Test of China's reforms in a region wealthier than most nations

GUANGZHOU, China Tue Nov 26, 2013 5:01am IST

An employee yawns as he works at a garment factory in Humen township, Guangdong province November 24, 2013. REUTERS/Stringer

An employee yawns as he works at a garment factory in Humen township, Guangdong province November 24, 2013.

Credit: Reuters/Stringer

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GUANGZHOU, China (Reuters) - Just days after China announced sweeping reforms to revitalise its economy, several hundred striking workers rallied outside a Nokia (NOK1V.HE) factory in its wealthiest and most industrialised region shouting: "Protect our rights!"

This flareup over labour benefits in the vast factory belt of Guangdong province underlines the main difficulty in pushing through the reforms - the need to maintain stability while bringing changes in laws, businesses and society.

"We have hopes for a better China," said one worker surnamed Huang who said he was forced to accept new contracts with worse terms of employment after Nokia sold its mobile phones business to U.S. software giant Microsoft (MSFT.O).

"We're striking because the system isn't fair and doesn't protect us enough. From a regular citizen's perspective, I hope for a more harmonious and fair environment ... I hope the reforms help us."

The aim of the reforms is increasing productivity and transforming China's export-based economy into a consumption and services-driven model. At the same time, powerful local governments and state-owned monopolies must be made to give up some of their powers.

More than most other regions, the test of the reforms will come in Guangdong, where slowing international demand has badly hit factories and manufacturing plants. "The factory of the world" manufactures a bewildering array of products from electronics, jeans and shoes to furniture, Barbie dolls and Volkswagen vehicles.

But in a region that accounts for one-tenth of China's output and around a quarter of its exports, many factories are closed, shops shuttered and street stalls deserted.

"At night-time in the 1980s, the factories opened late into the night," said Xiao Gongjun who runs a printing factory in the gritty Guangdong town of Dalang. "Now it's all dark."

Still, the annual GDP of Guangdong last year was about $935 billion, which would make the province the 16th biggest economy in the world, smaller than South Korea but larger than Indonesia.

It has also been the region where China has traditionally launched its reforms, starting with Deng Xiaoping's transformational decision to open up the economy in 1978.

Last week, President Xi Jinping unveiled a 60-point social and economic reform agenda, the most ambitious since Deng. It promises to further free up markets, launch land and residence registration reforms to help migrant workers like Huang, ease the one-child policy, embark on judicial reform and encourage more private investment.

"We are faced with an imperative need to deepen reforms, to innovate, to transform the functions of government in order to embrace international standards and build a law-based and internationalised business environment," said provincial Governor Zhu Xiaodan last week.

"We can no longer follow the path of export-led development as in the past. We need to further open up ... fully streamline governments and decentralise government power to make the governments function more efficiently."

THE HOPE

Hopes that the provincial government will pull off the changes smoothly rest primarily on the man who runs Guangdong - local party chief Hu Chunhua.

Tipped as a future leader of China, Hu's reformist mettle will be tested as he tries to reconcile top-down party edicts with on-the-ground realities and resistance to change from bureaucracies and interest groups.

"He (Hu) must watch Guangdong's interests but at the same time you're a national leader, you're a Politburo member, you're a rising star. So for him, this is an almost impossible task, he has to face that challenge," said Cheng Li, a Chinese leadership expert at the Brookings Institution.

But even before the current programme was unveiled, Hu announced plans in August to spend 672 billion yuan to develop Guangdong's less developed fringes in the next five years through transport networks, new cities and industrial zones, to broaden growth beyond the overcrowded Pearl River Delta.

Hu has been quoted as saying by Xinhua news agency that Guangdong must "unswervingly" deepen reforms and to "realise our leadership responsibility", though he didn't mention specifics.

For President Xi, Guangdong also holds sentimental value.

His father, Xi Zhongxun, was a former Guangdong party chief who implemented reforms in the province under Deng's guidance - much the same as Hu must do now for the son.

"Xi Jinping must be successful (in the reforms). If he's not successful, we are entering a very disturbing period in China's elite politics," said Cheng Li. "It's also in Xi Jinping's interests to ensure Guangdong does well."

POSSIBLE AREAS OF REFORM

It's not clear which areas of reform Guangdong would focus on first but Peng Peng, a researcher with the Guangzhou Academy of Social Sciences, said it could make four possible breakthroughs.

These include tax and debt management reforms to improve financing of large-scale projects; legal reforms in a new free-trade zone, a market for farmers to trade village land, and further relaxing the "hukou" household registration system for Guangdong's 30 million or so migrant workers who are often denied the same benefits of locals.

"Farmers settling into the city should be fully integrated into the urban housing and social security systems," Peng wrote in an editorial in the Yangcheng Evening News newspaper.

Guangdong is also pushing for a large free trade zone in the region, on the lines of one already approved for Shanghai, which could take a lead in financial reforms and link up with neighbouring semi-autonomous cities of Hong Kong and Macau.

Crucially, any reforms must be carefully weighed for cost implications on local governments.

Guangdong can draw on capital markets to raise funds for infrastructure projects, but its 100 million population means any surge in welfare support, or drying up of land sales revenues from land reforms, could exacerbate its already high levels of indebtedness.

In a region beset by high-profile factory strikes, protests against state acquisition of land and deep rural-urban inequalities, the government must cede some ground on land reform and farmers' rights to ease social tensions while preserving the ability of local authorities to raise funds through land sales.

"After local governments give farmers more property rights, local governments might face a debt crisis," Wu Jinglian, a top China economist who for the past 35 years has helped steer China's reforms, said in an interview with Caixin magazine.

"How will they repay these debts? Where will future revenues come from? For these problems, one must find a way for them to overcome their opposition and obstacles, while helping them resolve practical problems."

SLOWDOWN EVIDENT

But locals say something must be done for Guangdong, which is at risk from slowing export demand as well as the competition for resources and investment from other hubs like Shanghai and the nearby Jiangsu province.

Rejuvenating and upgrading Guangdong's polluted and ageing factory towns and urban landscapes will take time, and possibly new skill-sets among the workers.

It will also have to come amid a widespread lack of trust in employers and allegations of collusion with local authorities.

At the Nokia factory, four protesters said they were beaten and detained by police for demanding their rights.

"If the factory has money and influence, the government will not help the poor and powerless like us," said another worker surnamed Yang. "China's rule of law is different if it involves politics." (Editing by Raju Gopalakrishnan)

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