Critical Eye on Hefei

An inland city lures investors from the coast

by Adam Ross

A surge of foreign investment has driven growth in China's east coast for more than a decade. But as prime investment destinations become more crowded and more expensive, investors are steadily moving inland toward places like Hefei, capital of Anhui province. Compared to Shanghai and surrounding cities in Jiangsu and Zhejiang, Hefei offers lower labor costs, proximity to raw materials, and better access to China's inland markets. Investors are taking notice.

Strong local economy

Hefei's real GDP grew at a brisk 13.3 percent last year, fully two percent ahead of Anhui's already strong growth. Exports from Hefei rose 21.1 percent in 2003 and accounted for an eye-opening 59 percent of Anhui's total exports. Imports into Hefei, which jumped 50.8 percent, accounted for 42 percent of all imports into the province.

The Hefei metropolitan region is known nationwide as a production base for raw materials, energy resources, and household appliances. Maanshan Iron and Steel Co. Ltd., in eastern Anhui, is one of China's top 10 steel makers, reporting 2003 profits of more than ¥2.5 billion ($302.4 million). Hong Kong-listed Anhui Conch Cement Co. Ltd. is a large producer based in the nearby city of Wuhu. And Hefei Rongshida Group is one of the nation's largest electrical home appliance manufacturers.

A short walk through central Hefei reveals that stores are filled with national brands of clothing, appliances, and motorcycles—as well as shoppers. Local residents are clearly spending enough money to please consumer goods makers and to keep turnover brisk. Though Hefei retail centers are not yet comparable to those of Beijing and Shanghai, consumer markets are clearly developing quickly. The city is an example of China's growing inland markets, which are claiming larger shares of wealth and spending as China's economy continues to speed ahead.

Attracting investment

In addition to the strong economic base in Hefei, local government has stepped up efforts to attract outside investment. Officials are proud to note that recent investment promotion events held in Shanghai, Beijing, Guangdong, and elsewhere in China have helped woo manufacturers to Hefei. Hefei also rewards individuals and organizations that successfully bring investment into the city with cash. The provincial government has arranged trips to Japan and South Korea for local businesses seeking foreign partners. Local officials report that overall, new investors are most strongly swayed by Hefei's low labor costs compared to more-developed coastal regions.

Greater Hefei has two national-level economic development zones. The Economic and Technological Development Area, founded in 1993, is home to a range of heavy machinery and consumer goods manufacturers. The New- and High-Technology Industrial Development Zone, launched in 1997, focuses primarily on serving electrical appliance manufacturers.

Foreign investors with significant Hefei investments include ABB Inc., the Coca-Cola Co., Mitsubishi Heavy Industries Ltd., Sanyo Electric Co. Ltd., Unilever plc, and Uni-President Enterprises Corp.

Transport links and other difficulties

To support sustained economic growth, government at all levels will need to spend more on transportation infrastructure. There is currently no true highway between Hefei and Nanjing, the capital of neighboring Jiangsu. Since Nanjing is a major port for Hefei imports and exports, and the site of the closest international airport, it is an important link for foreign investors. Yet the 150-km trip can take a painful seven hours in traffic, and with no direct rail line between the cities, trains are no more convenient.

The railway situation should improve markedly in a few years, as construction moves forward on the Nanjing-Xi'an railroad. The two-track Nanjing-Hefei section of this line, which is targeted for completion by 2007, will reduce rail travel times between the cities to as little as 45 minutes.

Most foreign trade into and out of Hefei is processed through Shanghai or Nanjing. Foreign manufacturers in Hefei report customs disputes with officials in Shanghai, who tend to treat Hefei-based manufacturers as lower priority than Shanghai-based producers. Companies tend to have fewer problems when filing customs registrations in Hefei itself, but these kinds of procedural issues, common throughout inland China, remain a concern for foreign investors.

Hefei and the Yangzi River Delta

Hefei would like to reap the benefits of Yangzi River Delta (YRD) growth as much as possible, but it is really only a satellite city in the region. At nearly 500 km from Shanghai (about the distance from New York City to Buffalo), the trip is not a viable commute. With such geographical limitations, government and industry leaders view the YRD primarily as a downstream market for local goods and a continuing source of investment into Hefei.

Perhaps equally important to firms already set up in the YRD, Hefei is establishing itself as a major gateway to the 64 million people of Anhui—and to other inland locales. Present cost and geographical fundamentals support such a role, and Hefei's rich history as an economic and political center also bodes well. With continued government support, especially in boosting transportation infrastructure and in fostering free-market conditions, Hefei will become increasingly visible as a hub in the heart of China.

Hefei and Anhui Economic Indicators, 2003
	Hefei		Anhui
	Amount	% change over 2002	Amount	% change over 2002	Hefei as % of Anhui
Population	4.57 million		64.1 million		7.1
Real GDP	¥47.78 billion	+13.3%	¥397.32 billion	+11.3%	12.0
Exports	$1.82 billion	+21.1%	$3.06 billion	+24.9%	59.5
Imports	$1.20 billion	+50.8%	$2.88 billion	+66.5%	41.7
Source: Hefei Municipal Government and Anhui Council for the Promotion of International Trade

Hefei Infrastructure Spending, 2003
Transportation Infrastructure	¥10.54 billion
Electronic Machinery and Equipment	¥10.50 billion
Telecom and Electrical Infrastructure	¥6.10 billion
Source: Hefei Municipal Government

Anhui FDI, 2003
Contracted FDI	$1,023.67 million	+15.4%
Utilized FDI	$390.51 million	+4.1%
Source: Anhui Council for the Promotion of International Trade

Top Five Sources of Foreign Investment, 2003 ($ million)
Hefei			Anhui
1.	Hong Kong	$139.60	1. Hong Kong	$424.77
2.	Virgin Islands	$38.78	2. United States	$114.94
3.	United States	$32.33	3. United Kingdom	$87.78
4.	Australia	$7.79	4. Virgin Islands	$80.73
5.	Canada	$7.65	5. South Korea	$67.90
Source: Hefei Municipal Government and Anhui Council for the Promotion of International Trade

Adam Ross is a research associate at the US-China Business Council in Shanghai.

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