to a friend.
Thomas L. Sims and Jonathan James Schiff
Cover by John Yanson
Thomas L. Sims
is commercial consul in the US Consulate General, Chengdu, Sichuan Province.
Jonathan James Schiff
(jonathanschiff@hotmail.com) runs an investment and consulting firm in western China.
China launches a plan to develop its western regions--but will it work?
US companies must look at the plan's high-technology
requirements: the engineering studies, the management, the high-tech systems for infrastructure projects, and the newer, better materials that are not yet available in China.
The area covered by the plan includes six provinces (Gansu, Guizhou, Qinghai, Shaanxi, Sichuan, and Yunnan), three autonomous regions (Ningxia, Tibet, and Xinjiang), and one province-level municipality (Chongqing). Inner Mongolia and Guangxi Zhuang Autonomous Region may also be included, as exactly which areas comprise "the west" and thus will fall under the plan is still under discussion (see Map).
The movement to open th e west is not new. Within the last 60 years alone there have been two major efforts to transform it. The first was the movement of the Nationalist government to Chongqing during the war against Japan, which included the transportation of industries up the Yangzi River. Then, in the 1960s, fearing a Soviet attack, China relocated its critical defense industries to western China.
The latest effort aims to address, and alleviate, the tangible and intangible obstacles to development in western China. The tangible obstacles include poor infrastructure, minute levels of outside investment, an ailing environment (especially in Chengdu, Sichuan Province, and Chongqing Municipality), and a weaker education system than the rest of China. The key intangible obstacle that is holding back development is the business philosophy that underlies the region's economy. According to a key member of one province's planning commission, the western development strategy has been designed to introduce the people of western China to new ways of doing things. Another Chinese official noted that changing the way people think is crucial to the success of China's latest drive to develop its west.
The grand scheme
Chinese Premier Zhu Rongji laid out the major objectives of the plan at the March 2000 session of the National People's Congress. The strategy focuses on five areas:
- Infrastructure development The government will focus principally on expanding the region's highway network. The highway density in eastern China is 35.4 km per 100 km2, while the density for western China is only 7.1 km per 100 km2. The plan also calls for building more railway track, airports, and gas trunk pipelines. Electric power grids and telecommunications, radio, and television facilities will be expanded, as will support infrastructure in large and medium-sized cities. The plan also calls for "rational" exploitation of water resources and water conservation in general.
- The environment The strategy encourages projects to protect natural forests along the upper reaches of the Yangzi River and the upper and middle reaches of the Yellow River. Terraced fields on steep slopes (more than 25 percent grade) should be returned to forests or pastures. Water conservancy efforts will also include improving the biological environment, constructing efficient irrigation systems, using water resources efficiently, and implementing cross-valley water-supply projects. According to China Economic Information, the gross water-resource reserves and exploitable water resources in China's southwest make up 70 percent and 77 percent, respectively, of the country's total.
- Local industry Rather than forcing a "cookie-cutter" approach to development, the government is encouraging different regions to develop industries that maximize local comparative advantages in geography, climate, resources, and other conditions. Where possible, these regions are also urged to capitalize on high- and new-technology industries.
- Science, technology, and education The strategy states that regions should develop different levels of expertise in the workforce, as well as improve its overall quality. The strategy also recommends that the regions accelerate product development from scientific research.
- Investment environment The government hopes western provinces will take steps to attract more foreign investment, capital, technology, and managerial expertise by improving industrial structure and reforming state-owned enterprises (SOEs). The wealthier and more developed eastern and coastal provinces are also being asked to play a major role. Beijing expects them to develop new markets and bring advanced management and innovative production styles to less-developed western enterprises. In turn, the west will provide markets, energy, and a supply of raw and semi-finished materials that will contribute to the east's own economic restructuring.
Attracting investors
The central government's sponsorship of the strategy does not mean that all investment will come from Beijing. Regions will be responsible for finding investors for projects that conform to the plan's objectives. Beijing has given greater authority to local governments in western areas to suggest their own strategies. And the central government is helping in other ways. For instance, Beijing recently raised the provincial-level special economic zones of Changsha, Hunan Province; Chengdu, Sichuan Province; Guiyang, Guizhou Province; Hefei, Anhui Province; Kunming, Yunnan Province; Xi'an, Shaanxi Province; and Zhengzhou, Henan Province to national-level status, allowing them to offer more generous incentives to investors. All seven locations are viewed as strategically important to the development of China's interior.
At a May press conference, Director General Zhang Xiaoqiang of SDPC's Department of Foreign Investment outlined six policies to attract foreign investment into western China:
- The percentage of foreign preferential loans used towards western development will be increased from 60 to 70 percent. Chinese financial in stitutions will provide more loans to foreign-invested projects.
- The State Council has approved the Directory of Dominant Industries in the Middle and Western Region, which will encourage the efficient allocation of foreign funds invested in industrial sectors.
- Foreign-funded projects listed on the forthcoming Catalogue Guiding Foreign Investment in Industry will enjoy advantageous tax rates. For three years after the current preferential tax policy has ended, investors in these projects will enjoy an income tax rate as low as 15 percent. Enterprises with export volume exceeding 70 percent of total production may pay a rate as low as 10 percent.
- Beijing is relaxing its restrictions on where foreigners may invest. Foreign-funded retail firms, for example, may now establish operations in the provincial capitals of western China, and allowances for investment in telecommunications and insurance are expected to follow.
- The government has pledged to help overcome foreign-exchange related problems in preferential projects.
- Methods of commercial cooperation will be expanded to include build-operate-transfer projects, security financing, and others.
A chance for success
Previous efforts to develop the west have not succeeded. Why should this one be any different? While the chance of failure does exist, this strategy has the potential to succeed, for a number of reasons.
Perhaps most important, the present strategy concentrates more on market-opening economic theories than on political ideology. Indeed, the Great Western Development Strategy is proof of the central government's realization that to preserve social stability, the standards of living and economic conditions in western China must continually improve.
In addition, the plan of action that the government is adopting--namely to improve infrastructure and implement policies to attract investment--has proven successful in the east. Shenzhen, Guangdong Province, and Pudong, Shanghai, were both rural and relatively backward areas that have been transformed by such development strategies. However, they were also located next to economic powerhouses (Hong Kong and Shanghai), which is not the case for most of the west.
Finally, eastern China, most prominently Shanghai, is showing true commitment to funding the program. Shanghai has already signed 200 cooperative contracts with a total value of over RMB 10 billion ($1.21 billion). While the government is no doubt encouraging such assistance, the east does have some reasons of its own for wanting the west to develop. For instance, the environmental and ecological programs in the upper reaches of the Yangzi River will reduce flooding in the eastern provinces. Better infrastructure will allow the east to move its goods more easily to the west's 300 million consumers. And improvements in electrical grid distribution and the construction of more pipelines will directly benefit the east.
But for the plan to succeed, political and business leaders must acknowledge obstacles and deal with them objectively. Lower-level leaders who have closely administered their regions for decades will have to adopt a fresh approach. These individuals may either be too close to a situation to realize problems that an outsider can spot immediately, or, because of local conflicts, be unable to confront such problems. Whichever may be the case, the change in thought necessary for the successful implementation of the strategy calls for a detailed analysis to determine which solutions have and have not worked in China over the past 20 years.
Local leaders are already using the Great Western Development Strategy to justify their development plans. It is cited as the source for almost all new initiatives and programs in the west. Consequently, the central government is taking steps to ensure that local leaders do not initiate programs that are inconsistent with the strategy's goals. Such a situation would considerably damage the strategy and give rise to pess imism in the already wary international investment community. (It should be noted that the central government is trying to define its role largely as an overseer whose job is to maintain the master plan and ensure that development schemes fall within the parameters of the plan.)
Another obstacle is the lack of a published financing plan. Without such a plan, there is no way to identify which government body will be directly responsible for funding which projects. Support for some national-level projects will come from the central government, while a mix of provincial and national funds will support other projects. Support for still more projects will come from small townships and municipalities. In addition to government grants, some projects will be funded by private or semi-government funds, such as bank loans, equity financing, and bonds. In some cases, preferential financing will come from the government via preferential interest rates or repayment schedules. In other cases, SOEs will go to the market in an attempt to raise equity financing. Another possibility is that coastal provinces will help by providing special subsidies and establishing joint-ventures with western entities. And last, but not least, foreign investment will be eagerly sought to make up shortfalls.
Where's the beef?
American companies must consider where the real opportunities lie among these many projects. While t he total numbers sound impressive, it is too soon to tell whether real opportunities will be available to US firms. Many of these projects are in basic infrastructure development, an area in which Chinese firms have expertise. US companies, then, must look at the plan's high-technology requirements: the engineering studies, the management, the high-technology systems for infrastructure projects, and the newer, better materials that are not yet available in China.
Many Chinese companies are interested in obtaining foreign investment, particularly if they can obtain the investment with minimal restrictions on the product's local content. Likewise, they prefer to obtain technology with few restrictions on local production. However, technology-transfer and in-country content terms are increasingly open to negotiation, and US companies should not be shy in their approach to such discussions. Indeed, the Chinese are quite concerned over the competitive pressure from entry into the World Trade Organization (WTO), and they are increasingly willing to compromise to obtain access to critical technologies that will make them world-class competitors.
The rewards of patience
Premier Zhu has mentioned that this is to be a "long-term" program--one with a timeline of 20 or 30 years. This statement is likely an effort to make sure participants understand that the program will be around for some time and to give them an opportunity to get their individual programs into the plan. This is also a realistic assessment, as China cannot afford to do everything at once, and the rate at which projects are approved will depend upon financing.
The initial list of projects, those identified for implementation this year, are by and large extensions of existing programs that local governments have resubmitted under the plan. A number of local planning commissions have stated that first-year projects are, for the most part, those that have already received approval and begun construction. In one provi nce, officials simply gave out the 1999 list of investment projects and told prospective investors that any project that had not been completed would be automatically included in their Great Western Development Strategy list for 2000.
By practicing the virtues of determination, focus, and patience, China has a good chance of succeeding in developing its inland economy. The key will be whether officials are able to make an honest evaluation of both old and new business and development methods. China must combine the successful practices of the past with innovative techniques of the future. Many people may discover that when looking forward, it is not wise to leave behind the lessons learned.
Chongqing Municipality
Guizhou Province
Sichuan Province
Tibet Autonomous Region 
Population: 2.21 million Yunnan Province
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Population: 31 million
Population: 36.6 million
Area: 485,000 km2 
Population: 41.4 million