Recently, however, exports have declined dramatically. December 2008 saw a slump of 2.8% year-on-year, a figure which was buoyed up by price increases - in real terms, the drop was 7.5%. Customs figures released in February 2009 showed that January's exports were down 17.5%, the largest drop since 1998. Imports are down even more drastically, dropping 43.1%. This figure is possibly even more worrying as it suggests a huge downscaling in industrial and commercial operations.

The impact of the drop in demand and production has been particularly pronounced in the PRD. Even before the financial crisis hit, times were tough for PRD manufacturers. Wages were increasing, new regulations were in place, the RMB was appreciating and prices for raw materials were rising. As a result, the Federation of Hong Kong Industries (FHKI) states that production costs in the PRD had risen by over 20% as of September last year, forcing many companies to consider closing or relocating.

The significant drop in demand from abroad over the past few months has only exacerbated these problems. Official figures suggest that up to 50,000 enterprises closed in Guangdong in the first three quarters of 2008, mainly in the toy and shoe manufacturing industries. Estimates for the total number of jobs lost in the region in 2008 range from four to ten million.

Close relation between Hong Kong and Zhuhai

Danny Lau, Chairman of HKSMEA explains that many companies are experiencing a crippling lack of cash.

Of course, the economic situation in the PRD has a significant knock-on effect in Hong Kong as well. According to data from the FHKI's "PRD Survey 2007", Hong Kong investment in the PRD totals USD350 billion. At the time of the survey there were 55,200 Hong Kong manufacturing enterprises in the PRD, employing 9.6 million workers. And it is not just jobs and industries in the mainland that rely on this investment - the FHKI estimates that almost 90% of Hong Kong-related industries in the PRD import and export goods via ports in Hong Kong.

To examine how the current crisis is affecting Hong Kong manufacturers more closely, we spoke Win Hanverky Limited, an international company that manufactures in the PRD. We wanted to hear their side of the story - how has the crisis affected them and what measures they have had to take.

Win Hanverky Limited

Win Hanverky manufactures, distributes and sells integrated sportswear and activewear / outerwear for a number of top-tier international sportswear brands. Headquartered in Hong Kong, Win Hanverky has factories across Asia, including nine in Guangdong. The company distributes and sells its products to markets across Europe, North America and Greater China.

Jenny Hsu, Shipping Manager of Win Hanverky is paying close attention to the global situation.

Jenny Hsu, Shipping Manager of Win Hanverky, explains that so far the company has not been overly affected by the financial crisis, as most of their current orders were confirmed last year. However, they are wary that certain aspects of their business, such as exports to the US, may be adversely affected as the crisis goes on. Measures have already been introduced to mitigate any negative effects, using video conferencing to replace face-to-face meetings can save money on travel expenses.

While business may be fine for now, Jenny expresses some concern about the exposure that being involved in the global economy brings to Win Hanverky. They are also concerned about the effects that China's new labour contract and minimum wage laws have had on operational costs. However, despite these concerns the company has no plans to relocate any of their PRD operations elsewhere.

The road forward

So what can be done to help the SMEs that are bearing the brunt of the financial crisis in the PRD? As Danny Lau, Chairman of the Hong Kong Small and Medium Enterprise Association (HKSMEA), explains, one of the main problems that companies face right now is a crippling lack of cash. "Banks have tightened up their credit line, and also it's very difficult for companies to collect their accounts receivables. Suppliers and subcontractors have also tightened up their credit to customers. So they're running out of cash, and some cannot afford to pay salaries, both to Hong Kong staff and staff in China." He acknowledges that the Hong Kong SAR Government has already introduced measures to address this problem, providing a HK$10 billion fund to guarantee loans made to SMEs, however he notes that only HK$600 million has been granted as of yet. "The Hong Kong SAR Government is trying to help, but they need support from the bankers."

However, Professor Frank Song, a faculty member of The University of Hong Kong School of Economics and Finance, believes that the problem is more fundamental. "A lot of Hong Kong companies are in low-tech, labour-intensive industries. They employ cheap labour, and use lower levels of technology without much consideration for the environment. All of these factors are a big problem now for Hong Kong companies." He believes that the only way forward for Hong Kong manufacturers is to change their business models. "In the short term, they can apply for support from the local governments, or from the Hong Kong SAR Government. But in the medium- to long-term, they have to look for alternatives. I think that this model of relying on cheap labour and cheap land has to change."

This comment may sound harsh, but it is fairly in-line with local and central government plans for the PRD, and Guangdong as a whole. Guangdong Province's Vice Governor Wan Qingliang has been quoted as saying that "We have a policy to empty the cage for the new birds," encouraging labour-intensive industries to move inland to China's central and western provinces to allow new high-tech and service-related industries to flourish.

Challenges and opportunities in the PRD

In December 2008, China's National Development and Reform Commission ("NDRC") issued a document titled "The Outline of the Plan for the Reform and Development of the Pearl River Delta (2008-2020)". The report indicates that Guangdong is to take a leading role in the government's plan to take a "scientific outlook on development", moving towards a "resource-conserving and environmentally friendly society" and promoting scientific progress and innovation. The report's foreword highlights the government's attitude towards the PRD and its role in furthering the development of the nation as a whole:

"At present, profound changes are taking place in the economic situations at home and abroad, and the Pearl River Delta is at the crucial point for transforming its economic structure and development pattern. This region faces both rigorous challenges and great opportunities in its further development. On the eve of the 30th anniversary of the reform and opening-up, we have formulated this outline of the program for the reform and development of the PRD with an eye to the broader national strategy and long-term development plan of the country, in order that the PRD can add or create new advantages, reach a new level of development, and further play its leading and exemplary role for the whole country."

The report then goes on to outline plans for the region's development. The main objectives of the plan are to build a modern industrial system; strengthen innovation; modernise infrastructure; address discrepancies between the development level in urban and rural areas and between different areas within the PRD region; enhance resource conservation and environmental protection; improve social welfare; construct a harmonious culture; and further the open nature of the regional economy.

For now, the financial crisis may be striking a deadly blow to many manufacturers in the PRD. As the western economies plunge deeper into recession, it is difficult to know when demand will pick up again, and as a result, some of the PRD's manufacturers may not make it through to the other side. However, there is plenty room for optimism amongst those who are willing to grasp the opportunities this situation presents. Indeed, the current crisis may turn out to be the catalyst that sparks a new era of growth and development in the region.