BACKGROUND

Being at the forefront of China's reform and opening-up, the Pearl River Delta (PRD) region at large faced problems with its industrial transitions and upgrading in the recent two years as a result of the Chinese renminbi (RMB) appreciation, rising raw materials cost, increasing labour and land cost etc. Moreover, a series of regulatory changes such as the implementation of the new Labour Contract Law and “Unified Tax System” as well as policy adjustment in the processing industry, brought about unprecedented “cost impact” to the PRD region.

International experiences indicate that there are mainly three types of industrial upgrading and transition, that is, through technological innovation, institutional and cultural evolution, and cost considerations. Since the recent industrial transition in the PRD region is a combination of the above three types, the industrial upgrading could progress towards an ideal state after ten to twenty years’ of natural evolution.

The industrial transition and upgrading of the PRD has aroused the attention of the international community. On 25 February 2008, the Wall Street Journal published a long article titled, “Has the Prosperity of PRD Become Yesterday's Dream?” It reported that 10 per cent of 70,000 Hong Kong invested factories will stop their production by the end of this year because of increased cost and strict supervision. This article sparked a debate in mainland China. The authority of Guangdong Province said that the data was inaccurate and the facts exaggerated.

Industrial transition and industrial upgrading are important to the improvement of the competitiveness of the PRD and the Chinese central authority have also paid much attention to it. After an inspection of Shenzhen and Dongguang in late April, Wang Yang, party secretary of Guangdong Province said, “If you don't adjust the industrial structure today, you will have to be adjusted by the industrial structure tomorrow.” The first “adjustment” in his speech means “positive” action, while the latter means “passive”, that is, it will hinder the local economic development if you don't adjust the industrial structure.