China’s Northern and Inland Provinces Recession Free

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Streets of Harbin / ASIA BRIEFING LTD

Central Avenue, Harbin’s pedestrianized shopping center, is booming with many international and Chinese luxury brands and boutiques lining both sides of this historic street

By Chris Devonshire-Ellis and Andy Scott

Jan. 3 – China Briefing and Dezan Shira & Associates staff have spent much of the past few days during the holiday season traveling around China, and especially the inland and Northern provinces, assessing the impact in these secondary locations of the global financial crisis on the local economies.

Still largely disconnected from the international foibles of trade and commerce, the inland and northern provinces of China depend much more on China trade and trade with other markets, such as Russia and Central Asia, that are also themselves largely isolated from the global markets. These areas then, with huge populations and massive territories, represent for China and much of emerging Asia the last bastion of isolationism and protection from the oft rapacious demands of the global economy. As Karl Marx’s “Das Kapital” once again hits the best seller lists in its treatise of the fundamental flaws of capitalism, it is these, largely agrarian and proletarian economies that appear both resilient and dependable in times of international economic strife. Marx would recognize the trends.

The lessons are two-fold – firstly the potential importance of China to be able to resist exposure to the current perils of global trade, which if hard liners in the Communist Party have their way, may result in a slow down, or at the very least a more measured approach to the suitability of further exposing the national economy to international markets. Guangdong Province has been extremely hard hit with exposure to the global downturn. Similar exposure to domestic businesses, jobs and the economy in China’s huge inland regions could be calamitous for the nation, and here lies China’s quandary – how to encourage investment into these areas to raise the standards of living, but still maintain an economic buffer zone to keep them protected from downturns not of China’s own making?

But to the provinces first: With about a fifth of the country’s population, Northeast China generates about a third of the country’s GDP and a fifth of its foreign trade. It also absorbs about 30 to 40 percent of China’s foreign direct investment. The region’s GDP (excluding Beijing and Tianjin) increased by more than 90 percent from 2003 to 2007, reaching RMB1.13 trillion. Exports for the region reached US$136.73 billion, but used FDI only reached US$4.86 billion, as investment tended to focus on the first-tier cities of Beijing and Tianjin.

Central China’s location has potential given its geographical advantage and ability to link the eastern and western regions. A lot of time and effort has been undertaken by the central government to develop the region’s infrastructure and increase investment to cities such as Wuhan and Xi’an that can then be used as regional logistics hubs. Between 2001 and 2007, Central China’s GDP grew at over 105 percent, reaching RMB5.02 trillion in 2007.

There is obviously room to grow in these regions, and with China’s massive US$586 billion stimulus package likely to focus on infrastructure development, a lot of opportunities and jobs are going to be created in these historically overlooked areas of the country. With Guangdong Province reeling from a mass exodus of export manufacturers and the migrant laborers, it is these regions that will step in.

Heilongjiang for example, is a huge province, covering some 460,000 square kilometers – roughly the size of Spain – with a population of about 40 million and a nominal GDP of around RMB707.7 billion. Its capital, Harbin, has long been a trading center with Russia – the border is just some 400 kilometers east, and from there through to Vladivostok and the main markets in South Korea and Japan. To the north, the main crossing is at Heihe, and the famed Trans-Siberian Railroad, with links across Russia to Moscow and the markets of Eastern Europe. While Russia has seen eight years of strong growth come to a halt as a result of the global crisis, Eastern European countries like the Czech Republic and Slovenia are faring much better thanks to their membership in the European Union.

Harbin Ice Festival / ASIA BRIEFING LTD

Harbin’s Annual Ice Festival is a world-class attraction drawing hundreds of thousands of Russian, Japanese, Korean and Chinese tourists every January and February. It generates millions of dollars for the local economy from a free, dependable and reusable resource – ice cut from the Songhua River.

While there is no doubt that Japan and Korea’s economies are suffering, Heilongjiang is still isolated from the worst of it, as it is a major supplier of pharmaceuticals, timber, and agricultural produce to the rest of China, and that Russian trade corridor keeps much of the economy moving. Harbin itself, the provincial capital, is booming – luxury condominiums overlooking the Songhua River are going for RMB20,000 a square meter – prices comparable to high end Beijing residences just a couple of years ago. Add to that a year round tourist season, and the world class event that is the Harbin Ice Festival – attracting tourists from Russia, Japan and Korea, who are increasingly finding the lower costs of winter vacations in the area an attraction – and one can see why the province is global recession protected. While the comfort factor for businesses in Shanghai – mainland China’s easiest city for foreign companies to do business in, but also its most competitive – remains high, exposure there to the whims of global trade has left many feeling the chill winds of recession. Harbin meanwhile boasts Lane Crawford stores, and luxury boutiques from the likes of Gucci, Ferragamo, Cartier and Chanel.

Heilongjiang’s strategic position as a supplier of goods and produce to China’s national domestic markets, coupled with the exploitation of its tourist attractions to wealthier neighbors ensures its protection from global downturns. It’s a picture repeated across Central and Northern China.

In Hubei Province, the city of Wuhan has been able to expand its capacity for manufacturing heavy trucks, motorcycles, construction equipment, and automobile parts through the steady flow of FDI. The city has ambitions of being one of the top manufacturing hubs in the region.

The province’s economy will also depend on the future of the Three Gorges project. The Three Gorges project is the largest hydroelectric river dam in the world that should have an electricity generating capacity of 22,500 megawatts by the time it is completed in 2011. The local government has already teamed up with the municipality of Chongqing to make the Three Gorges a top tourist attraction.

Hubei has the advantage of having one of the country’s most developed inland water transportation system. The Yangtze and Hanjiang rivers pass through its center and most of its counties and cities are located along the water transport lines.

The ports of Wuhan, Huangshi, Shashi and Yichang are all open to foreign ships, with the Wuhan port being one of the largest of its kind on the middle and lower reaches of the Yangtze River. There are also open freight shipping lines to Hong Kong, Japan and Southeast Asian countries. Hanjiang River is a major waterway linking northwest Hubei with the Jianghan plain while also having the major ports of Xiangfan and Laohekou.

Hunan Province had already allocated more than US$200 billion for infrastructural development prior to the central government’s stimulus plan. Rich in mineral deposits, much of Hunan’s economic output comes from the mining sector. The smelting and pressing of ferrous and non-ferrous metals accounted for 19.6 percent of total industrial output. Thus the province has been able to easily attract other similar businesses coming from the coastal cities.

The province will also move to develop its cities of Changsha, Zhuzhou and Xiangtan as experimental zones for energy-saving and eco-friendly programs. Located in the northeastern part of the province, these are long-time industrial cities facing difficulties due to a lack of resources and presence of heavy pollution.

Another potential destination for investment is Jiangxi province which offers substantial savings to investors. Land cost in Jiangxi is 50 percent cheaper when compared to Guangdong Province, while energy and water cost upwards of 25 percent less. It is also a province rich in agricultural and mineral resources, being both a leading source of timber and bamboo products in the country as well as having large supplies of copper, silver and uranium.

While in Northern China, Dalian continues to attract foreign investment. The city has enjoyed a continuous double-digit increase in GDP since 1992 and in 2007, its GDP registered a 17.5 percent increase, reaching RMB313.1 billion. According to a nationwide appraisal by the National Bureau of Statistics, Dalian ranks eighth among Chinese cities in terms of overall strength, and by 2010, its GDP is expected to reach RMB342 billion.

In terms of international trade, the majority of products manufactured or processed in Liaoning, Jilin or Heilongjiang provinces are exported through Dalian. Domestically, a large amount of energy resources such as coal and oil that are sourced from Northern China flow through Dalian on their way south by ship to power the energy-sapping factories in Zhejiang and Guangdong. The city’s proximity to Korea and Japan also ensures that a large amount of the trade with these countries involves Dalian in some way or another

These are just some of China’s inland locations that will see increased attention over the next year or two, from the central government, and from foreign investors looking to solidify their China positions and break out of the now stagnant Pearl River Delta.

Foreign investors will need to rethink their longer-term views regarding their China strategy. As the promised markets of Shanghai, Beijing and Guangzhou become ever more competitive, and more globally aligned, it is the global recession proof weight of the local markets in cities such as Harbin, Dalian, Wuhan, Zhengzhou and Changsha that are bearing up the most, and savvy international investors would do well to examine how to go about penetrating these markets and properly selling to a Chinese domestic market that is both robust, developing, and attractively protected from the perils of international economic storms.

Related reading

Business Guide to Beijing and Northeast China

Business Guide to Central China

China’s Neighbors

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