Journey to the West

Is the dynamo of China’s current growth its western interior?

Journey to the West

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Calls to Go West have often bounced around the world’s more flamboyant discotheques, courtesy of the Village People and, more recently, the Pet Shop Boys.

But the phrase has its origins in 19th century US history, and the view that westward expansion across the American continent would spur a new era of growth and opportunity.

This interpretation, rather than its more exotic musical cousin, would have been the one stirring Zhu Rongji to make a similar plea on behalf of China’s western frontier almost 10 years ago. Zhu, then the Chinese premier, oversaw the launch of the grandly titled Great Western Development Strategy, which aimed to narrow the income disparities between the country’s western landmass and its coastal provinces.

Almost 10 years on and some in the media believe the west’s time has finally come, with a spate of articles now noting that the interior provinces are outperforming their richer coastal brethren in the east. One such piece has Xinhua leading off with the headline: “China’s economic growth shows a new pattern: cool in the east and warm in the west.”

The statistics offer some evidence for this view. Nine provinces in the western and central regions posted double-digit growth in the first quarter, observes the South China Morning Post. Guizhou was the country’s fastest growing province with its GDP surging 15.9%.

On the contrary, the previously fast growing – and export-dependent – provinces in the east have slipped to the bottom of the GDP growth rankings. Guangdong and Zhejiang, for example, ranked 26th and 29th respectively.

In a recent research report, HSBC economist Qu Hongbin opines: “The latest economic data supports our conclusion that the inland provinces are likely to lead the growth recovery this year.” Qu visited major cities in Shaanxi, Hubei and Hunan and found that consumer spending was growing by almost 20% year-on-year.

When Qu asked why this was, local HSBC managers explained that the inland economy was much less dependent on exports. Ergo the global crisis was having a smaller impact on wage growth and employment (and hence consumer confidence). Likewise consumer confidence had also held up better inland, largely thanks to the property market. In the coastal cities property prices have been extremely volatile, and as house prices fell consumers experienced a negative wealth effect that dragged down spending. No such thing had occurred in the inland provinces – if only because property prices had not gone up much in the first place.

But as Qu also point out, a lot of the credit for the west’s performance has to go to the government’s $586 billion stimulus package – a large proportion of which has been skewed to the inland provinces. In fact, Sichuan – which was hit by last year’s earthquake – is slated to receive about $140 billion in stimulus-related spending.

The poster child for the west’s ambitions is the Chengdu-Chongqing Economic Zone, which is one of the nation’s most densely populated areas (it will hit 108 million in the next decade) and straddles Sichuan.

Infrastructure spending here is off the charts. Around 2,656km of railtrack is under construction and is expected to be complete by 2012. Additionally, 2,782km of roads are being built. “At present the Chengdu-Chongqing Economic Zone accounts for about 5% of the national economy,” says Yang Qingyu, the director of the Chongqing Municipal Development and Reform Commission. “By 2020 it is expected that it will be 8%, with the zone reaching a GDP of Rmb5.5 trillion.”

The west, of course, is not a homogenous region. But its six provinces, five autonomous regions and single municipality makes up 70% of China’s landmass. The South China Morning Post writes that traditionally it has been viewed as the “poor inland cousin”. However, in its recent outpacing of the coast it sets “a precedent not seen since China adopted its open-door policy in 1978,” observes the newspaper.

But we should be wary of getting too carried away. Yes, the west’s recent performance has been stellar, but in absolute terms it still lags the coast dramatically. And statistics can be deceptive. A 15.9% improvement in Guizhou’s economy would add Rmb9 billion to its GDP. Meanwhile Guangdong’s ‘depressed’ growth of 5.8% – as experienced in the first quarter – still adds Rmb44.5 billion to its own GDP (if annualised). So in absolute terms, the gap between Guizhou and Guandong will have got bigger by year’s end not smaller.

And what of foreign investors? They have been slower than the government would like to Go West. FDI was down 20% – on a national basis – for the first five months of this year. But in western China it was down by an even greater 30%. The country’s three major economic clusters – the Yangtze River Delta, the Pearl River Delta, and Beijing-Tianjin-Hebei – accounted for a dominant 90% of total foreign investment in the first quarter. Historically, the west has done well to pick up a 5% share.

Zhu himself thought it could take 20 to 30 years for the inland areas to catch up with the coastal provinces. The west’s current outperformance may shave a few years off this target, but it is still going to be a long haul. Government investment will have to play a disproportionate role too, especially if FDI rates fail to pick up.

But what is not in doubt: the west’s resilience is proving a welcome boon at a time when the other West (Europe and America) continues to post flagging demand.

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