By Bob Savic, Advisor to Dezan Shira & Associates
At the heart of Beijing’s Imperial City lies the sprawling palace complex of the Forbidden City. Home to China’s celestial emperors, its heavenly grounds were off-limits to ordinary mortals. In modern-day Beijing, China’s leaders talk of the capital city’s future role in much more outward-oriented and earthly terms. They look not only to embrace other surrounding lower-tier Chinese cities, in forming a megacity cluster, but in creating five so-called “super-cities” across the country – the Greater Bay Area (GBA), Yangtze River Delta, Beijing-Tianjin-Hebei region (Jing-Jin-Ji), the mid-Yangtze River area, and Chengdu-Chongqing urban agglomeration. These will link to countries and regions across the Eurasian supercontinent and beyond.
The first building blocks for this vast network of urban connectivity was formally set out in China’s “Vision 2035”, being part of the 14th Five Year Plan (see What to Expect in China’s 14th Five Year Plan? Decoding the Fifth Plenum Communique). China’s President Xi Jinping encapsulated Vision 2035 in somewhat reserved terms – referring to it as making China a “moderately prosperous country” by that date. Nonetheless, the implications in achieving even such a supposed modest level of economic development would entail a seismic shift in China’s relations with other countries across the world.
In advance of what looks like becoming a new global economic paradigm, China’s policymakers have already begun to progressively attune China’s domestic development and its international relations with countries around the region and other continents. This has mainly manifested itself, in recent years, in a plethora of China-driven transnational infrastructure programs and multilateral trading arrangements. It is also evidenced in domestic economic and social reforms designed to enable sustainable and inclusive development, prospectively benefiting Chinese households and consumers, the small and medium-sized business sector, and China’s fast-expanding network of suppliers from partner countries across the world.
This first article, in a two-part series, will explore China’s megacity concept from the perspective of how these new urban centers will fit into recently-created regional mega-trade deals, including the Regional Comprehensive Economic Partnership (RCEP). It will also examine the international economic implications of these megacities on surrounding countries and their relationship with China’s rising economy, which is being fashioned within the context of an international exchange rate policy supporting a long-term appreciating currency that promotes domestic consumption and services, over traditional manufacturing and exports.
The following article will look at aspects of socio-economic policy, including governance of large corporations in dealing with economic inequality amid elevating the status of the small and medium-sized enterprise (SME) sector, such as through health and digital business opportunities. It will also cover aspects of the Belt & Road Initiative’s impacts on business prospects arising from its facilitation of transnational urbanization policies and how these will change the geoeconomics of a new connected world, of which China will be the main driver. One may say this is a development most western corporate decision-makers have largely accepted, despite pullback from certain western political circles.
In November 2020, 15 Asia-Pacific states became members of the RCEP, the mega-regional trade grouping. RCEP’s aim is to unify and deepen economic linkages across East Asia and the eastern Pacific – with China as the region’s key driver of economic growth. In this regard, China’s 14th Five-Year Plan calls for “comprehensively improving the level of opening to the outside world and the promotion of trade and investment liberalization and facilitation”. To this end, China took the lead in ratifying the RCEP earlier this week. RCEP signatories aim to ratify the agreement before the end of the year so it becomes effective January 1, 2022.
From the perspective of China’s development of the Asian region, through RCEP, the agreement could have significant implications for expanding intraregional supply and value chains, enhance comparative advantages for manufacturing among various countries, and further cross-border investment flows as China outsources production. The RCEP will be the world’s largest free trade zone, and its 15 member states are home to 2.27 billion people, with a total GDP of US$26 trillion and total exports of US$5.2 trillion.
ASEAN economies will be in a unique position to service China’s growing domestic economy with value added consumer and intermediate products. At the same time, Japan and South Korea will continue integrating their high-technology production platforms with China’s expanding R&D capabilities amid its transformation into a digital, cloud-based, and artificial intelligence (AI) economy. Concurrently, Australia and New Zealand are likely to further develop the supply of food, upstream, and value-added downstream resources to China’s maturing economy and tap consumption markets.
More specifically, from an industry perspective, given that China will be a major source of investment across RCEP’s value chains, while also offering advantages to regional manufacturers, for example, Japan’s automotive industry expected to benefit from Chinese households’ demand for vehicles. Singapore will stand to gain mainly from growth in supplying China with chemical and petroleum products, while Vietnam develops a greater focus on electronics and machinery. The lower-income RCEP economies will also benefit from the significant shift of textile and apparel industries out of China to their lower cost bases.
The largesse of China’s economy and the demand it will generate for light manufactured goods, high-end services, and various value-added commodity resources, from across this increasingly highly integrated region, can be put into the context of the actual size of its economy by 2035. In this regard, it is anticipated to overtake the US, in terms of nominal GDP, according to the Japan Center for Economic Research (JCER). JCER envisages that China and Hong Kong’s economy will reach US$41.8 trillion by 2035, a fraction below the US and Japan’s economies combined, at about US$42.3 trillion. China is also expected to have a prospective GDP per capita of US$30,000 by that date, according to official Chinese targets, adding even further weight to its elevation as the world’s largest consumer-driven economy in years to come.
The 14th Five-Year Plan sets out new targets for China’s urban growth. These include plans to facilitate about half of the rural migrants to settle in five super-city clusters, including the Beijing-Tianjin-Hebei region (Jing-Jin-Ji), the Yangtze River Delta, the Mid-Yangtze River area, the Greater Bay Area (GBA), and the more recently announced Chongqing-Chengdu city cluster. While there are other smaller city clusters, these five groupings are notably being promoted as regional power-house socio-economic and cultural centers. Each will be designed to enable both “domestic circulation” and serve as hubs in facilitating “external circulation” between China and the global economy. Taken together, the populations of these megacities will be a staggering 600 million people – equivalent to that of the European Union and Russian Federation combined.
China’s process of urbanization is, of course, decades old. It is considered essential in enabling the country’s ambitious economic growth strategies. This ongoing movement of people from rural communities to urban environments will likely continue for the foreseeable future with the possibility that the urbanization ratio could rise to three-quarters of the population, by 2030, from under two-thirds currently. This will roughly mean up to 220 million additional urban residents – the current population of Brazil, Latin America’s largest country – over the coming decade.
Supersize investments into these regions are already underway, partly explaining the recent infrastructure boom and accompanying soaring global base metal commodities prices. In this effort, central and provincial governments are channeling record-level funds to boost smart grid technology, new high-speed rail, state-of-the-art 5G networks, autonomous driving and electric vehicles, other forms of advanced mobility, and big-data systems.
To comprehend these modern and colossal new urban growth policies, one may consider the example of the GBA. Being an integral part of the 14th Five Year Plan, it is an initiative to foster comprehensive and seamless regional economic and financial integration between Guangdong province’s principal cities, such as Guangzhou and Shenzhen, with various Pearl River Delta urban areas, including Hong Kong and Macao. In all, the GBA’s population would account for up to 70 million people, with the highest income per capita in the country, and a total GDP of about US$1.3 trillion, similar to that of South Korea.
At the current rate of development, the GBA has already been transformed into a key international hub for advanced manufacturing. It also hosts several of the world’s most highly innovative tech companies. These are complemented by a growing soft infrastructure of finance, tourism, leisure, and other creative industries. In this capacity, Hong Kong is being primed as the ideal financial and professional services center acting as a platform for international capital flows between global finance hubs and the GBA, in addition to other megacities, across China.
Chinese megacities are anticipated to become inland hubs not only for different parts of China, but also for countries partnering or otherwise connected with China, by 2035. For instance, the newly proposed Chongqing-Chengdu metropolis will serve as a center for the development of western China, a gateway for the Yangtze Economic Belt, a logistics node for the Eurasian overland Belt & Road Initiative and a strategic economic fulcrum for ASEAN, according to a World Bank report entitled “Chongqing 2035”.
Given the infrastructure being built at the confluence of these major Chinese development programs, Chongqing-Chengdu’s road and rail networks will connect to major international markets, including those of nearby Southeast Asia, particularly the countries located on the Indo-China peninsula. The size of Chongqing’s municipality, alone, is comparable to entire countries, while its nine inner districts are comparable to the areas of leading global cities, such as New York, London, Paris, Hong Kong, and Singapore. Indeed, Chongqing’s rate of growth has been growing at triple the rate of the latter two in recent years. Meantime the first completed high-speed rail networks will be three times the length of South Korea’s and about three-quarters of Japan’s.
As the Chongqing-Chengdu megacity evolves and comes to fruition, by 2035, it is anticipated to be the endpoint of a value-added manufacturing production chain that sources lower cost inputs and capital machinery intermediate products from nearby ASEAN economies. These countries’ production platforms are therefore expected to service the super-city’s specialized industries of automobiles and information technology over time.
Another outcome in the evolution of the megacity will be the creation of an expansive domestic market of wealthy consumers. These will particularly arise from sizeable improvements in cross-city transit systems, mixed-use residential-recreational-commercial developments, and the adoption of renewable energies replacing the current high and polluting consumption of coal.
As the wealth of a megacity’s residents increase so will the market for higher quality and lower cost household goods produced in ASEAN. Mega economic regions, such as Chongqing-Chengdu, will take a more visible role as centers for piloting new domestic policies and new technologies, and linking China to both dynamic country-groupings, such as ASEAN, but also in connecting across the vast transcontinental Eurasian space and beyond.
As mentioned earlier, China has looked to expand the consumption side of its economy. This has been generally positive, but for to secure a more significant shift – China will need to rebalance its focus on export and investment drivers.
This will require seismic economic and social transformation, which will be impacted by internal factors, such as a rapidly aging population and external pressures in the form of a challenging relationship with other major economies. These issues are sharpening Chinese policymakers’ focus on raising domestic consumption and productivity, elevating the sustainability of economic growth, and reducing vulnerability to international supply chain disruptions.
The success of each of these policy components is dependent, to varying degrees, on China’s ongoing exchange rate management involving an incremental and systematic strengthening of the Chinese Yuan against the US dollar. Should such a transformation fully bear fruit, China’s growing multi-trillion-dollar economy and its expanding international and intraregional engagements will have significant and long-lasting implications for the global economy.
Rebalancing in favor of greater dependence on domestic supply enables the prospect of reformulating China’s trade flows and thereby adjusting business and consumer demand patterns for products and services. Concurrently, productivity growth would be bolstered by a re-tooling and re-skilling of the manufacturing sector alongside the development of advanced technologies to reduce reliance on imports and further support domestic consumption.
The 14th Five-Year Plan adopts the idea of “dual circulation” as its core concept for future economic growth. The term has been around for several years but now features prominently in policy statements though without much definitional criteria.
What is apparent are its intended outcomes. These involve an overall economic objective to revamp the decades-old growth model on to a more sustainable trajectory, while weathering the uncertainties of a more complicated domestic background coupled with a problematic international environment. In essence, the idea would be for China to largely depend on domestic circulation to drive economic growth, supplemented by external circulation made up of the international cycle of inward direct investment and overseas trade.
Domestic circulation is anticipated to expand and deepen domestic consumption demand for the period up to 2035 and beyond. This would involve a variety of accommodative policies, including strengthening the social safety net and instigating wide-ranging rural reforms. The purpose would be to basically develop a sense of financial security for households, so they spend more and save less.
On the supply side, the economic policy focus will be to raise industrial capacity and productivity by incorporating the latest technological innovations and improving management and labor skills. This will be key to meet self-sufficiency targets. At the same time, Chinese policymakers will need to manage a form of integration into global markets, whereby developing economies will provide China with the competitively-priced consumer, industry, and technological inputs while hedging against the headwinds of a less certain political outlook with parts of the developed world.
External circulation introduces some new concepts over the Vision 2035 period. These are mainly manifested in new technologies, such as digital currencies and blockchain, which would be developed to enable reliable and secure international supply chains. New standards and protocols to be established under a modern China-led globalization paradigm would prospectively allow for a more regulated and fairer form of globalization that would emphasize sustainable development, inclusion, green technologies, and a greater balance between the needs of large corporations and the rest of the economy.
In particular, one may expect a greater recognition by the government in supporting the roles of local suppliers and the SME sector and, externally, empowering developing economies to mature and reach higher standards of living for their populations. These would include the currently lower income economies of Southeast Asia to South Asia, from the Russian Far East to the Middle East, from Africa to Central and Eastern Europe, and perhaps, further beyond to Latin America and the Caribbean, where developing nations are increasingly signing up to China’s Belt & Road program.
Perhaps, over the period of Vision 2035, the Belt & Road Initiative may be reincarnated into a modernized version dealing with challenges facing the world, including worsening demographics, climate change, intensifying economic inequalities, and future global pandemics. The issues surrounding a transcontinental Belt & Road will be dealt with in more detail in the second article in this series.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at email@example.com.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.
Previous Article « Belt and Road Weekly Investor Intelligence, #21
Next Article EU-China Investment Deal in Doubt, Businesses Caught in Geopolitical Crossfire »
Dezan Shira & Associates´ brochure offers a comprehensive overview of the services provided by the firm. With its team of lawyers, tax experts, auditors and...
Doing Business in China 2022 is designed to introduce the fundamentals of investing in China. Compiled by the professionals at Dezan Shira & Associates in...
With the scope and penalties of China’s social credit system being further clarified in 2021, legal and regulatory compliance has become more important than...
As a legitimate tool for reasonable tax planning and cost saving, tax incentives play an important role. Companies also use tax incentives as a useful...
A firm understanding of China’s laws and regulations related to human resources and payroll management is absolutely necessary for foreign businesses in...
Over the last few months, China has been quickly expanding the pilot program on electronic special value-added tax (VAT) fapiao (hereafter special VAT...
Dezan Shira & Associates helps
businesses establish, maintain,
and grow their operations.
Stay Ahead of the curve in Emerging Asia. Our subscription service offers regular regulatory updates,
including the most recent legal, tax and accounting changes that affect your business.