Strategy

China’s “Go West” Policy Spawns Economic Powerhouse

The Communist Party has poured infrastructure spending into the inland regions that had up until then been largely left out of China’s economic mir...
Ted C. FishmanNovember 27, 2012

China’s 18th Party Congress wrapped up on November 15.  No press was allowed to report on any of the inner workings or discussions during the Congress.  That’s business as usual.  The Chinese security apparatus seemed just as nervous that something would get in the Congress as would get out.

When Hu Jintao, the outgoing President, and the new President, Xi Jinping, addressed the delegates, they warned the nation not to be soft on corruption.  Hu cautioned that corruption has nearly run so rampant that it threatens the legitimacy of the Party and the stability of the state.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

The worries come at a crucial time for China and the world.  The country’s rate of GDP growth, now around 7.5%, is markedly lower than the nine-plus percentage point boosts that were commonplace during the past two decades.  Economic planners in China and abroad worry whether the country can achieve middle-income status in the near future, or at all. 

One reason corruption is now such a big issue in China is that growth is relatively slow.  What’s more, the country’s prosperity seems to be receding into something like a zero-sum game.

China’s wealth gap is troublingly high.  The country’s Gini coefficient, a standard measurement of economic inequality, is a high 0.44 (on a 0 to 1 scale in which 1 is a country where all the wealth is controlled by one person), a number that puts the country in the worrisome zone for social unrest.  

The biggest driver of the wealth gap in China since the early 1990s had been the geographic divide in the country between the powerhouse eastern coastal cities and the rest of the country.   Lately, however, Chinese citizens commonly complain that corruption among officials, their families, and an economic elitepropels the wealth gap. 

The Communist Party and its social planners have expected strong public discontent over the imbalance of economic growth for some time.  They have also created a grand strategy to ameliorate, in part, the economic imbalances tied to geography.  It is the so-called Go West strategy, which, beginning in 2001, poured infrastructure spending into the inland regions that had up until then been largely left out of China’s economic miracle. 

As of the end of 2011, the Chinese government had spent close to $325 billion on physical infrastructure improvements to literally pave the way for industrial development and intense urbanization.  Where huge funds in China flow, corrupt officials wallow in money, and the Go West initiative has had plenty of scandal. 

The high-speed railway leading to Lhasa, Tibet, was compromised because officials used cheap concrete that was not up to specifications.  The infamous former mayor of Chongqing, Bo Xilai, is said to have siphoned off a huge fortune while modernizing that city.  He is now implicated in a number of scandals including the murder, by his wife, of an English business partner. 

Even so, the Go West developmentswhatever their, um, inefficiencieshave nevertheless been a mighty contributor to new economic growth in the once overlooked regions.  One poster child for success is Chengdu, the remarkably orderly and glistening city of 10 million people that is the capital of Sichuan Province. 

An Economic Powerhouse
The province has a total population of 90 million.  Chengdu has grown into the kind of economic powerhouse that amazed visitors to Eastern China in the 1990s and early 2000s.  It is credibly replaying the game of Guangzhou and Shanghai, in which those cities woke up after market reform and became world-beating economic engines for all of China.

While China as a whole is going slower, Chengdu streams on ahead.  Aside from government money and foreign investment, the metro region has also received a huge boost from an unprecedented privatization of farmland.  Nearly all land in China is owned by the state, but farmers around Chengdu have been part of an experiment in privatization.  

Giving farmers the land they sowed also gave farmers real assets to fund their sowing. They quickly learned to borrow against their land, buy property in the city, and pool their money into investment funds.   That has fed the local banking industry, pushed construction, and helped finance local industries. 

In 2011 the regional GDP growth hovered around 15%, and farm incomes were up by the same amount.  This is not a small local phenomenon; it is a big local phenomenon.  Sichuan Province alone has a population just under one-third that of the United States and one-quarter that of Europe.

With a building boom under way, and the charms of older Chengdu (which also includes lots of shoddy Communist-era buildings) are yielding to the angularity of a modernist skyscraping metropolis. When I first visited the city in 2004, there were already some outposts of big multinational companies, including Intel, Motorola, Ericsson, D-Link, Siemens, Alcatel, Mitsui & Co., and Fuji Heavy Industries. 

Few of those were engaged in heavy manufacturing in the city; most were there for software development.  Before Chengdu benefited from the Go West infrastructure spending, multinational companies produced mostly what they could move out of the city electronically. 

Costs of talent were low, even by Chinese standards, and the workforce, drawn from local engineering schools, abundant. Chengdu’s ambitious growth plans call for development and redevelopment of huge swaths of land around the city officially labeled the Tianfu New Area.  City planners foresee different clusters for light and heavy industry taking root in parcels reserved for them  

One area, the Tianfu Software Park, is already well built and growing. As of the end of last year the city overall counted 1,000 software companies with 150,000 employees, the lion’s share of whom are in the new buildings in the Software Park.  Interestingly, although China does not yet have a strong reputation for creative industries that appeal to global tastes, Chengdu has managed to become a Chinese hub for electronic gaming studios, such as Shanda Interactive, Take-Two Interactive, and Ubisoft, which employ hundreds of game developers to produce for the world market. 

It is tempting to see China as a monolith, and the macro-oriented coverage of the country encourages that view.  One must look at China’s statistics overall, keep its corruption in sight, and track with its new national leadership.  But the stories of cities and regions away from the center warrant a close look, too.  Chengdu, and other cities on the make possess some of the most vital local but largeeconomies in the world today.  

Ted C. Fishman is the author of China, Inc., How the Rise of the Next Superpower Challenges America and the World and Shock of Gray. A former floor trader and member of the Chicago Mercantile Exchange, he ran his own futures and options trading firm.  He was the keynote speaker on China and global demographic change at the CFO Playbook for Private Companies conference in Miami last month.