Ratings Mar 18

Guangdong remains trade powerhouse despite virus, trade war

International trade may have slipped and services are on the rise but region is still the world’s factory

Guangdong remains trade powerhouse despite virus, trade war
Shenzhen has grown into one of China’s most prosperous cities.

(ATF) – Southern China’s Guangdong province is expected to remain the world’s factory even as coronavirus threatens global recession and the trade war with the US takes its toll on world trade.

While the province’s international trade dipped 0.3 percent to 7.14 trillion yuan (US$1 trillion) in 2019, it still accounted for 22.6% of China’s foreign trade, according to official Chinese data.  

Guangdong conducts the most foreign trade among provinces, partly thanks to its proximity to Hong Kong, China’s most important international financial hub and a major trade centre in its own right. The province’s rise as a manufacturing superpower is in large part due to investment by Hong Kong businessmen since mainland China’s economy opened up in the 1980s.

The Sino-US trade war, launched in 2018, has had limited impact on the region. Exports to the US contributed no more than 20% of its total shipments in 2018, according to a credit report on the Guangdong provincial government by Pengyuan International, a Chinese credit rating agency. 

EU, Southeast Asia

In addition, the growth of Guangdong’s trade with the EU and Southeast Asia has helped the province offset declines in exchanges with the US, having risen 10.7% and 4.9%, respectively, according to official Chinese data.

The COVID-19 epidemic shuttered many factories and companies but the Chinese central government has ordered their resumption as infections have dipped. 

By March 2, more than 90% of companies in Guangdong had  resumed operations, state news agency Xinhua reported. Also, more than six million migrant workers have returned to work in the region, representing a third of the itinerant worker population of the province, according to the local Human Resources and Social Security Department.  

Services rise

Manufacturing has become a less important aspect of business in recent years as the province has restructured its economy to foster the growth of services companies, according to the Pengyuan report. 

By 2017, the tertiary sector accounted for 53.6% of Guangdong’s GDP, more than manufacturing’s 39.3%. Domestic consumption is becoming increasingly important in the wealthy province, where Ferrari and Porsche sports cars can be seen in cities like Shenzhen and Guangzhou. In 2017, Guangdong’s consumption ratio was 50.3 percent, according to Pengyuan. 

Guangdong also has the highest GDP of any Chinese province, rising 6.3% to surpass 10.5 trillion yuan last year, according to official Chinese data. The government announced in January a GDP growth target of 6% for this year. Both are in line with Pengyuan’s projection of 6.0%- 6.2% in 2019-2021. 

Between 2014 and 2018, economic growth outperformed the rest of China, reaching per capita GDP of 86,412 yuan. That’s 34% higher than the national average and seventh among its peers, according to Pengyuan. However, Pengyuan expects GDP growth to gradually moderate over the next three years. 

Debt Burden

Measured relative to GDP, the province’s debt burden is less than the provincial average, even though its absolute debt is high. Direct debt was about 1tn yuan at the end of 2018, about 83% of the provincial debt ceiling set by the central government, according to Pengyuan.  

The provincial government’s broad debt could be about 2.6tn yuan at the end of 2018, the agency estimated. The broad debt to GDP ratio grew moderately, however, to 29.5% last year from 24.5% in 2015. Debt growth has been much slower than the average of China’s local governments, said Pengyuan’s report. 

The Guangdong government’s liquidity will rank among the top five Chinese provinces over the next 12-24 months, the agency said, and the it has had the highest fiscal deposit compared with its peers in recent years.  

Pengyuan predicts Guangdong’s fiscal deposit may be 410bn yuan at the beginning of 2020, enough to cover debt principal and interest payments. All the liquidity assessment ratios of Guangdong are expected to be significantly above the local governments’ average this year, Pengyuan projected.  

Pengyuan has assigned Guangdong a long-term foreign currency issuer credit rating of AA- and a long-term local currency issuer credit rating of AA, with a stable outlook.