Abacus photo ©Carlo Cortes IV/Reuters; Mobile phone photo: ©PHILIPPE LISSAC/CIRIC 13 TRADE Two-speed economy Two-speed Investing in China Investing ), launched in January 2000. No. 231/232 May 2002 Observer Xibu Da Kaifa This is an ambitious effort to steer state This is an ambitious effort loans investment, outside expertise, foreign In fact, and private capital into the regions. Why might this be a problem? For smaller Why might this be a problem? ones, advanced larger countries or more imbalances can be managed. But regional China is a veritable giant and, despite central being bound together by a strong is a country of several cultures authority, and traditions. One challenge it has to face its in this era of globalisation is to prevent jeopardising pattern from uneven growth not only cohesion, but long-term economic stability too. The Chinese government with is responding Development Strategy Western its Great ( uch has been said and written in years about China’s recent economic potential, with some claims that it may one day rival the United has certainly been growth States. China’s since the 1980s and even impressive point to a conservative projections may be a there However, bright future. has been very weakness: that growth with the bulk of the unevenly spread, US$400 billion in new investment during 1983-2001 concentrated in the eastern and southern coastal belt. In fact, the eastern accounted for 88% of coastal region direct total inflows of foreign China’s investment (FDI) during this period, but attracted just 9% and the the central region than 3%. western little more region M , Duisburg University, Germany University, , Duisburg , OECD Directorate for Financial, Fiscal and Enterprise Affairs, and Fiscal and Enterprise Affairs, for Financial, , OECD Directorate

China has enjoyed unparalleled growth, has to be but more done to steer investment into the and regions remoter western provinces. Professor Markus Taube Markus Professor Mehmet Ögütçü Getting China’s regions moving regions China’s Getting TRADE Investing in China

the government channelled $45.5 billion in 2000 to develop the west, and plans are afoot to increase that figure. But it will take more than money to make the strategy work.

The areas lagging behind are enormous: the inland provinces account for 56% of the country’s total land surface, an area almost twice as big as India, and 23% of its population, spreading across 11 provinces and autonomous regions (see map). Yet per capita incomes are only 60% of the national average. And the gap has widened: in Gansu province, for instance, per capita income fell from 84% of the national average in 1980 to 56% in 1999. World Trade Organization membership offers a chance for these regions in the west and north to compete for new investment, including from abroad, but they will have to overcome massive infrastructure and employment problems first.

The Chinese authorities originally concentrated on developing the eastern ©Encyclopedia Britannica coastal regions in the hope that growth would spill over into the rest of the country. Good in theory, but so far the effect has been limited. The fact that economic reforms have generally been skewed in favour of the coastal regions is one reason. Part of the result is that this vast section of universities in provincial capitals such as would be to target resource-seeking FDI the country, already handicapped by its Xian and Chengdu, abundant natural from elsewhere in the world market that distance from world markets and possessing resources, with oil, gas and minerals in would integrate western China into the only a very restricted, relatively poor, local Xinjiang, and a strong agricultural base. In value chains of its eastern coast’s export- market, has had to make do with ragged fact, Sichuan province is the main producer oriented businesses. This may mean and faltering state-owned industries. of rice in China. There is also great tourist relocating some investments as well as potential to be tapped from such historic bringing in new ones and would focus on What private money there was inland has sites as the Silk Road, the Tibetan plateau, operations that do not have to be close to all but gone to the coast, with net capital the archeological digs of Liuzhaigou and the the final customer. Services would be an flows moving from the lagging west to the desert oasis of Turpan, where much fruit is obvious option, such as accounting for the prosperous east belt, where earnings are grown. But these assets have not been coast’s hotel businesses, or call centres and higher. To make matters worse, the inland enough to attract foreign investors in today’s data processing. In manufacturing, region has suffered a brain drain, as hard and competitive global economy. attracting producers of spare parts for skilled and entrepreneurial youth migrate technology and machinery may be useful. east for higher salaries and better living How can this be changed? Obviously, given conditions. their distance from the coast, the promotion All of this presupposes a modern of direct export-oriented industries is hardly information technology (IT) infrastructure, Mobilising those resources an option for these regions; nearby which western China lacks. Moreover, the countries like Russia, Kazakhstan, transport systems would have to be On the positive side, the region does have Uzbekistan, Turkmenistan, Pakistan and improved and inter-regional trade lower costs to offer in the form of an India, may offer opportunities, not least restrictions removed to give the inner untapped reservoir of skilled labour from because of their proximity, though there are regions a chance to supply the natural former military-managed enterprises, as well one or two political difficulties that could resources and labour inputs that eastern- as a huge mass of cheap unskilled labour. complicate matters, like ethnic questions based enterprises currently import from There are some research institutes and along some borders. A less bumpy route abroad. In the longer term it might be

14 Observer No. 231/232 May 2002 TRADE Investing in China

feasible to locate more market-oriented development clusters, for instance, with research and development facilities away Promoting export-oriented their greater provision of research and from the east, where facilities tend to be industries is hardly an option development and networking. military related. And more use should be for the western regions, so the made of the small pool of skilled labour This is vital, since a region needs a minimum until now absorbed in military and other challenge has to be to target stock of human capital if it is to absorb the state enterprises. resource-seeking FDI from advanced technologies and management elsewhere that would integrate skills made available by FDI and to translate The massive concentration of funds brought western China into the value FDI-induced growth potential into durable in by the government’s “Go West” campaign chains of the east. economic development. Provinces like should greatly improve the region’s Sichuan and Shaanxi have very strong infrastructure over the medium term, but research institutions and facilities of academic not so the institutional and regulatory set- learning. These institutions have traditionally up. Another area requiring change is the can be a decisive element in the final choice emphasised technological research, but could banking system, whose current role under of investment locations, but without proper become useful sources of skills for R&D-type the planned economy focuses on handing management, they risk leading to FDI. More government effort is needed to out state grants and collecting profits. The corruption, rent-seeking and market improve education and create surroundings problem of non-performing loans is acute. distortions. Their aim has to be to improve that will keep qualified individuals from Freeing up the banks would not only help long-term business opportunities in the emigrating eastwards and attract improve the “bankability” of projects, but region so that FDI not only flows in, but entrepreneurs from the east. would increase transparency and reduce stays as well. Moreover, incentives like tax corruption, too, which is so important to breaks and exemptions can leave local Energy investments do offer potential, of attracting investment today. governments short of funds to invest in course, with pipeline projects able to deliver infrastructure and the fight against crime local economic stimulus by way of pump While the central government has greatly and corruption – precisely the elements stations, maintenance, security and so on. improved the environment for regional needed to attract investment. Multinationals Linking FDI with local enterprise development, local governments have some have to choose carefully and investment development is important. But apart from work to do. There still seems to be promotion agencies can help to build a energy, other mining and raw material substantial room for improvement in the region’s image and attract the attention of extraction projects are unlikely to produce design of local micro-level environments for prospective investors. China knows this too many new links with local enterprises, foreign investment. The aim has to be to well: its Shanghai Investment Promotion even if foreign investors could be lured in. build up the local industrial sector and Agency and Yantai Investment Development prevent capital and skilled labour from Agency have been very successful out east The Chinese government has much to do to leaving the region, using market-based and are no doubt seen as a model for correct the widening income disparities incentives and capacity building where investment promotion agencies (IPAs) to be between its rich coastal provinces and the possible, rather than red tape and other created in the various western localities. sluggish interior. But Premier Zhu Rongji administrative interventions that distort has stressed that the Great Western management decisions. Given the vastness of China, changing the Development Strategy was a long-term FDI fortunes of all regions at the same time programme with a timeline of 20 to 30 Public intervention to attract FDI may be would be impossible. Rather, the Great years. This is a realistic assessment. While justified in situations where there are Western Development Strategy could China cannot afford to do everything at additional, indirect benefits that the market concentrate more on establishing focal once, it must at least make sure that any alone cannot yet deliver – technology points of investment, as it has started to do. future increase in FDI benefits the parts of transfer, bringing in skilled labour, fiscal Industrial districts in Xian, Kunming, the country that need it most. agreements, and so on. Incentives like these Luoyang, could be encouraged to become References China in the World Economy: The Domestic Where investors tread Policy Challenges, OECD, 2002. Geographical distribution of FDI stock in China Foreign Direct Investment in China: Challenges and Prospects for Regional Development, OECD, 1983-1998 1980s 1990s forthcoming. Eastern region 87.8 90.0 87.6 Lemoine, Francoise, “FDI and the Opening Up Central region 8.9 5.3 9.2 of the Chinese Economy”, CEPII, 2000. Western region 3.3 4.7 3.2 Ögütçü, Mehmet, Foreign Direct Investment in China’s Energy Sector, “Geopolitics of Energy”, Source: OECD June 2000. Eleven provinces: Guangxi Zhuang, Xinjiang Uyghur, Ningxia Muslim, Tibet Autonomous Regions, and Yunnan, Sichuan, For more on Xian meeting: Shaanxi, Guizhou, Gansu, and Qinghai provinces, as well as Chongqing Municipality in the west. www.oecd.org/daf/investment, under “conferences”.

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