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Tianshen Rong

Dongguan, Prosperous Chinese City and “Factory to the World,” May Be On The Financial Brink

Some worry Dongguan could be the canary in the coal mine. By Aimaimyi via Wikimedia Commons

The factory of the world may be in serious trouble. The southern city of Dongguan, home to more than 800 domestic and international factories and one of the most prominent urban economic engines in China, now teeters on the verge of bankruptcy, according to study conducted by a Chinese university and cited by the South China Morning Post.

When China implemented its Reform and Opening policy in 1978, authorities designated Dongguan as one of the cities in the Pearl River Delta poised to lead China’s economic transition. With generous fiscal support from both the central and local governments, the former farm town was transformed into the “world’s factory” in less than three decades, in part by pursuing a “three-plus-one” trading mix (三来一补). This labor-intensive economic scheme, intended to attract foreign companies, involved what Baidu Baike, China’s Wikipedia, calls “custom manufacturing with materials, designs, or samples” supplied by overseas companies as well as compensatory trade, in which goods were paid for with other goods. According to some 2011 statistics, Dongguan was the wealthiest city in China on a per-capita basis. 

Recent allegations about Dongguan’s possible bankruptcy first emerged online in mid-August when Shao Gongjun, (@肖功俊) manager of Dongguan Qili Printing Com Ltd., posted this comment on Sina Weibo, China’s Twitter:

“According to inside sources, Zhangmutou County (樟木头县) [a part of Dongguan city] is 1.6 billion RMB (about US$254 million) in debt and [its administered] villages collectively 700 million RMB (about US$111 million) in debt, amounting to 2.3 billion RMB debt (US$366 million) in total! Yet the budgetary income for 2010 was 436 million RMB. With the exhausting of land finance [土地财政, a system where local governments rely on revenue from the sale of land] [as a source of income], a reduction in taxable projects and enormous interest payments, the County has virtually already gone bankrupt and become the ‘Dongguan Greece’. That’s why the 2011 Budget Report is not published online! ”{{1}}[[1]]【樟木头政府破产?】据知情人士透露,樟木头政府负债16亿元,各村负债7亿元,总计高达23亿!而2010年一般预算收入4.36亿,随着土地财政枯竭,收费项目减少,加上庞大的利息支出,理论上该镇已经破产,成为名副其实的“东莞希腊”,以致2011年预算报告不敢晒在网上! [[1]]

While official sources have yet to respond, Weibo chatter surrounding Shao’s report stimulated discussions on Dongguan’s current economic status. Many Sina Weibo users cited their own accounts of Dongguan’s economy. 

@许_杰律师 commented on plummeting real estate prices, writing, “I heard last year that it was 100,000 RMB (about US$16,000) for an apartment, with various kinds of appliances [thrown in] as gifts. The earlier ‘three-plus-one’ Hong Kong businessmen ran away long ago.” {{2}}[[2]]去年就听说当地的房子十万元一套,送各类电器家具。早期从事三来一补的港商跑光了[[2]]

@评论员李铁 also saw problems in Dongguan real estate: “As far as I know, home price in Zhangmutou have not risen much in the past 8 years, because they can’t. [As the] RMB appreciates, lots of Hong-Kongers who lived in Zhangmutou have fled back to Hong Kong. (Zhangmutou is called the ‘little Hong Kong’ and used to be Hong Kong’s back yard.) If [authorities there] continue to engage in land finance, it will only lead to more people leaving Zhangmutou. This is the quandary in China: If you think land finance can make the country prosperous, the only result you get is both people and industry running away, debt, and bankruptcy. ” {{3}}[[3]]据我所知,樟木头的房价8年涨幅不大,因为涨不了,人民币升值,居住在樟木头的大量香港人逃回了香港(樟木头称小香港,曾经是香港后花园)。如果还搞土地财政,更没人选择樟木头了。这就是中国制造的困境,如果你以为地产可以兴邦,最后的结果就是,人和产业都逃离了,负债、破产。[[3]]

Some worry that Dongguan could be the canary in the proverbial coal mine. The influential Hu Shuli (@胡舒立), a famous financial journalist and the Editor-in-Chief of Caixin Media, suggested in a September 1st Weibo tweet that Dongguan’s possible collapse is the inevitable consequence of general problems that all local governments face. She wrote, “When the economy is in cyclical and structural recession, local governments are doomed to fall into a fiscal predicament. What should the [central] government do? Preventing the [local] governments’ hands from stretching too far, reducing government expenditure, making budgets transparent, and intensifying regulation are more crucial than ever. ”{{4}}[[4]]当经济周期性和结构性下行时,地方政府财政注定陷入困境。政府是何对策?应如何作为?防止政府的手越伸越长,节俭开支,预算透明,加强监督,比历史上任何时候都更加重要。 [[4]]

Dongguan officials have not yet replied to online chatter. By Swoolverton via Wikimedia Commons

Some relevant statistics are becoming available. According to Dongguan Times, a local newspaper, on October 7 the Dongguan Department of Property Regulation issued online statistics showing that house sales during the September 30 – October 7 national holiday week fell by 56.1% compared with the same period last year.  However, this seemingly grim outcome did not appear to alarm the sales managers interviewed by Dongguan Times. While the explanation proffered by some sales managers that many city residents choose to spend their week-long holiday away seems insufficient to justify the discrepancy, the findings of Zhongyuan Real Estate Co. Ltd. (中原地产) may shed some light. Zhongyuan writes that 2012 is China’s year of rigid demand (刚性需求年), during which demand comes in bursts. Perhaps Dongguan’s next burst is yet to come.

Neither state officials nor media have directly addressed the allegations of Dongguan’s downfall thus far. Perhaps as long as “maintaining stability’” (维稳) throughout the country remains the premier goal for all public sectors in anticipation of the 18th Party Congress in early November, inquiring into the fate of the country’s economic backbone is simply too risky.

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Tianshen Rong