Sunday, 5 May 2013

Doing business in China, Part 1: Focusing on developing the interior

At over 9.6 million square kilometres, China is the world’s second largest country by land area behind only Russia. Unsurprisingly it also has the highest numbers of imports and exports of any other nation. Traditionally concentrated near the eastern coast, the Chinese economy has grown frighteningly fast. But as Beijing begins critical reforms to spread growth more evenly, the best places to conduct business in China might just be the historically neglected interior.

A useful way to look at the geography of China is as an island. Not in a classical sense of being surrounded by water, and it might seem strange to consider the country as an island when it is enclosed by mountains, deserts, and dense forests. But to understand China is to comprehend that the centre of Chinese geographic and demographic gravity is towards the eastern seaboard. This characteristic has defined China for centuries.

Modern China can be divided into two broad sections: the Chinese heartland and the non-Chinese regions which border it. Most of what the world regards as “Chinese”, the ethnic Han, live south and east of the country closer to the coast. This critical Chinese heartland stretches in an elongated triangle of sorts from Beijing in the north to Chengdu in the west; and from Shanghai near the eastern coast and Hong Kong in the south. The rest of China’s lands are sparsely populated by ethnic peoples Beijing has politically integrated in the modern era, but whom China has struggled to control in the past.

Chinese historians call the arbitrary line separating the more disperse western regions from the more concentrated east the 15-inch Isohyet. One side of this line receives more than 38 centimetres of rain each year while the other side receives far less. Because of this, the distinguishing feature of the Chinese heartland is its favourable agricultural attributes. Humans will naturally congregate around areas where food and water are in abundance, and the Chinese are no different. Even though the eastern seaboard boasts almost all of China’s arable land, China as a country has only one-third the arable land per person as the rest of the world. This particular geographic pressure has concentrated Beijing’s attention for many decades.

Of approximately 1.35 billion people, over 400 million people hug the wealthier, fertile coast while over 900 million people inhabit the western, less hospitable, regions. A further linguistic division can be made latitudinally where Mandarin is spoken in the heartland’s north near the crucial waterway of the Yellow River, while Cantonese is spoken in the south around the equally important Yangtze River.

Historically, the surrounding areas of China were the domain of nomads and horsemen and under only loose central Chinese control. Meanwhile, farmers and merchants dominate the heartland where today the bulk of Chinese economic activity occurs. The Pacific coast of China has many natural harbours facilitating an enormous amount of trade over the centuries, especially during the last two decades. Today, the coast remains both China’s greatest attribute when interacting economically with the world, and its greatest vulnerability.

Since the 19th century the coastal region has become extraordinarily wealthy and deeply intertwined with the global system. The interior has remained poor and largely isolated. Beijing tries to balance between the two regions but its interests are strictly in maintaining stability, which can lead to contradictory economic and political decisions. These decisions might not always make economic or fiscal sense, but they are necessary for the continuation of China’s ruling party.

If trends continue to suggest a declining competitive advantage in low-cost, export-oriented manufacturing in coastal industries, Beijing might have to reconsider the eastern coast’s historic role as the pivotal driver of Chinese economic growth. Because the more efficient China becomes as an exporter, the more of a hostage it becomes to its customers.

So in anticipation of declining economic success along the coast, Beijing is advancing plans to develop the Chinese interior to avoid snowballing migration into larger cities and encourage rural China to urbanise. This helps explains why China cannot be viewed as a single market. The country is made up of individual cities with differing characteristics and economic structures. And while the coastal regions continue to attract the bulk of foreign investment, many investors are beginning to notice Beijing’s emphasis on developing the Chinese interior.

A major obstacle Beijing wishes to avoid is the social, political, and economic pressures caused by migration to the larger cities. Rivers in China, especially the Yangtze River, will be of critical importance for Beijing’s plans. This long corridor of industrial zones from Chongqing to Shanghai is already becoming a significant area for investment, development, and urbanisation. The river itself will act as a highway for goods and people, connecting the coast with the interior along a common, cheap water transport channel. Beijing will be bringing its considerable resources to bear in reintegrating and recentralising the interior as a way of assuaging any future economic strife.

If the central government can develop the Yangtze River sufficiently, essentially creating an extended ‘coast’ along the riverbanks, Beijing will take a huge step forward in unifying the Chinese economy. But it will be a big job. The Yangtze River meanders 6,418 kilometres through China from its source in the Tibetan Plateau touching 19 provinces on its way to the sea, not counting its many tributaries. The waterway is critical to the daily lives of more people than the populations of the United States and Russia combined.

The first phase of forcibly shifting the Chinese economic core inland will require urbanising the banks of the Yangtze River.  More so than the iconic Yellow River, the mighty Yangtze is central to Chinese power dividing the country into two basic geopolitical units: north and south. The Yangtze River is easily the world's busiest inland waterway for freight transport. In 2011 it carried 1.6 billion metric tons of goods, representing 40 percent of the nation's total inland waterborne cargo traffic, up 250 percent from 2004. Shanghai, rated as China’s best city for conducting business in 2012, sits at the mouth of the river serving as the final gateway to the rest of the world for goods manufactured further upstream.

Strengthening the Yangtze River will give Beijing a waterway as significant for further economic development as both the Mississippi and the Nile are for the United States and Egypt. After all, goods transport by road is roughly 30-35 times more expensive than transport by water, and rail is 3-3.5 times as expensive, meaning that cities without direct access to the Yangtze are inherently less viable as manufacturing and trade hubs.

The last decade has experienced dramatic increases in waterway freight traffic in some provinces along the Yangtze River corridor, such as Anhui (840 percent, to 364 million tons), Chongqing (640 percent, to 117 million tons) and Hunan (500 percent, to 179 million tons). By 2011, the nine provincial capitals sitting along the Yangtze boasted a combined gross domestic product of $1.17 trillion, up from $181 billion in 2001. This wealth is roughly comparable to the gross domestic products of South Korea and Mexico.

Along the banks of the Yangtze, Wuhan is already well-developed in terms of industry and urbanisation and is the flagship city for inland development projects. Many roads, waterways, and highways bring goods and people from inland cities such as Xian, Changsha, Kunming and Zhengzhou down to Wuhan's ports on their way to Shanghai. Wuhan especially serves to integrate China’s regions along the Yangtze giving Beijing the leverage it needs to extend control into the interior of China. Industrialising the Yangtze corridor where Wuhan and Chongqing are important stops reflect Beijing’s evolving economic interests spreading the potential for foreign investment into whole new lands.

The next decade will be just as important for China as the last. As Beijing looks to develop the interior regions along the strategic Yangtze River, going against the grain of Chinese history, millions of inland people will begin to see their lives change for the better as foreign direct investment in the provinces is encouraged by the central government. A rebalancing of growth towards rural sectors will be necessary to lift rural residents into the middle class.


Aarondennis said...

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Chinas economy

Thesmith said...

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