China's "Go West" policy has mixed result

CHONGQING, China Thu Nov 23, 2006 12:48pm EST

1 of 2. Chinese workers produce cars at the assembly line at the Changan Ford car factory in Chongqing in this May 27, 2005 file photo. Changan Ford is a 50-50 joint venture of Ford Motor Co with Chinese local car maker Changan Automobile Co. Ltd. Nearly seven years after Beijing launched its 'Go West' campaign to lift incomes, ease social tension and bring prosperity to an impoverished region, foreign firms have saddled up mostly only for minor investments, while domestic firms feel left in the dust.

Credit: Reuters/Reinhard Krause

CHONGQING, China (Reuters) - If you build it, they will come -- except perhaps to China's vast, untapped western frontier.

Nearly seven years after Beijing launched its "Go West" campaign to lift incomes, ease social tension and bring prosperity to an impoverished region, foreign firms have saddled up mostly only for minor investments, while domestic firms feel left in the dust.

Multinationals from Microsoft Corp. to Nokia, Motorola and Siemens have set up research centers in big cities. But the list of players that have invested the big sums that Beijing hoped for remains small and stagnant.

BNP Paribas's chief China economist, Chen Xingdong, summed things up with a Chinese proverb: "The government thought once the phoenix tree was planted, the phoenix would come. But it didn't."

The much-touted campaign, kicked off at the turn of the century, aimed to revive the fortunes of the country's 12 poorest provinces or regions, which are home to a quarter of China's people but account for just 15 percent of gross domestic product.

Beijing had hoped to narrow income disparities with the thriving east, assuaging simmering ethnic tensions.

Some manufacturers have answered the call, seeking relief from rising labor and living costs along an increasingly affluent eastern seaboard, while retailers battling for consumers' dollars have discovered unsated pockets of demand.

So the likes of Intel Corp. and Ford Motor Co. have set up plants in the two biggest cities -- Chengdu, the capital of Sichuan province, and Chongqing. Carrefour S.A. and IKEA have set up shop and plan more outlets.

Chongqing, a city of 30 million, boasts investment from more than 30 of the top 500 corporations in the world.

"Multinationals move westwards, building research and development centers in cities like Chengdu, because of low-cost but well-educated talent," said William Kusters, chief of the China Mission of the Asian Development Assistance Board.

TOO REMOTE

But overall, foreign direct investment in the west, spanning two-thirds of the sprawling country, has amounted to less than $2 billion a year between 2000 and 2005 -- less than half the total that Shanghai alone has attracted.

"The main challenge for the west remains infrastructure, and there are not enough items that attract foreign investment," said Kusters. "The west is like an economic island in the middle of nowhere. There is not much interaction with the rest of China."

For some firms, western China's isolation is a boon.

Lafarge, the world's top cement firm, runs operations in Chongqing, Chengdu, Guizhou and Yunnan, hoping to cash in on the government's push to develop new infrastructure.

"All these provinces are mountainous areas that are naturally protected from imports," said Cyrille Ragoucy, chief executive of Lafarge Shui On, a joint venture with Shui On Construction and Materials Ltd..

For others, through, remoteness is a bane.

"It's still difficult to lay out a sales network in western rural areas because of the poor infrastructure," said Frederick Leung, finance director of TV maker Skyworth Digital Holdings Ltd..

Regions such as mountainous Xinjiang or Tibet remain transport nightmares; Sichuan -- known for pandas and spicy cuisine -- is thousands of kilometers from Shanghai; central provinces such as Henan or Hubei are closer, but shipping goods to the coast is still costly and time-consuming.

That's why western China's trade, which came to $164 billion in 2000-2005, made up just 5 percent of the nation's total.

Beijing has been trying to realize more of the west's potential by providing tax breaks and incentives for energy, information industry, telecommunications, biomedicines and space technology.

LONG MARCH

The central government has also directed about 70 percent of all multinational aid and 70 percent of all tax revenues toward projects in western China over the past six years, according to a cabinet-backed Web site devoted to all things West (here).

In one sense, the policy is working. Economic growth in the West averaged 10.6 percent a year from 2000 to 2005, outstripping the national rate of 9.4 percent.

But western China is starting with so much a disadvantage that the faster growth it is now enjoying risks going unnoticed.

"What worries people in the west is that the gap between east and west is actually widening, no matter in absolute or relative terms," said Wei Wei, director of the Western China Economic Development Research Centre in Xi'an.

Xiang Wenbo, executive president of machinery maker Sany Corp., reckons the government must do more.

"Capital only follows profit. Current policies are not flexible enough," he said. "The government should provide more incentives, such as more favorable tax rates and land policies."

Even then, it may take another decade before Chengdu and Chongqing catch up with their coastal city cousins. For other places, it will be a marathon, not a sprint.

"It is a Long March, requiring several generations' efforts," Kusters said.