——Exemplified with the city of Hangzhou

By Wang Zhonghong Research Department of Industrial Economy of DRC & Li Jianwei, Macro-economy Department of DRC

Research Report No.147, 2011

I. New Contradictions and Challenges Facing the Industrial Transformation and Upgrading in Southeast Coastal Area

Despite the remarkable successes achieved over more than thirty years of reform and opening up, drawbacks have increasingly showed up in the mode of the industrial development in China's southeast coastal area. In recent years, in particular, changes in international and domestic environments have brought about new challenges and contradictions to the industrial transformation and upgrading in southeast coastal area. Those challenges and contradictions include:

1. Rapid rise in cost of production factors and the further weakening of traditional comparative advantages

First, the labor cost has increased considerably. During 2006~2009, wage of workers of the manufacturing industry increased by 30% in Hangzhou, while labor costs mounted up by a year-on-year 25%~30% in Hangzhou from January to April, 2011. In April 2011, the producer price index of the industrial products went up by 5.7% in Hangzhou, year on year, while the purchase price index of raw materials jumped by 13.8% from a year earlier, widening the gap between raw material prices and producer prices of the industrial products. Second, the financing cost has increased substantially. In the first quarter of 2011, the balance of bank loans and the increase in current assets of the industrial enterprises above the designated size in Zhejiang Province registered 2 percentage points and 0.5 percentage points lower respectively than those of the previous year. The accounts receivable and the interest payments increased at a fast pace and, in particular, the interests facing small and medium-sized enterprises increased by 42.8% and 35.4% respectively year on year. Third, power shortfalls have been large in 2011. It is predicted that the shortfall during the summer peaks will stand at over 1 million kilowatts in Hangzhou, which will hinder the normal production and operation of enterprises.

2. Inadequate driving force behind the growth of external demand and loads of precarious factors

Export in foreign trade is not optimistic as a result of the slow economic resurgence in developed countries, the major efforts devoted by developed countries to advancing re-industrialization and the trade frictions against China frequently triggered by developed countries. At the same time, enterprises have much difficulty getting the grasp of the price trends of staple commodities and the renminbi exchange rates, and most of them would not accept long-term and sizable orders. From January to April 2011, the middle rate of renminbi against US dollar appreciated by more than 1.97%. In the first quarter of 2011, the value of goods delivered by industrial enterprises in Zhejiang for export grew by 17.5%, down 9.6 percentage points over the same period of the previous year; the value increased by 16.4% in April, down 15.0 percentage points over the same period of last year.

3. Deficient innovation capacity and low rate of industrial added value

Enterprises have invested less in innovation. At present, the R&D input by industrial enterprises above the designated size in Hangzhou accounted for 1.5% of their business turnover, showing a big disparity as compared to the average input of 4.6% contributed by leading enterprises in China. The industrial development has contributed little quality and economic benefit, and the rate of industrial added value has remained low. In 1998, the rate of industrial added value was 24.75% in Hangzhou and the rate registered 20.70% in 2005 and was down to 19.08% in 2009, being even lower than the national average of 26.5% and much lower than the average of over 35% in developed countries.

4. A heavy program for the construction of infrastructure facilities and less motivation for nongovernmental investment

Perfect infrastructure facilities are a major factor for industrial transformation and upgrading. With the change of urban forms, aggregation of population, change of means of transportation and transformation of production patterns and lifestyles, the new round of infrastructure construction has become the important task for the development of many regions in southeast coastal area. Given the limited government financial resources and the huge fund shortage, the nongovernmental investment has thus undoubtedly become a very important integral part. However, the nongovernmental investment has been on the low side as a whole. In the first quarter of 2011, the nongovernmental investment in Hangzhou accounted only for 4.5% of the total infrastructure investment. Of this percentage, the nongovernmental investment in water conservancy focused on municipal infrastructure construction and in communications and transportation, warehousing and postal service focused on management of public facilities and road construction only accounted for 2.6% and 5.7% respectively.

II. Efforts Should Be Made in Three Aspects for the Industrial Transformation and Upgrading in Southeast Coastal Area

The authors are of the opinion that, to address the above-mentioned contradictions and challenges and in compliance with the traditional theories on industrial transformation and upgrading, priorities should be placed on improving the environments for industrial development, enhancing the capabilities for industrial development and optimizing the objectives for industrial performance for the industrial transformation and upgrading in southeast coastal area in the days to come, with the three aspects correlating with, unifying and promoting each other.

1. Improving the environments for industrial development

The environments for industrial development are the external cause for industrial transformation and upgrading. They mainly include natural environment, social environment, government roles and market demand.

(1) Natural environment

The natural environment mainly refers to resources and infrastructure facilities, location and climate, such as the adequacy of land and water resources, transport convenience, supply of telecommunications, broadband, power, oil and gas and the facilities of environmental protection, and so forth. Those are essential and primary factors for industrial development, transformation and upgrading.

Hangzhou is a place of interest on the national level, where living conditions are being built to match those of world-famous cities. The city is being built into one of China's leading and world-class low-carbon cities. All this has provided Hangzhou with a favorable natural environment for its industrial transformation and upgrading. However, relevant surveys indicate that Hangzhou is also faced with such problems as inadequate utilization of port resources. How to fully capitalize on the advantages of the Hangzhou Grand Canal, step up the integration of wharfs along the both sides of the canal and strengthen the construction of waterway infrastructure facilities and modern functional port areas is an important part in improving Hangzhou's natural environment.

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