Galloping FDI

 

Foreign direct investment in the interior regions by multinationals and others has also picked up, according to statistics.

FDI in Chongqing increased by 66 percent from $6.34 billion (5 billion euros) in 2010 to $10.52 billion last year whereas in Guangdong the increase was a mere 7 percent from $20.26 billion to $21.79 billion over the same period.

"Foreign companies seem to be targeting particular areas and pinpointing where it is best for them to go inland, " Liu says.

Sander van't Noordende, group chief executive of Accenture Management Consulting, on a visit to the company's Beijing offices in the World Financial Center, says China's fast-growing regions are of interest to multinationals as a result of a scramble for signs of life anywhere in the global economy.

"Everyone in business, particularly these days, is looking for growth. If you are in Europe these days, it is not a pretty picture. North America is somewhat better but clearly all clients I speak to are looking to invest or get a bigger percentage of their business from emerging markets. That is almost a universal objective."

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He says there are obvious attractions of moving into China's new emerging regions, but also pitfalls.

"If you want to focus on more mature parts of China, the competition will be intense, and every position has been taken," he says.

"But if you go to the high-growth areas, which might be second-tier cities, it might be more complicated in terms of how to do business. It is certainly not immediately straightforward."

Changsha experiment

One place that has been in the news recently has been Changsha, in Hunan province, now basking in the steamy heat of its summer with temperatures in the high 30s.

With growth that run well into double digits, it has been reported the local government has plans to invest 829 billion yuan in an airport extension, roads and other infrastructure projects.

The scale of investment - which the local government denies is that big - has drawn comparison with the 2008 economic stimulus package, being a fifth of what was spent for the entire country in the wake of the financial crisis on just one city with a population of 7 million.

Liu at the EIU says that such an investment level may be difficult for the local economy to soak up.

"It is something like 150 percent of the GDP of the local economy. I think we saw with the stimulus package there was too much liquidity created that was difficult to absorb. It is probably not sustainable or healthy for the long term," she says.

However, Changsha could not now be better situated to develop. It is a hub on the new 313-km/h Beijing to Hong Kong high-speed rail link.

It is already connected to Shenzhen with a travel time of three hours, and when the Beijing section opens in December, the travel time to the capital will be just six hours.

Yet some local people in Changsha remain disconnected with their fast-growing local economy.

Lei Lei, 41, a housewife shopping in Heiwado, one of the city's bright new shopping malls, with her son Yu Zhenghang, 7, says the high growth rate creates a distorted picture.

"You cannot just take GDP as a measure of development. A lot of what is happening does not address, for example, the housing needs of people. The local provision is still pretty poor," she says.

She welcomes investment in transport and other infrastructure but she says it doesn't alleviate many of the stresses of daily life.

"My main concern is not getting sick because if I get sick there is no one to take care of my child. I don't have the money for the costs of the medicine and I can't afford health insurance either."

Many small business owners have seen the benefits of fast growth, however. Wen Haitao, 39, runs the Dr Wen Vet Clinic of Changsha City, based in the Tianxin district.

He started the business 19 years ago but says turnover has doubled in recent years.

"It has become quite an exciting place. My client base has also changed. I have a lot of foreign customers from Russia, Japan, South Korea and the United States. One difference is they bring in a lot of cats. Chinese people tend to have just dogs," he says.

Qui Qingchun, 44, who runs a body therapy business, Fange Biology Co, which employs 10 people, says the growing middle class in the city has made it possible for businesses such as his to exist. Treatments start at 1,000 yuan.

"It would not have been possible to operate a business like this just a few years ago. Similar businesses to mine are now doing well, however," he says.

Guiyang overdrive

Back in Guiyang, there are major efforts to turn the city into a regional financial center.

Jack Xiao, president of Roomax Consulting, based in Guangzhou, has been hired to market the newly constructed financial district, which became open for business this year.

Bank of China has already agreed to buy a 200-meter-tall tower and 13 other financial institutions, including another leading State-owned bank ICBC, have signed agreements to occupy space.

"The leading banks increasingly see Guiyang as a place to have a regional headquarters and to serve even the west of China from here. We are looking also to market the center to financial institutions from the US and Europe later this year," he says.

The potential of the city has certainly been spotted by some of China's traditionally savvy coastal business people.

Investors from Zhejiang and Jiangsu provinces, home to many of China's richest entrepreneurs, are behind the new Guiyang Southwest International Trade City, a vast 10-sq-km wholesale market that will have 36,000 outlets.

"We saw an opportunity here after in-depth research because there was such a coordinated facility here," says Wang Luobao, the 48-year-old vice-general manager from his base in the Renaissance Hotel in the city.

"What we are creating will be one-stop shop for goods not just from the region but from all over China."

Business potential

A report by Boston Consulting Group, Big Prizes in Small Places, China's Rapidly Multiplying Pockets of Growth, highlights the business potential of China's inner regions.

It forecasts the number of middle class and affluent consumers in China that will come from third-tier cities, which predominate in these areas, will more than treble from 27 million households in 2010 to 92 million in 2020.

Waldemar Jap, partner and managing director of BCG, based in Hong Kong, says there is a tendency to see people from inner China as peasants with little spending power.

"Many of them are, in fact, relatively rich since these areas have relatively high per capita incomes. It has to be remembered that many of these inner provinces are not that far from the coastal provinces," he says.

"What we are telling our clients is that they are going to be a battlefield and a very significant growth driver over the next five years. In some ways they hold the key to the billion consumer market that everyone has been talking about for years."

A major question is for how long the marked disparity in growth between the coastal and developing inland regions will continue.

"I think it is quite likely to continue for 10 years or so," says Liu at the EIU.

"A lot of the growth is being driven by investment but this will not continue forever and for them to continue to grow more fundamental factors such as labor productivity and market reform will have to be addressed."

For now, however, we will all have to get used to a two-speed China.

(China Daily 08/24/2012 page1)