Economy

So provincial

You can’t understand China unless you understand its provinces

There are countless books offering to explain China to outsiders. But few will have involved the grunt work of Tom Carter, who spent two years on the road visiting all of China’s provinces, and took photos of what he encountered.

The result is China, a Portrait of a People. “The cultural distance between China and the West remains vast,” Carter warns in the introduction. “For all its attractions and headline-making news, China is still relatively unknown to Westerners.”

Of course, photos have their limits. For those looking for more detail, another way to get a handle on the Middle Kingdom is to read HSBC’s new ‘Guide to China’. As popular financial blog Zerohedge.com put it: “[it’s] arguably the most comprehensive summary of the country that conventional wisdom sees as becoming the world’s biggest economy within a decade, and less than conventional wisdom sees as the biggest bubble in the history of the world.”

Guide to China’s authors make it clear at the outset that there are no quick and easy answers to questions about the country: “What emerges from this guide is a more complex picture of China than even many experts have assumed.”

Instead the guide tells the story of a country where the writ of officials in the capital is tempered by “local governments [empowered] with unprecedented economic authority.”

To be clear, the report is bullish about China’s near-term prospects (if somewhat qualified). It argues that “sizzling growth should continue for at least another five years,” powered by provincial governments’ own “far more ambitious plans for the expansion of their rail networks and clean energy activities than those stipulated by national targets.”

The authors remind readers that that although “ten years ago… China still largely resembled a union of African countries”, in another decade it will have six provinces boasting GDP of more than $1 trillion (each comparable to Canada; see map above for other comparisons). It also talks about high-tech IPOs in Zhongguancun, ‘Beijing’s Silicon Valley’ (there have been 35 so far this year). And it lauds the seemingly unstoppable rise of manufacturing on the Yangtze River Delta (Jiangsu is expected to overtake Guangdong as the country’s largest provincial economy by 2012). The cities of Chongqing and Kunshan (in Jiangsu) combined could also soon have enough capacity to make 80% of the world’s laptops.

There’s also some helpful advice about China’s burgeoning luxury goods market. Although many might associate ‘first-tier’ cities like Beijing and Shanghai with the new wealth created in China, it’s the Inner Mongolian city of Erdos that’s expected to overtake Hong Kong’s per capita GDP in only three years time. The city’s wealth (built largely on coal reserves) has made it “China’s luxury car capital with more Rolls-Royce, Ferrari, Jaguar and Mercedes-Benz cars per capita than any other city”.

At the same time, the report offers more than a hint of caution. It warns that, far from being coordinated “these growth ambitions have increased inter-regional competition”. The authors worry that the flood of investment in the country could lead to further overcapacity and bad debt. It cites State Council fears that the Wuhan-Guangzhou bullet train will not be able to pay off its loans as a prime example.

It also touches on a theme that WiC has raised repeatedly: tensions between central and local governments. Just how much the leaders in Beijing rely on cooperation from local officials is apparent, it says, in their response to concerns over soaring property prices. “Beijing launched its fierce crackdown on property speculation in April,” the report points out “and yet eight months on, not only have prices barely moved downwards, volumes actually rose again in September and October. Not a single city has rolled out the much expected property tax.” It argues that attempts to consolidate the iron, steel and rare earth industries have faced similar resistance.

On the other hand, when the local authorities share the same goals as their masters in the capital, projects “can be accomplished with superb efficiency and speed.” The report cites China’s multi-trillion stimulus package and subsequent recovery from recession last year as a case in point.

The difficulty of getting provincial officials on board is something well understood by the leadership, it says, and is part of the reason why the next generation of leaders (like Xi Jinping and Li Keqiang) have spent a significant part of their careers as provincial bosses. To that end, the report notes that: “[a] large-scale campaign is underway, making local postings for promising new leaders mandatory.”

The overriding message to take away from HSBC’s China guide: “For anyone hoping to conclude a business deal in China… don’t assume you only have to deal with decision-makers in Beijing. You must also make sure local officials are on your side.”

Yes, it’s 244 pages. But worth the reading time as a good way to understand more about the country, province-by-province, city-by-city. Contact us if you’d like a copy.


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