374 { China’s Quest
were encouraged to purchase Chinese-origin inputs for the products they
manufactured. Exports and imports for industrial production were duty-
free. Goods produced in the SEZ could be sold into China with the approval
of Guangdong authorities and after paying import duties. The standard tax
rate was 15 percent, but lower rates were permitted for transfer of technology,
projects with a longer capital turnover period, or early investment in the SEZ.
Profits could be freely remitted abroad.
Once the Shenzhen SEZ was opened, Hong Kong manufacturers began
shifting their labor-intensive operations there. Among the first to relocate
were luggage and clothing manufacturers. An initial trickle became a steady
flow and then a flood, although company headquarters and legal incorpora-
tion were typically left in Hong Kong under the protection of property- and
market-friendly British law. Other Hong Kong firms secured contracts to
build roads, wharf facilities, factory and apartment buildings, telecommuni-
cation systems, and other infrastructure for the Shenzhen SEZ. Hong Kong
firms and been constructing such infrastructure up to world standards for
decades. Now they moved into immensely larger markets in the PRC.
Relatively quickly, the integration of the Hong Kong and Guangdong
economies spread beyond the Shenzhen SEZ to the entire Pearl River Delta
(PRD). Other PRD cities began emulating Shenzhen. Very soon, the PRD was
producing a hugely disproportionate share of China’s exports. Guangdong’s
leadership embraced integration with Hong Kong and did what they could
to encourage it. New and locally financed highways, rail lines, utility and
telecommunications networks, and maritime logistical facilities increas-
ingly tied the region together. Strong infrastructure attracted more invest-
ment. By 1997, when Hong Kong reverted to China’s control, Hong Kong
businesses operated over 50,000 factories across south China. Soon migrants
from across China were pouring into the PRD, looking for work and higher
incomes, and turning Shenzhen into the only city in Guangdong province
where Mandarin, not Cantonese, was the lingua franca. This influx of labor
held wages down—as did CCP control over labor unions. Guangdong quickly
became the vanguard of China’s new participation in the global economy
and pioneered a path soon followed by cities up and down China’s coast.
The dynamic, globally linked economy of Hong Kong became, in effect, one
of the key drivers of China’s opening and reform. Shanghai, the one urban
region of East China that might have challenged Hong Kong’s leading role
in China’s opening to the world, was kept out of the reform process until
1990 because it contributed too much revenue to central government coffers.
Ironically, Guangdong was able to take the lead in China’s opening because
it cost Beijing so little—and because of the powerful economic symbiosis it
developed with Hong Kong.
Guangdong’s vanguard role in China’s opening is reflected in statistical
data on the utilization of foreign capital (FDI and foreign loans combined),