China’s west puts itself on the map

cities in West China like Xi’an are the ones that have quietly become powerhouses, and the effects of their transformation are rippling across the country’s economy.

31 de mayo de 2018

Chinese cities like Shanghai and Beijing are household names the world over, having risen to fame as central players during the country’s economic ascent.

Xi’an is a far less familiar city to most, despite being home to over 12 million people, nearly a third more than New York City. But cities in West China like Xi’an are the ones that have quietly become powerhouses, and the effects of their transformation are rippling across the country’s economy.

Xi’an, the entry point of the ancient Silk Road, is reclaiming its former glory, having become an important node in logistics. Last year, the city imports and export increased 39.1 percent from a year earlier. It recorded 254.5 billion yuan (US$ 40.42 billion) in total imports and exports.

Chinese ecommerce giant has invested 20.5 billion yuan to set up global logistics headquarters there, including the world’s first unmanned intelligent distribution station.

“Western cities, playing catch-up, have been gaining fast even though it was coastal cities like Shanghai and Shenzhen which were among the first selected for economic development zones, modern infrastructure, and opening up to foreign investment when China started opening up in the early 80s,” says Warner Brown, Associate Director of Research, JLL China.

Take Tianfu Park in Chengdu. While it may not be quite in the same league as Beijing’s famed Zhongguancun,which is home to heavy-hitters such as Xiaomi and Didi Chuxing, it recently announced that 11 start-ups located at the park are potential unicorns, along with a further 20 in the wider city.

Chongqing has the honour of being named the world’s fastest growing city, home to more than 30 million people in 2017. Last year, growth slowed to 9.3 percent  after 15 years of double-digit increases.

Going west

The effort to westernize the country’s economy has been going on for nearly two decades.

The national government waged campaigns such as ‘Develop the West’ launched in 1999 and ‘The Rise of Central China Plan’ in 2004 drew investment, especially to the manufacturing and heavy industries, which helped close the infrastructure gap.

Massive funding and incentives gave western cities a leg up in the 2000s, leading to annual average economic growth of 10.7 percent. For instance, foreign-invested enterprises (FIEs) in government-supported industries received a reduced income tax rate of 15 percent for the first three years after any existing tax break ends, while businesses in ethnic minority areas were privy to reduced income tax or be exempted altogether, as part of Great Western Development Strategy (GWDS).

“The biggest industries in Western cities tend to be heavier and lower on the value chain – they are a mix of automotive manufacturing, food processing, equipment manufacturing, building materials, consumer goods, among others,” adds Brown. “They dominate due to pro-industrial policies and have provided a foundation and solid growth for Western cities which are looking to expand into  more advanced industries or doing traditional ones in new ways, for example through automation.”

Natural advantages

The Belt Road Initiative, announced in 2013 and aimed at creating a modern Silk Road linking China to Eurasia and Africa, has given its western cities a boost based on their proximity to the routes.

And with China moving up the value chain, moving away from basic manufacturing to digitize the economy, these western cities are developing higher-value industries like advanced manufacturing, tourism, new energy, cloud-computing and e-commerce, which is helping to drive their competitiveness, according to JLL’s China Cities Go Global report.

There are benefits to being further down the developmental ladder, too. “Their low costs are attractive for firms looking to relocate operations from increasingly expensive coastal cities. These cities still have the strongest labour pools in West China. They will be the first ports of call for any firms looking to invest there. In addition, the big Western cities are relatively more generous with incentives to attract major investments, including allotments of land, subsidies for utilities and other tax incentives,” says Brown.

In particular, Chengdu stands out for successfully promoting its location and economic advantages to attract talent and high-tech companies to venture out to China’s western regions. The city’s malls in the business district boast almost 600 regional flagship stores. It’s also helped by its history of research and development, as well as lifestyle factors such as its world famous cuisine, leading to “a virtuous cycle of investment and image-building”, as Brown points out.

Looking to the future

For all their development, China’s western cities continue to face an uphill task in battling issues like battling pollution and brain drain.

“Reversing the outflow of talent is one of the most important issues that China’s western cities need to address. Talent still flock to coastal cities for higher wages and the perception of better opportunities,” says Brown.

He also cautions that these cities could be overly reliant on state-led investment and state-owned enterprises to propel their economies. It was reported the Chinese government has invested 6.35 trillion yuan (US$914 billion) in 300 major projects, mainly in infrastructure and energy, in western regions: In 2016 alone, 743.8 billion yuan (US$117.14 billion) was spent on 30 major initiatives.

Yet Brown is optimistic about their prospects. These cities have a reputation for being more laidback and affordable, promising a better quality of life – to become China versions of successful medium-sized American cities with their own appeal like Denver and Austin. Western Chinese cities are also enacting policies to make it easier to acquire local residence and start companies.

“Chengdu, Xian and Chongqing are known as better cities for their quality of life compared to coastal cities,” he says. “There is potential to capture educated workers who are interested in work-life balance and building careers in cities that are relatively affordable while still being pleasant to live in.”