The Pearl River Delta, south China's manufacturing center for more than two decades, now faces the hurdle of development.

How to step out of its current stagnancy is a top priority for the region, and regional economic integration looks to be the most promising solution.

By shifting 80 percent of its manufacturing to the Pearl River Delta area where land and labour costs are low, Hong Kong has gained a considerable increase in profits and achieved a new industrial structure, in which tertiary industry accounts for 80 percent of its gross domestic product.

Yet such a structure has its own problem of instability and low potential for growth. Thus Hong Kong has a need to integrate its economy with that of the Pearl River Delta area.

Meanwhile, neighboring Guangdong Province, which gained a boost by establishing itself as a manufacturing base in the 1980s, now finds itself making fewer profits as the processing base behind the trade port of Hong Kong.

Bountiful land and cheap labor facilitated Guangdong's rapid development as a manufacturing center in the early years. And processing according to investors" samples or for sent-in materials, assembling supplied components, together with compensation trade became the common business modes in the area.

Yet when the land and labor advantages were fully utilized, Guangdong slowed down in terms of development.

Grass-roots level public revenues in some parts of the province even turned a deficit in recent years.

To alter its current predicament, Guangdong needs to implement regional economic integration for industrial restructuring. The old modes of processing and compensation trade should be replaced by normal trade.

The Pearl River Delta might have absorbed the harmful effects of a monotonous industrial mode in the early and mid-1990s if it had transferred manufacturing to a larger South China area and adapted to tertiary industry, including finance.

Unfortunately the accumulated capital was poured into speculative real estate, securities and futures for quick profits, which not only failed to reverse the unhealthy economic trend but also led to later financial crisis in the province.

Now the Pearl River Delta area is getting another chance to upgrade its industrial level in a big way " as long as injections of large-scale capital are made and land goes on the market.

Currently there are trillions of yuan in savings stuck in large State banks. Reforming the financial sector has become a pressing issue. The government is readjusting the policies on regional capital markets, secondary boards and the over-the-counter market.

A logical way of adjustment would be establishing regional capital markets and equity exchange centers to integrate scattered centers that belong to different departments.

With its concentration of small and medium-sized enterprises, the Pearl River Delta area has desirable conditions for the growth of regional small and medium-sized finance, including indirect financing through banks and direct financing through over-the-counter markets. Regional capital groups could be formed on this basis. Then the Hong Kong Growth Enterprise Market could be connected with the Shenzhen Market, providing a channel for large-scale financing. Another channel for financing could be luring foreign investments.

The pursuit of capital profit will then force low-profit, labor-intensive enterprises to move outwards from the delta area and make a pan-Pearl River Delta economic circle a possibility.

The land-use system is also undergoing reforms at present. Premier Wen Jiabao has stressed that economic development should not be at the expense of farmers" interests. The central government holds that land, as a basic factor of production, should be allocated by the market. Land for collective construction in rural areas should enter the market directly; the price of land for industrial and commercial use should be decided by the market.

The government will strictly control the land for public use and compensate the farmers at market prices.

Guangdong has taken a step forward in this regard by allowing rural collective construction land to enter the primary market or be exchanged for shares. This reform enables rural collectives to enjoy the long-term added value brought along by changing the use of land.

Moreover, reform of the land-use system will increase the price of real estate for enterprises in the delta area and those heavy-polluted and low-tech small and medium-sized enterprises will be forced to surrounding areas.

It is difficult for the Pearl River Delta to upgrade its industrial level by way of traditional means. With large-scale capital and market-allocated land use, however, the Pearl River Delta economy could succeed in the integration.

Boasting a well-developed service sector, Hong Kong has the high-level industry needed for regional economic integration. The capital market of South China is still in Hong Kong.

Guangdong should cooperate with this financial and logistics center to promote overall integration.

The vertical integration of industries with high added values and those with low added values could increase profits. Once the administrative boundaries and department monopolies in resources are cracked, the pan-Pearl River Delta area could realize great success in regional economic integration.

(China Daily January 12, 2004)