Go west for China growth

By:
Published on:

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.


Disclaimer
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.

No representation, warranty, or assurance of any kind, express or implied, is made as to the accuracy or completeness of the information contained in this document and no member of the RBS Group accepts any obligation to any recipient to update or correct any information contained herein. The information in this document is published for information purposes only and does not constitute an analysis of all potentially material issues. Views expressed herein are not intended to be and should not be viewed as advice or as a recommendation. You should take independent advice in respect of issues that are of concern to you.

This document does not constitute an offer to buy or sell any investment, and nor does it constitute an offer to provide any products or services that is capable of acceptance to form a contract. The products and services described in this document may be provided by any member of the RBS Group, subject to signing appropriate contractual documentation. No member of RBS shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this communication.

In the UK the Royal Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, in Hong Kong by the Hong Kong Monetary Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority ABN 30 101 464 528 (AFS Licence No. 241114) and in the US, by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in this document are made in compliance with an applicable exemption from the registration requirements of the United States Securities Act of 1933, as amended. In the United States, securities activities are undertaken by RBS Securities Inc., which is a FINRA/SIPC (www.sipc.org) member and subsidiary of The Royal Bank of Scotland Group plc. Dubai International Financial Centre: This material h s been prepared by The Royal Bank of Scotland plc and is directed at “Professional Clients” as defined by the Dubai Financial Services Authority (DFSA). No other person should act upon it. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a “Professional Client”. This document has not been reviewed or approved by the DFSA. Qatar Financial Centre: This material has been prepared by The Royal Bank of Scotland N.V. and is directed solely at persons who are not “Retail Customer” as defined by the Qatar Financial Centre Regulatory Authority. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a “Business Customer” or “Market Counterparty”.

The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. The Royal Bank of Scotland N.V is authorised by De Nederlansche Bank (DNB) and is regulated by the Autoriteit Financiele Markten (AFM) for the conduct of business in the Netherlands. The Royal Bank of Scotland plc is in certain jurisdictions an authorised agent of The Royal Bank of Scotland N.V. and The Royal Bank of Scotland N.V. is in certain jurisdictions an authorised agent of The Royal Bank of Scotland plc.

Copyright 2013 RBS. All rights reserved. This communication is for the use of intended recipients only and the contents may not be reproduced, redistributed, or copied in whole or in part for any purpose without RBS’s prior express consent”