New China Guidelines Promote Transfer of Manufacturing to Inland Regions

Posted by Written by Alexander Chipman Koty Reading Time: 4 minutes

China’s manufacturing sector is set to move from the developed east coast to the country’s inland regions – that is, the central, western, and northeastern regions – per new government documents.

On January 14, 2022, the Ministry of Industry and Information Technology (MIIT), the National Development and Reform Commission, and eight other authorities jointly released the Guiding Opinions on Promoting Orderly Transfer of Manufacturing (the “Guidelines”), which were issued internally on December 25, 2021. On January 17, 2022, the MIIT published an interpretation of the Guidelines, offering more clarity on the policy’s content and significance.

Together, these documents lay out a strategy building initiative to 2025 to promote the transfer of China’s manufacturing sector towards lesser developed regions. The policy seeks to facilitate already existing economic trends as the developed coastal regions are increasingly transitioning to service and innovation-driven growth models.

Here, we look at the key directives of the latest Guidelines and their implications for foreign investment in China.

Promoting the domestic transfer of industry

The Guidelines state that local governments should guide labor-intensive industries to shift to central, western, and northeastern regions. They contain numerous directives on policies and strategies that local governments can adopt to accomplish this goal.

Themes highlighted throughout the Guidelines include developing an abundant and skilled labor pool, building infrastructure, cooperating with the developed east coast, and establishing a conducive policy environment. While promoting the development of energy intensive industries, the Guidelines also emphasize that governments should ensure that they meet carbon emission and environmental protection standards in the process.

Details of the Guidelines’ policy recommendations are as follows:

Optimize comparative advantages

When guiding the transfer of manufacturing industries, the Guidelines state that each region should consider how best to optimize its comparative advantages. Specifically, the central region should concentrate on emerging industries, energy and raw material bases, equipment manufacturing, and high-tech; the west should develop chemicals, resource-intensive processing, new materials, light industry, and high-tech; and the northeast should focus on upgrading high-end equipment and aviation industries.

Foster innovation in cities

In addition to advancing regional comparative advantages, governments should pay special attention to developing the capacity of key cities and urban areas to optimize industrial chains, per the Guidelines. Governments should promote more technologically advanced industries to move into the leading cities of these regions, such as provincial capitals. The Guidelines further encourage governments to coordinate the development of urban agglomerations and city clusters to divide labor efficiently, build industrial development platforms, and consolidate regional logistics bases, among other areas of cooperation.

Encourage international cooperation

Another directive of the Guidelines is to accelerate internationalization and attract foreign investment. This will be done though optimizing the Negative List system, improving Pilot Free Trade Zones, and other efforts to create a supportive environment for foreign investment.

The Guidelines also direct governments to increase international linkages by promoting border connectivity, participating in overseas economic and trade cooperation zones, joining with foreign countries to operate industrial parks, and encouraging participation with Belt and Road Initiative countries.

Establish and improve systems to support industrial transfer, adopt best practices of the eastern region

The Guidelines contain multiple measures about improving systems and mechanisms to facilitate industrial transfer. These include directives to establish a competitive industrial supply chain ecosystem and encourage the establishment of R&D and financial centers.

Further, the Guidelines emphasize the importance of applying the strengths of the eastern region to expedite development of the central, west, and northeast. These can be done by transferring technology, talent, and financial resources, such as through benefit sharing mechanisms, joint demonstration zones, and partnerships between R&D institutions.

Improve policy environment

Finally, the Guidelines call for a supportive environment to encourage domestic and foreign investment in the central, west, and northeast’s manufacturing sectors. Specific policies include revising the Catalogue of Industries for Encouraging Foreign Investment, and implementing the Catalogue of Encouraged Industries in the Western Regions and the Catalogue for Guiding Industry Restructuring. The Guidelines also call for governments to establish funds to support industrial transfers, improve transportation and logistics infrastructure, and upgrade skills training.

Need for more details, see policies in practice

Industrial transfer to China’s interior regions cannot happen immediately, as it necessitates work on issues of labor availability, infrastructure, and international connectivity. The Guidelines thus indicate the Chinese government’s efforts to offer policy solutions to make the less developed central, western, and northeastern provinces more competitive.

Unfortunately, while the Guidelines contain a long list of directives for local governments to undertake, they lack details and specificities about their implementation. It will be up to local governments, in collaboration with relevant ministries, to interpret these directives and form concrete policies to implement them in practice.

The Chinese government’s attempts to transfer manufacturing to less developed regions, especially in the interior, are not new. The government has been encouraging investment in the interior for years, including through the “Go West” policy of the early 2000s, which saw middling results.

In the past, the government introduced incentives like tax cuts and fee reductions to attract investments to these regions, offering precedent for how the Guidelines may be implemented. Yet, the mixed results of previous efforts also show that industrial transfer cannot be directed from above, as businesses must find the underlying market logic to make the shift.

Strengthening the economic competitiveness of China’s interior regions

As labor-intensive industries gradually leave their traditional hubs in the east, the rest of China will find itself competing with countries in South and Southeast Asia, like Vietnam, Indonesia, and India, for investment. Amid rising labor and land costs in China, foreign investors in manufacturing who have traditionally operated in the country’s developed eastern regions, like Guangdong, Zhejiang, and Jiangsu, are increasingly considering relocating part of their operations.

Nevertheless, the east coast’s advanced labor markets, high quality infrastructure, international connectivity, and proximity to robust consumer markets continue to make it the most efficient option for many businesses. Moreover, manufacturing in the east is not disappearing, but transitioning to advanced, high-tech manufacturing.

In this sense, the Guidelines do not represent a strict transfer of manufacturing, but a rebalancing of different types of manufacturing. Foreign investors in Asia should therefore consider what region offers the most conducive environment for their business and industry focus, whether it be in China’s east coast, inland regions, or further afield in South and Southeast Asia.

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