Global Policy Forum

By Mark Landler

Every Monday for seven years, Wang Tai-ching has boarded a ferry in Hong Kong and chugged up the muddy waters of the Pearl River delta. His destination is a factory in Zhongshan, one of the slapdash cities that have sprouted in Guangdong Province over the last decade, crowding out rice paddies and duck ponds with smokestacks and elevated highways.

Mr. Wang, and thousands of Hong Kong entrepreneurs like him, have helped transform Guangdong into the fastest-growing region in China -- a capitalist hothouse on the South China Sea. As China moves closer to its dream of entering the World Trade Organization, however, people here are nervous.

Far from relishing the prospect of free trade and wide-open markets, they worry that the new competition could threaten their livelihood. To enter the W.T.O., China will have to throw open its doors to foreign companies. And by reducing tariffs on imports, it will level its commercial playing field -- depriving the frontier capitalists in Guangdong of many of their advantages.

"The beauty of W.T.O. is that it is a signal to foreigners to come in," said Mr. Wang, 55, who bunks in a spartan dormitory with his workers during the week. "But it's different for the people who are already here. I don't know how many will survive and how many will fail."

Mr. Wang's factory makes disposable diapers. His company, Disposable Soft Goods, is one of 15 such manufacturers in China -- a remarkable statistic for a country that regarded throw-away diapers as an unattainable luxury a few years ago. Procter & Gamble began selling Pampers throughout China last October, setting off a ferocious price war.

For Mr. Wang, that is just the beginning of his headaches. As part of its agreement to join the W.T.O., China is committed to reducing duties on imported raw materials like plastic and fabric by 40 percent, and to open up its tightly controlled distribution system. This will greatly benefit global manufacturers like Procter & Gamble, enabling them to cut their prices even further.

"It's going to be very tough for the local companies to survive," said Andy Xie, an economist who specializes in China at Morgan Stanley Dean Witter in Hong Kong. "The W.T.O. deal means that in industries with large economies of scale, the American companies will dominate."

As one bounces along the pothole-pocked roads here, Zhongshan seems the very picture of a swaggering gold-rush town. Tacky hotels and karaoke bars line the streets, while prostitutes troll for visiting businessmen. But there is something new in the air these days: fear.

"The local people are scared," said Mr. Wang, who employs 130 workers, most of them women. "They're worried about losing their jobs. They're worried about their factories being closed. To them, this is a revolution."

Of course, the threat to Chinese-owned companies is not confined to Guangdong Province. But it resonates powerfully here because of Guangdong's hard-won prosperity. An economic backwater as recently as 1984, this province of 60 million people capitalized on its proximity to Hong Kong and its distance from Beijing to transform itself into a free-market powerhouse.

Initially, companies moved their factories across the border to escape rising labor costs in Hong Kong, a former British colony. The increasingly blurry line between Guangdong and Hong Kong enabled the garment industry to evade strict quotas placed on clothing exported from China.

Later, business people from Taiwan came, attracted by Guangdong's anything-goes atmosphere and the access to Hong Kong's duty-free port. More than 4,000 Taiwanese companies set up footwear, electronics and other factories.

By the early 1990's, Guangdong was producing two-thirds of China's exports. When Deng Xiaoping made a famous visit here in 1992, he held up the province as a model for China. Guangdong, he declared, would become the "fifth tiger of Asia," alongside Hong Kong, Singapore, Taiwan and South Korea.

But the political winds have shifted, and the country's leaders are now promoting development around Shanghai and in the northern provinces. Guangdong's economic growth slowed to 9.4 percent last year from 10.2 percent in 1998.

Although it still grows faster than China as a whole, its share of the country's exports dropped to 41 percent in 1999 and 38 percent in the first quarter of this year. "The focus of China's economic development is moving north," Mr. Xie said. "Guangdong will remain successful, but it will no longer be central to China's growth."

In some industries, the Chinese government is trying to accelerate this process. Earlier this year, Beijing began requiring garment manufacturers here to pay a deposit equal to 30 percent of the value of their exports. Factory owners complained.

"We think the Chinese government is trying to drive us out of business to move the industry up north," said Laurie Jim, whose Hong Kong garment-trading company works with dozens of factories in Guangdong. "Eventually in southern China, there won't be any garment factories at all."

The outcry from the apparel makers was so loud that the government shelved its policy. But Ms. Jim believes it is only a temporary reprieve. As China seeks to establish normal trading relations with the United States to and enter the World Trade Organization, she contends, China will intensify its efforts to move labor-intensive production from Guangdong to the less-developed northern regions.

Even without state intervention, Guangdong's advantages are slipping away. Today, many apparel companies here make a portion of each piece -- a sleeve or collar -- in Hong Kong, so they can claim it is "Made in Hong Kong," and ship it out under the territory's less-restrictive trade quotas.

By 2005, however, the United States is scheduled to lift quotas on textiles from China. That would erase the advantage of splitting production between Guangdong and Hong Kong. And with labor costs significantly lower in northern China -- not to mention countries like Mauritius and Bangladesh -- it would rob the apparel companies of one of the main reasons to build factories here.

"Guangdong has been very good in taking advantage of loopholes," Mr. Xie said. "But when the rule of law is strengthened, it will be tougher to do that." Like other coastal provinces, Guangdong has a thriving underground economy in smuggled oil, cigarettes and food products. China's prime minister, Zhu Rongji, has made cracking down on smuggling the centerpiece of his anticorruption campaign.

Guangdong also led the way in the creation -- and subsequent downfall -- of investment trusts. These state-run companies borrowed heavily to invest in often-dubious real estate ventures. When Beijing decided to make an example of one of them by throwing it into bankruptcy, it chose Guangdong International Trust and Investment, the flagship venture of the provincial government.

In some ways, Guangdong is suffering the same growing pains as any region that struggles up the economic ladder. With its labor costs the highest in China outside of Shanghai, it is trying to attract more capital-intensive industries, like telecommunications, computers and software. It is also trying to hold on to the higher-end segments of its traditional manufacturing industries.

"What Guangdong needs to do is move up the value chain," said Vincent Chen, the founder of Texwatch.com, a Web site that tracks the garment industry. "They will be known for making high-quality products, like polo shirts."

As China seeks to catch the technology wave, however, Guangdong may find itself handicapped by its dearth of good universities and its less-educated work force. China's Internet industry is centered in Beijing -- home to the top-notch Beijing and Qinghua universities.

For all its weaknesses, experts say that Guangdong is still far more competitive and resilient than other parts of China. They note that the Pearl River delta is dominated by private entrepreneurs -- a stark contrast to the sclerotic state-owned enterprises of northern China.

"None of those grievous problems that you see up north blight the Pearl River delta," said David Dodwell, who has written extensively about the region. "Most of the companies here are leaner, meaner, and better equipped to confront international competition."

Indeed, Wang Tai-ching is not about to wave a white flag. He notes that he, too, will benefit from lower duties on imported raw materials. Lower duties on machinery will allow him to install another assembly line in his factory.

To counter the threat from Procter & Gamble, he wants to build warehouses in the north to deliver diapers in Shanghai and Beijing. Eventually, Mr. Wang predicts, his factory will produce 300 million diapers a year. With 19 million babies born in China every year, he says there are more than enough bottoms to go around. "I'm very optimistic about W.T.O.," Mr. Wang said gamely. "But the changes haven't happened yet."

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