Beijing’s ambitious programme to modernise the Yangtze river over the next 15 years, and build up a supporting road and rail network, is set to open up China’s interior and transform its economic landscape.
Since China first opened up its economy to the outside world in 1978, the division of spoils from its remarkable run of economic success has been distinctly lopsided. The eastern provinces boomed thanks to a decent transport infrastructure, subsidised economic zones and ready access to a network of ports up and down the coast.
The result, over the years, has been a steady widening of the gap between the coastal provinces and the rest of the country in terms of economic activity and wealth. Foreign direct investment (FDI) for all 12 western provinces averaged less than $2bn annually in 2000-05, or just half the amount attracted by Shanghai alone.
Internal migration
This chasm could hardly be ignored by Beijing, not least because it had sparked a mass wave of migration within China, steering millions of poor rural workers in search of work from the interior towards coastal provinces. Income disparities that are now wider than in the US have also raised simmering resentment in the countryside.
The central government’s answer to this growing divide, devised by Beijing’s top policy-makers as far back as the late 1980s and rubber-stamped by the National People’s Congress in 2000, is the ‘Go West’ campaign. This campaign aims to eliminate poverty and narrow the regional economic divide by 2050.
It involves large-scale funding for a range of infrastructure projects to lay the groundwork for future development, together with a range of tax and other incentives calculated to attract both domestic and foreign investment to inland provinces.
Transport is crucial to the plan, since logistical shortcomings are the main reason why investors have so far shunned central and western regions. Road and rail connections to the west are being expanded and improved, with many new expressways being built along the Yangtze corridor.
However, trucking remains a very expensive way to move goods more than just a few hundred kilometres because of the highly fragmented nature of the industry, along with regional protectionism practices and high toll rates. The rail network is better suited to long-distance freight transport but there is chronic under-capacity in the system that will take years to rectify.
Water works
This leaves water transport as the most effective means to ship goods over long distances for the foreseeable future.
And it is here that the Yangtze comes in. Stretching some 6300 kilometres from its source on the Tibetan plateau in the west to the East China Sea near Shanghai, the trunk line of China’s longest river is navigable across more than 2800km of China’s heartland. It carried 650 million tons of cargo and 2.6 million 20-foot equivalent units (teu) of containers in 2005, the largest volumes in the world. Known as the ‘golden waterway’, the Yangtze is by far the most important transport artery between China’s interior and the ocean.
Even so, it remains a sorely underused resource. According to China’s Ministry of Communications, only about 20% of its navigable capacity is currently being exploited, despite the total volume of cargo shipped more than doubling between 2001 and 2005, from 310 million tons to 795 million tons.
Modernising the Yangtze has become a matter of urgency, as for the first time since China’s economic reform process began, rising costs in the dynamic coastal regions are persuading significant numbers of foreign manufacturers to consider locating plants in the country’s vast interior.
Rising costs
From September this year, Guangdong province, which accounts for nearly one-third of all China’s exports, will increase its minimum wage by an average of 17.8%. This will bring the minimum wage in the provincial capital Guangzhou, for example, to Rmb780 ($97.50) a month. Other coastal cities and provinces, such as Shanghai and Jiangsu, are likely to make similar moves.
More worrying for foreign manufacturers, since they routinely pay above average rates to attract and retain the best workers, is a growing shortage of labour in certain hot spots. While China has traditionally been seen as an endless source of cheap workers, half of the factories in Guangdong’s Pearl River delta region now suffer from a labour shortfall – estimated at two million workers, according to China’s Ministry of Labour.
This represents about 10% of the local workforce. The problem has also been felt in other important manufacturing centres such as Shanghai, Fujian and Zhejiang.
But it is not just labour costs that are rising. According to property consultant DTZ, average monthly rental prices for industrial space in Chengdu, capital of Sichuan province, are about Rmb10-15 per square metre – about one-quarter to one-sixth the price of equivalent land in Shanghai.
There are signs that the government’s massive investment drive is starting to pay dividends, especially along the middle and upper reaches of the Yangtze. For example, in Chongqing, currently being built as the regional capital, foreign trade has been growing at an average annual rate of nearly 20% over the past five years to stand at to $4.3bn in 2005. Although this represented only 0.3% of the national trade total, the trend is improving.
FDI in the city increased 28% in 2005 to reach $521m, against a background of declining foreign investment in China as a whole. Leading multinationals here include Ford, whose joint venture Changan Ford Auto makes 150,000 cars annually, and BP, which has set up a $250m commodity chemical plant.
What these examples show is a nascent, though growing, trend among investors to look seriously at moving their operations further into China’s interior, using the Yangtze to ship components and materials upstream and finished products downstream. About 100 of the world’s top 500 companies have a presence in the west of China.
Interior inefficiency
Even so, western provinces still have plenty of catching up to do, and by most counts remain about 10-15 years behind their coastal rivals. Their economies are dominated by the state sector, with its attendant problems of inefficiency, protectionism and high levels of pollution.
Local governments have little experience of running a market economy. As a result, they are often bureaucratic and incompetent, setting out, for example, procedures for business registration and licensing that are often costly, complex and ambiguous.
These problems will ease over time. More pressing for the central government is the need to remove the chronic logistical bottlenecks that slow the passage of goods into and out of the west. The further upriver, the greater the problems.
Inadequacies in both port and rail facilities, for example, together with excessive bureaucracy on the part of customs officials, mean that it can sometimes take longer for shipments to travel between Chongqing and Shanghai (normally between seven and 15 days by barge) than between Shanghai and Los Angeles.
If the Chinese government can successfully roll out an integrated transport network across the country, allowing easy access to its vast interior, the impact on the national and world economy will be enormous. A recently published paper by Deloitte & Touche compares China’s current construction programme with the US’s efforts decades ago to build its own trans-continental railways and interstate highways. These great transport arteries that allowed access to the US’s interior, it argues, paved the way for its economic dominance throughout the 20th century.
David Lammie is a writer on Chinese business and editor of Yangtze River Ports 2006.
