Go west for China growth
China is on the cusp of a new boom, according to leading academic and advisor to the Communist government.
Western economists have failed to grasp the scale of economic change hundreds of miles west from traditional growth hotspots such as Shanghai, says Professor Xuewu Gu, Chair in International Relations at Bonn University.
Concerns have been rising over China’s recent economic slowdown – growth decelerated to 7.5 per cent in the second quarter – but Gu says it is set to revive. “We are in the early phases of expansion from east to west,” says Gu “China is just at the beginning of the boom.”
'China is just at the beginning of the boom.' While Shanghai’s economy expanded 7.5 per cent last year, westward Sichuan province notched up 13 per cent growth and is expected to grow 16 per cent in 2013. Sichuan remains the star performer among those emerging provinces with its focus on the IT sector, low-carbon technologies and decentralised energy supplies bringing power to rural areas. China’s first shale gas well was drilled there in 2010 and the province is the centre of China’s push to develop shale gas reserves that could be twice the size of those in the US.
Western China makes up around two thirds of the country’s land-mass and accounts for about 28 per cent of its 1.35 billion people, but has largely been bypassed in China’s rush to develop. Average wages are around a quarter of those in Shanghai and Western provinces have so far received less than five per cent of all foreign direct investment into China.
Now firms are beginning to recognise the region’s potential. While some multinationals are shifting production out of China altogether to avoid rising costs, others are investing heavily out west. German carmaker Volkswagen, for example, has decided to spend more than RMB25 billion (USD4 billion) alone in Xinjiang in China’s northwest corner. The firm plans to produce 50,000 cars a year there from 2014.
Chinese companies are also leapfrogging central provinces to the west of the country – an area that contains two thirds of China’s natural gas and around half its coal. Energy, wind power, IT and electronics are the foundation of the new boom, says Gu.
The move from east to west is one aspect of a broader change in China’s economy – one with stronger private businesses serving a more dynamic domestic consumer sector.
China’s new leadership are comfortable with what Gu says is a controlled economic slowdown while it fosters a more ‘qualitative’ growth – one less reliant on energy-intensive industry, exports and low-value goods.
“The leadership aren’t worried actually. They are already satisfied with 6 or 7 per cent growth while the economy is going through this structural transformation.”
Their more daunting challenge is to face down entrenched interests inside the Communist Party and the bosses of China’s powerful state-owned businesses. Both have prospered under China’s old economic model – one based on tight state control.
“China has reached a turning point – politically, economically, militarily, socially. The new leaders are willing to push on, but they face resistance at every turn,” says Gu. “Every big step requires negotiation and compromise.”
The battle is centred on a raft of economic policies championed by Premier Li Keqiang in recent months. He is proposing, for example, to allow private businesses to compete in the airline and banking industries for the first time.
China’s more reformist leadership should win this battle of wills, says Gu. First, there is broad agreement across the Party’s main factions that reform is necessary to keep China’s economic miracle rolling forward. The likelihood of infighting is low. Second, the CEOs and CFOs running state-owned enterprises ultimately owe their positions to the Party. They may fight moves to liberalise, but ultimately they will have little choice but to submit.
The statements and opinions expressed in this article are solely the views of Xuewu Gu speaking at an RBS client event on July 10 2013 and do not necessarily represent the views of the Royal Bank of Scotland.
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