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Critical Eye on Wuhan

Central Hub

The rise of central China gives a boost to its leading city

by Eric Arndt

A politically and economically prominent city in the early and mid-twentieth century, Wuhan, Hubei, was once the scene of some of the Cultural Revolution's (1966-76) most intense moments and a favorite getaway for Mao Zedong. Although Wuhan has since lost its former political weight, it remains an economic leader in central China. The city is also building on traditional strengths—strategic location and nationally significant heavy industrial and tertiary educational bases-- to position itself as a modern, high-tech center.

Home to 8.3 million people, Wuhan is central China's largest city. It is also one of central China's most prosperous and fastest growing cities. From 2000 to 2007, its economy nearly tripled in size, from ¥120.7 billion ($17.7 billion) to ¥314.1 billion ($46.1 billion). Growth continued at 2007's 15.6 percent pace in the first half of 2008. The heavy industrial sector—led by China's first major steel complex and fourth-largest steel producer, Wuhan Iron and Steel (Group) Corp.—has spearheaded this growth. Taking advantage of this base, many foreign automakers have set up shop there, most prominently Dongfeng Peugeot-Citroën Automobile Co. Ltd., Dongfeng Honda Automobile Co., Ltd., and Dongfeng Nissan Passenger Vehicle Co. In 2007, auto industry revenue grew more than 33 percent to ¥75.8 billion ($11.1 billion).

Strategic logistics location

Much of Wuhan's past, present, and likely future prominence stems from its position astride the confluence of the Yangzi River and its tributary, the Han Shui, making the city a natural hub for waterway transport and ensuring its status as a key trading center for centuries. Wuhan's location also places it within easy reach of China's major population centers: Beijing, Chongqing, Guangzhou, Shanghai, Shenzhen, and Tianjin. Numerous provincial capitals— including Nanjing, Jiangsu, and Xi'an, Shaanxi—all lie within a 1,200 km radius of the city.

Strategically important to China's transportation network, Wuhan has benefited hugely from China's transport infrastructure boom and is slated to become an even more important rail, road, air, and water hub. Major rail lines and expressways that connect Beijing with cities in Guangdong, and Shanghai with Chengdu, pass through Wuhan. The city's inland port is expanding and will be capable of handling 100 million tons of cargo annually by 2010, according to Cargonews Asia. Current facilities are capable of berthing sea-going ships of 10,000 tons. In addition, Wuhan's Tianhe Airport is the largest in central China, providing service for domestic and regional carriers, and the Civil Aviation Administration of China has developed plans that support Wuhan as the country's fourth-largest aviation hub—behind Beijing, Shanghai, and Guangzhou, Guangdong.

Infrastructure investments are part of a much broader push to develop China's central regions under the broad policy rubric of "Rise of Central China," first announced by Premier Wen Jiabao in 2004. As costs along the coast rise, central and local authorities hope to attract greater investment inland, with extensive transport infrastructure investments that give enterprises access to the central region's lower-cost labor. Such new connections have already enhanced Wuhan's effectiveness as a national distribution center, and the city has attracted new manufacturers of home appliances, electronics, and packaging. Hubei is slated to develop as an agricultural processing and high-tech center and key modern logistics hub, with Wuhan leading the way.

Despite Wuhan's location, growing infrastructure, and policy support, its final role in China's logistics and distribution system remains unclear. Central China hosts another major rail hub in Zhengzhou, Henan, and Chongqing's port is dramatically increasing its cargo throughput and capacity. For example, according to Chongqing's municipal government website, the city intends to invest ¥15.8 billion ($2.3 billion) in expanding river ports by 2010. The expansion of transport facilities at the Three Gorges Dam—including a ship lift capable of lifting 3,000 tons—will increase the volume of freight traffic to Chongqing, adding further weight to the city's pull as a western terminus for Yangzi River traffic. Wuhan's final position in the flow of goods across China will likely become clear only after major infrastructure investments are completed and the region's future development and demand patterns are more clearly established.

High education and low costs

Wuhan is also a regional education center. It is home to 52 institutes of higher education, including Wuhan University, which ranked seventh-best overall in the nation this year, and another six universities in the top 100, according to China Gaoxiao Xinxi Wang (www.gxedu.org.cn). Altogether, Wuhan's institutes of higher education enrolled more than 740,000 students in 2006, the most of any city in China. In 2009 alone, the city's top engineering and technical schools—Wuhan University, Huazhong University of Science and Technology, and Wuhan University of Technology—will graduate nearly 25,000 bachelors of science.

Yet though educated talent is widely available, wages remain low compared to coastal education centers. Average salaries in 2006 were ¥19,759 ($2,896), compared to ¥36,097 ($5,293) in Beijing and ¥29,569 ($4,335) in Shanghai.

Lofty high-tech goals?

Wuhan is touting its advantages as an attractive destination for high-tech foreign direct investment. East Lake High-Tech Park, the focus of efforts to foster a high-tech cluster in Wuhan, is already a domestic leader in fiber-optic cable, transmission, and photoconducting that seeks to expand this base into other sectors, including pharmaceutical manufacturing, biotechnology, and software development. Related services industries, particularly services outsourcing, have also been granted special policy incentives—including land subsidies, low personal income tax rates, training assistance, and export subsidies—to encourage rapid growth. Several US high-tech industry leaders have set up facilities there—including IBM Corp. and Electronic Data Systems Corp., a Hewlett-Packard company—according to the park's website.

Though Wuhan has a strong information technology (IT) sector, many engineering graduates, and a number of research and training centers to support IT and high-tech industry development, other cities offer similar advantages. Changsha, capital of Hunan, offers nationally competitive academic credentials to potential investors. More significant, Sichuan's capital, Chengdu, boasts strong educational institutions and has successfully attracted several high-tech foreign investors, including Intel Corp. As with logistics, the high-tech sector in central and western China is still taking shape, and Wuhan faces stiff competition.

Power and pollution woes

Like other cities across China, Wuhan faces considerable environmental and power challenges. Rapid industrialization and heavy industrial demand have outpaced the city's wastewater treatment capabilities and pushed the limits of its power production and transmission capacities.

Snowstorms earlier this year damaged Hubei's power grid system and led to coal shortages, forcing the city to restrict electricity use in some urban areas. In August, Bloomberg reported that Hubei implemented austerity measures that reduced Wuhan's power supply by 34 percent—targeting high-energy-consuming companies such as small steelmakers, petrochemical producers, and cement plants—to ease a coal shortage caused by high summer demand. Wuhan's power supply problems are connected to larger national issues and are therefore difficult for the local government to resolve. Though Wuhan-based foreign-invested enterprises have reported few problems with their electricity, keeping the lights on will remain a priority for the Wuhan government.

Wuhan has also suffered from pollution. Years of dumping untreated wastewater have severely polluted the area's many lakes and seriously damaged the ecology of the scenic East Lake last year. To address wastewater issues, Wuhan has been cooperating with the Asian Development Bank (ADB) since 2000, and in 2006 ADB approved a $100 million loan to develop wastewater treatment capacity. Last year, the city more than doubled its 2005 wastewater treatment rate of 37 percent and kicked off a ¥2.66 billion ($390 million) cleanup project in March that is scheduled for completion in 2012.

Central China's centerpiece?

Wuhan offers numerous advantages for manufacturing and high-tech investors in China's interior. Yet the city's success depends largely on the extent to which central China realizes Beijing's ambitions to make it a new economic growth engine. If it succeeds, Wuhan, which considers itself central China's leading city, will be able to take advantage of its growing logistics and education platforms to generate rapid growth and stimulate high-tech sector development. Central China's rise as an economic powerhouse is still uncertain, but higher production costs along China's coast, better infrastructure in the interior, and central government encouragement may all spur regional development that elevates Wuhan to regional and national prominence.

Eric Arndt is manager, Business Advisory Services, at the US-China Business Council in Shanghai.

Copyright 2008 US-China Business Council

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