door’ policy prudently tested in 1979 – Shenzhen was chosen, along with Zuhai, by the central authorities, and for good reason…

Adding 14 coastal port cities in 1984 and entire ‘specific economic clusters’ centered on the coastal deltas in 1985, the policy was taking on a life of its own, attracting ever more foreign capital (as planned) and delivering output for export to foreign markets (also as planned), doing so exponentially…

By 2005, there were 210 national development zones and 1,346 provincial development zones, strongly coordinated by their proximity to coastal areas and their capabilities to access global markets through port and airport terminals

In many ways, the SEZs  are a paradox – willed by China’s central government and roundly contravening its founding principles

 

The economic expansion drove, and was simultaneously powered by, infrastructure investments on a monumental scale, initially with container ports and rail connections before launching a program of hundreds of airports

Credit iberchina.org - Source Lloyd's List 'Top 100 Container Ports 2017'

State planning has indeed been a major factor but the argument of a single line of causation should be evaluated with caution

We venture that, whatever the intention, the economic growth unleashed by the SEZs was not preordained... certainly not in scale

  • in line with the export oriented strategy of Asian countries, the experiment was designed to attract foreign capital in manufacturing facilities, importing raw materials and exporting finished goods – and it certainly did
  • breaking with centrally planned policies, the Zones offered flexible labor regulations, protection of private property and tax incentives

But if the success of the 'Open Door' has proven irresistible, the teeming millions engaged in this collective effort are creating a new – possibly unforeseen – reality

 

SEZs, free enterprise meets infrastructure planning

As symbols go, the Electronics Markets in the Huaqiangbei district of Shenzhen could be seen as a flashpoint on both ends of global trade, a freewheeling behemoth swatting down foreign competition and its energy a challenge to  Chinese central government

SEG Electronics Market - Shenzhen

Hugely impressive by itself, one may be forgiven to overlook that the thousands booths of the electronics market are only the showcases of a factory network stretching deep into China

One of SEG's 12 floors - a snap shot - credit joutrip.com

The sales counters, pressed one against the next in immense halls, are a model of free enterprise running wild

In many ways at the heart of the knock-off industry, the Delta is at the same time the champion of new design, software development and seemingly instantaneous prototyping of innovative hardware concepts

Standing out against the – by some measure seedy – Shenzhen 1.0 image of sweatshops, quick and dirty manufacturing, trademarks be damned,  and hustling salesmen, the astounding scale of the public infrastructure inaugurated in late 2018, from the high speed train link to the 54 kilometer-long bridge spanning the delta, commands attention

Hong Kong - Macau bridge - inaugurated in October '18 - credit Quartz

Undoubtedly a geopolitical statement pulling Hong Kong in a tight embrace, sitting uneasily with the “one country, two systems” agreement, both the bridge linking the city to Macau and the ‘Vibrant’ high-speed train link with Guangzhou (50 minutes for a 140 km ride) are setting out to rewrite the future of the Delta

High-speed 'Vibrant' at Guangzhou South railway station - credit  Wikipedia

With world-class infrastructure, 5 airports, of which Hong Kong, Guangzhou and Shenzhen all three vie for the status of main air hub in the Delta area and plan for additional runways, and a high-speed train network linking Hong Kong to 44 mainland cities via Guangzhou, the Delta region seems primed to raise the bar in its world-beating manufacturing preeminence 

Again...

...and the regional development plan for the Greater Bay Area today is promoted as 'China's all-round opening in a new era', offering opportunity 'not only for China but also for the world', according to Xue Feng, Foreign Ministry Commissioner in Hong Kong 

The ambition of the new development plan may turn out to be deeply transformative


A cycle – from decay to renewal 

and  back ...?

The lessons of past centuries infuse Chinese thinking and cannot be ignored by their Western partners

One dynasty has succeeded another

Kublai Khan, of Mongol ascent, destroyed the decaying Jin Dynasty (in the North) and the Song Dynasty (in the South), establishing the Yuan Dynasty around 1271

The collapse of the Mongol-led Yuan Dynasty by the middle of the 14th century was followed by the Ming Dynasty which lasted more than 250 years – a duration which was not devoid of vast swings from prosperity, construction works such as initiated by the Yongle Emperor, voyages of exploration launched in the South Pacific and the Indian Oceans and commerce to ultimately periods of  forced isolationism, banning oceanic shipping and trade...

the Yongle Emperor (1402-1424)

…a collapse ultimately leading in turn to the Manchu-led Qing Dynasty (from 1644)

Grounded in history, the decisions of the Chinese leadership cannot be understood without a keen sense of impermanence in human affairs

 

Deep down in China's psyche, the belief that the seeds of decay are bound to shape the future if – and when – the country’s renewal comes full circle is history's defining trait

Concluding comments in ‘Jostling for the front row’ narrowed China’s potential frailties down to two fault lines

  • the economic unbalance between the coastal regions and the continental China – festering since the opening of China to international trade in the 1980’s and exacerbated with the export push following the access to the WTO in 2001
  • the push-back of trading partners with large trade deficits in goods, foremost the US ($420 billion in 2018) but also the European Union (€185 billion - $210 billion) – a new and very negative trend for China’s export ambitions which, seen from Beijing, may or may not become a fixture of international relations

 

As we will discuss in a new report, China and its trading partners will resist policies addressing both issues as interlocking constraints

  • China will be anxious to double down on strong international trade as the only real guarantee to bring economic development to its continental regions
  • Its Western partners, fearing further losses to their industrial bases, will 'circle the wagons'

Self-defeating, the confrontation is likely to feed on national pride unless the terms of a wide ranging negotiation could incorporate the concerns of all the trading partners

It is never too early to weigh the options - but it may be a while before they gain any relevance ...