Government increases central region infrastructure spending to US$67 billion for 2008

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Policy shift targets rural areas instead of developed coast for infrastructure spending, Guangdong-based low cost manufacturers relocating

Feb. 12 – The central government has topped up its investment budget for rural areas by an increased RMB100 billion (US$13.9 billion) this year, Chen Xiwen of the Central Leading Group of Rural Work announced in his New Year Working Report.

The funds are earmarked for the construction of infrastructure projects for water, gas and electricity, as well as agricultural technology, among other projects, including investments in education and medical services. The final budget will be decided at the national congress to be held early in March.

The government increased its budget for rural areas by RMB80 billion last year, a record increase at the time. After decades of supporting urban development at the expense of the countryside, the authorities have begun to address the gap between urban and rural incomes. The contentious, 2,000 year old grain tax was abolished in 2006 along with other arbitrary fees, and free grammar school education was reinstated last year. However, infrastructure investment is still needed to support agriculture production are this is under strain, Chen said, quoting as an example that more than 30,000 of China’s 87,000 dams are unstable leading to water loss, poor water management, increased expenditure, less productivity, and in some cases, dangerous agriculural conditions.

Rural development has become one of the central government’s top concerns in recent years, with every “Number 1” document – the first document approved by the central leadership each year – focusing on rural issues since 2003.

But, Chen said, the country still needs permanent mechanisms for promoting agriculture and for urban areas to help rural areas. A recent survey put the agriculture-based population at around 700 million – about 50 percent of the entire population of the country.

Investment in rural areas is expected to be matched by those of the private sector, especially from Guangdong province, where recent shifts in tax policy and stricter application of labor law has meant many low-cost – high labor cheap production facilities are being squeezed out of the local market, a deliberate policy on behalf of the central and Guangdong governments to both direct investment further inland and to move Guangdong’s traditional low cost manufacturing base further upstream into value added services. Between 30-50 percent of Guangdong-based factories are considering relocating or closing down, according to the Hong Kong Chamber of Commerce, some seeking to cash in on land values and sell up, others relocating inland to take advantage of cheaper labor and improving supply chains.

Alberto Vettoretti, Managing Partner of Dezan Shira & Associates China comments “Over the past few years we have seen a shift in the dynamics of Guangdong away from low cost manufacturing and into more hi-tech services. Low end manufacturers are moving elsewhere, either inland in China or out to Vietnam and Southern India. With new investment planned by the central government for the inland areas, and an improvement in power supply, education and transport infrastructure, the central regions will be more attractive to the traditional Taiwanese and Hong Kong investors that have been the traditional hub of Guangdong manufacturing.”

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