China’s wild west: Investors nervous about slower growth in China need to look deeper — into the hinterland. China’s interior is growing fast, and in a more balanced way than the richer coastal areas.
China’s west contains 70 per cent of its land mass, 30 per cent of its population, but just 20 per cent of its total economic output. Per capita GDP in the mega-city of Chongqing, which has a population of 27 million, was $3,500 in 2009, versus $10,500 in Shanghai. That leaves plenty of room for catch-up. Chongqing grew its GDP by 16 per cent in the first quarter, above the national average. This month’s successful trade fair shows how cheap labour is attracting multinationals and investment. Investment is a main contributor to growth. Infrastructure spending in western China increased 22 per cent a year from 2004 to 2008, outpacing that of the east, according to brokerage CICC. Admittedly, local governments have used bank credit to fund projects. But, at least they are getting richer. Chongqing’s fiscal revenues were 76 per cent higher in the first quarter of 2011 than a year earlier, while fiscal expenses rose a more modest 47 per cent.
As infrastructure improves, multinationals like Intel are shifting production lines westward. Foreign direct investment was more than double in Chongqing in the first quarter compared to a year earlier, versus a 9 per cent increase in the southern manufacturing hub of Guangdong. Japanese laptop manufacturers hit by the recent earthquake may move factories to Chongqing, which is courting them with a new direct flight and longer visas.
A relative lack of exports, once a hindrance, now looks a blessing. Traditionally, growth in coastal regions was boosted by exports, leaving the interior behind. With external demand growth peaking, domestic consumption is now the country’s goal. Retail sales rose 20 per cent in Chongqing in 2010, higher than the national average of 16 per cent. Even luxury brands like LVMH and Tiffany’s are opening stores there.
Meanwhile, relative neglect by the state-owned sector means credit can flow more freely to entrepreneurs and smaller services companies. The private sector makes up more than half of the GDP in western provinces like Sichuan and Shaanxi, versus just a third in Shanghai. The west's crouching tigers look like the country's next growth engine.
