The Pearl River Delta, also known by its acronym PRD, is a powerful economic zone in southern China. Its main cities are 11: nine of them belong to Guangdong province and account for 54% of its entire population (which is 106 million); and the other two cities are Macau and Hong Kong, which, although not technically part of the Mainland, are also the economic powerhouse of the PRD and provide the area with its specific political and administrative status. In total this zone accounts for no less than 26.2% of China's exports, 9.1% of GDP and «only» 4.2% of the population.
This area is approximately 40,000 km2 in size, about the size of Switzerland, but with a population of about 60 million, the size of the whole of the United Kingdom. The area will soon become a fully-fledged urban mega-metropolitan area, with economic growth exceeding 8% per year in cities such as Guangzhou and Shenzhen. A true economic hub for China, whose planned market economy clearly goes far beyond the Yangtze River Delta hub (Shanghai) or the Tianjin area hub (Beijing).
The PRD region was historically the port through which trade flowed between foreign merchants and those from Guangzhou, which was known internationally at the time as Canton. Today, for example, it is the port from which 108 million smartphones from the Shenzhen-based tech giant Huawei were shipped out to the rest of the world last year. Toyota, Honda and Nissan have also established their plants in the region, turning the PRD into a leading industrial hub for the automotive sector.
For those who question the political and economic ties between the two cities that do not belong to the Mainland (Hong Kong and Macau) and the rest of Guangdong Province, a picture is worth a thousand words. Take a look at this photo we took of the Hong Kong post office on our recent trip to visit various service providers. A real visual shock for the British and Hong Kongers, who would never have believed they would see the Chinese flag flying above the Hong Kong flag on their official buildings. A few years ago, such subordination would have been unthinkable, but the Chinese government is well aware of the importance of Hong Kong and Macau as financial and commercial centres within the Pearl River Delta region for its economy.
But don’t go thinking that the area is a mass-produced hub of cheap labour like China was a decade ago – no. In the city of Shenzhen (population 11 million), no less than 40% of its GDP is generated by innovative companies in sectors such as biotech, alternative energy, the internet and technology. In fact, the area is starting to be known as the Chinese Silicon Valley, as the Zhongguancun district brings together universities, research and development institutes, law firms and accountancy firms, and a rapidly expanding community of tech entrepreneurs and investors, in the very style of Palo Alto.
Within the PRD, one can clearly sense the transition that the Chinese economy is undergoing, leaving behind the Made in China cheap enough to begin producing goods with value for money comparable to that of the Korean (obviously South Korean) or Japanese industries. The automation of industries in the region is in full swing, as is the transformation of the cheap labour force that used to migrate en masse from the country’s interior to the delta. Currently, these and other workers are becoming a more skilled workforce with higher wages, leading to increased consumption and economic growth amongst the region’s 60 million inhabitants.
One of the advantages – perhaps the only one – of managing a market economy controlled by a dictatorial government such as China’s is that planning is carried out efficiently and strategically. Especially when we contrast it – rather harshly – with Spain’s high-speed trains running without passengers, airports without aeroplanes, or the lack of a Mediterranean corridor. The infrastructure currently being built in the PRD (see map above) is in line with the needs generated by the region’s spectacular growth. These structures will radically improve journey times and transport links, as can be seen in the image on the left.
Connecting Guangzhou and Hong Kong by high-speed train in just 48 minutes effectively means merging a city of 13 million inhabitants with another of 8 million. And doing so with a journey that takes less time than many journeys within a single city such as Madrid or Barcelona. That is why the PRD will, within a few years, become a mega-metropolis across its entire area. In other words, imagine an urbanised area the size of the whole of Switzerland, with a multitude of downtowns teeming with skyscrapers. And that’s not all – far from it – because there are already three such economic hubs in China (the Pearl River Delta, Yangtze and Tianjin)… for the time being. The fact is that Communist planning, by pulling the strings of the capitalist market, involves fewer variables and uncertainties that might lead to surprises, and it implements structural changes and legislative reforms at will (it is another matter entirely whether their decisions are sufficiently sound, or whether the sheer size and inertia of such a colossal economy might overwhelm the captains steering such a voyage). That is why we believe that for the investor seeking to buy good companies at a good price and gain a thorough understanding of those businesses, it makes a great deal of sense to look in greater detail at specific regions rather than remaining at the general level of an economy which, due to its size, has a significant macroeconomic component. No fund manager can cover such an economic scale whilst maintaining the level of understanding of the businesses they invest in without incurring a significant opportunity cost. As Paramés says, returns are inversely proportional to the distance between the company and the fund manager analysing it. And I would add that diversification is also an enemy of returns and volatility (which is so necessary for finding good opportunities).
You may be wondering how an investor can capitalise on or take advantage of the region’s potential for economic growth. Well, as well as investing indirectly in the PRD through investment funds Whilst there are fund managers with portfolios of Hong Kong-listed shares (with accounting standards far more reliable than the inflated valuations on the mainland), there are also some purely Cantonese fund managers who have an even deeper understanding of the specific characteristics of local companies and their executives. We must not forget that Cantonese and Mandarin are very different languages, and communication problems can be significant if a fund manager of Mandarin origin (from Shanghai, for example) holds a meeting with an executive from a Cantonese company. That was precisely one of the reasons for our trip: to carry out the final due diligence on a Cantonese fund manager that manages no less than USD 5,000 million across various Chinese funds, one of which is a biotech fund.
In short, what we want to explain to you in this post is that China has such enormous potential and figures that within its macro-economy there are various micro-economies, such as that of the PRD, but with figures that are in themselves comparable to those of entire countries at the forefront of global development. These areas, which are like worlds apart, have their own cultural, linguistic, demographic, geographical and accounting characteristics, amongst others, which set them apart from the rest of China. And therefore, find a background Investing in China as a whole, managed from London, Paris, New York or even Singapore, implies a very superficial understanding of the investments being made. Or, at the very least, it entails a huge opportunity cost compared to the opportunities that a more local fund manager is able to capitalise on within their immediate economic environment. And as we have seen, in a mega-state such as China, such local specificity can be found in various economic zones or hubs, each of which is larger in scale than the whole of the United Kingdom. In other words, we are not necessarily talking about small-caps or companies with limited market capitalisation – far from it.
Photos: Weekinchina.com