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China city on the verge of bankruptcy – good or bad news?

I was recently forwarded an article entitled “A Chinese Mega City Is on the Verge of Bankruptcy” which explained how many municipalities in the Pearl River Delta are in financial trouble.  Here are some of the more juicy parts:

 

China’s province of Guangdong, which is somewhat surprising. With over 100 million people, a GDP of nearly $1 trillion – the biggest of all Chinese provinces, this South China Sea adjacent territory is perhaps China’s most important economic dynamo. One of the key cities of Guangdong is Dongguan.

 

After three decades of spectacular growth, Guangdong’s boom town of Dongguan is on the brink of bankruptcy.

 

Up to 60 per cent of its villages are running up deficits and will soon need a bailout from the township, researchers at Sun Yat-sen University have discovered.

 

It is a dramatic turn of fortune for Dongguan – one of the richest cities in China – and could foreshadow a wider fiscal crisis as the country’s economy cools.

 

Bai Jingming, a senior researcher at the Ministry of Finance, estimated in 2009 the total debt of village authorities could total 10 per cent of the country’s GDP, but there is no official data.

 

What’s really going on in China?

 

Sensationalism sells.  Many of you praying for a speedy global economic recovery have pinned your hopes on the Chinese economy to power a rebound.  So seeing bankruptcy crop up in the PRD would scare a lot of readers- unless they understood the following.

 

Calm down and see the big picture

 

China as a whole is still growing at one of the fastest rates among major economies and to put it bluntly- the central government is not short on cash.  In other words, if certain pockets of the country are cash strapped, it is because Beijing wants it that way.

 

The perceived reverse of fortune for Dongguan should be no surprise to China watchers.  The central government has made the following points loud and clear for many years:

 

Develop the interior even if it hurts the Coast

 

China has a massive discrepancy between the standard of living along the prosperous coast and the rural interior.  A nation of “haves” and “haves not” arranged along geographic boundaries is a recipe for social unrest.  That is not good for China or the world.

Kick the addiction to exports

 

When the economies of Europe and N. America went sour during the global financial crisis, China was hit hard because at the time they were heavily dependent upon exports. The central government vowed to not make the same mistake twice. They are actively encouraging a rebalancing of its GDP. Dongguan is the poster boy for an export oriented economy.  If you want to kick the addiction, the Pearl River Delta is a great place to start.

 

The mountains are tall and the emperor far away

 

To understand China, you need to realize that it is more like dozens of small radically different markets and regions tied together by the central party, rather than a single entity uniform from north to south.   Simply put, it helps to think of China more like a Europe rather than a United States.

 

Beijing is the puppet master pulling the strings but as regions like the PRD grew in economic strength they also gained more and more autonomy.  Beijing’s mandate to rule is based on their ability to keep all the puppets stepping in the direction that benefits the nation as a whole. One area can’t be allowed to get too rich if other areas remain poor.  Places like Dongguan were getting silly rich.

 

Chinese leaders feel the weight and draw from the experience of 5000 years of history when they make decisions. While it is not part of Beijing’s official message to the general public, historically speaking, distance plus linguistic and cultural differences have complicated the central government’s ability to control the deep south.   Even in the Chinese press, the headlines of the past 12 months have been filled with accounts of riots between locals and “outsiders” in the Pearl River Delta (PRD).  Most often the locals are the wealth factory owners and the outsiders are the migrant workers coming to the delta for work.  The central government understands that ethnic and regional conflict may flare up on a small scale, like these factory riots, but it can’t be allowed to get out of hand if Beijing wishes to maintain a stable China.   A dangerous prosperity gap among the providences/ ethnic groups may have been allowed temporarily, but reducing the severity of the problem is clearly a big part of the current plan in Beijing.

 

Beijing is proactively encouraging the transfer of wealth to the interior of the country, even if that means popping a few bubbles along the coast.

 

What does this mean for Buyers of Chinese products?

 

Here is my perspective as a 12 year PRD resident, owner of 2 PRD factories and general advisor to foreign buyers.

 

  1. There is no question that costs have been going up along the coast. This hurts the export business. Moving factories to the interior helps bring costs down in the long run.  Having those factories move to Hunan from Guangdong is a lot less disruptive to the supply chain than if they moved to another country. But in the short term, a factory move, even if across the street is a nightmare to manage.  Quality and Lead-times are the usual casualties.  Maintain open communications with your vendors in hopes you learn about the move in advance and can plan accordingly.

 

  1. Gone are the days of “easy sourcing” when foreign buyers could come to China, visit a few factories in a coastal city and expect to achieve significant savings.  Today, research should be conducted on a national level and a trip to China is more likely a few weeks long rather than a few days long.  Here are three short videos about how to find and manage vendors in this new reality.

 

Video 1: Finding Suppliers
Video 2: Evaluating Suppliers
Video 3: Negotiations

 

 


Mike Bellamy is an Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center. He is also the author of "The Essential Reference Guide to China Sourcing" and founder of PassageMaker Sourcing Solutions.

 

 

 

 

 

 

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