China's growth slowly starts to shift inland

SHENZHEN, China (Reuters) - Like a spreading ink blot, messy and uneven, economic growth is seeping inland from the coastal provinces that have been in the vanguard of China’s phenomenal growth over the past 30 years.

The shift, which has rough parallels to America’s westward migration in the 19th century, has the potential to narrow the noxious income gap between China’s vast, neglected interior and a relatively well-off seaboard that has hitherto attracted most of the investment by the central government and foreign firms.

Steve Smith’s company is part of the ink blot. Measurement Specialities, a maker of sensors used in everything from cars to pacemakers, recently acquired a small firm in Chengdu, capital of faraway Sichuan.

Smith, the general manager of Measurement Specialities’ Asian headquarters in Shenzhen, is already thinking of moving some non-core, labor-intensive operations to Chengdu, where all-in pay is about 20 percent lower than in Shenzhen, which abuts Hong Kong and is one of China’s richest cities.

“It’s certainly in the cards,” said Smith, who also sees potential to do more sourcing for his company’s worldwide operations using Chengdu as a base.

Intel, the world’s biggest semiconductor maker, said in February that it would close a plant in Shanghai to consolidate chip assembly and testing operations in Chengdu.

The experience of thousands of companies like Measurement Specialities buttresses the case that the inland could turn out to be one of the next wellsprings of China’s economic growth.

“Although shrinking global demand will affect consumer confidence in export-oriented coastal regions, the majority of consumers in interior regions will be much less vulnerable to the slowdown in exports and property markets,” said Qu Hongbin, chief China economist for HSBC.


Consider a smattering of recent statistics:

-- Urban fixed-asset investment in eastern China rose 15.4 percent in the first two months from a year earlier; in central and western China it surged 34.3 percent and 46.7 percent respectively, according to the National Bureau of Statistics.

-- Cement output in eastern China fell 4.6 percent in the first two months, but it rose 23.7 percent in central regions and 28.1 percent in western China.

-- Business confidence in the west was much stronger than in the east in the first quarter, according to statistics office surveys released last Thursday.

Migrant construction labourers work on building a new bridge in Shanghai March 23, 2009. REUTERS/Nir Elias

“The distribution of scores is a reflection of growth potential identified by businesses. Robust development in the past decade was concentrated in the east, leaving large untapped opportunities mainly in the western and central areas,” commented Sherman Chan, an economist at Moody’s in Sydney.

So it is that the fastest-growing part of China has been resource-rich Inner Mongolia. Between 2003 and 2008, the region enjoyed average growth of 19.7 percent a year.

Mainly rural provinces like Inner Mongolia, where agriculture accounts for over 70 percent of total employment, certainly have a lot of ground to make up. The ratio of urban to rural income per person rose in China to a record level of 3.3 in 2007, government figures show.

Worried by the yawning wealth gap, Beijing launched a “Go West” development policy in 1999 that has gathered momentum since President Hu Jintao took power in 2002. Both Hu and Premier Wen Jiabao cut their teeth running poorer inland provinces.

Apart from spending more on rural infrastructure and subsidies, the current leadership has abolished the centuries-old agricultural tax, made compulsory education free in the countryside and set up a rural medical insurance scheme.

Recently, the central government has allowed local governments to issue bonds for the first time and has given western and central provinces bigger quotas than those in the east.

“China has been rather timid since it started its reforms about taking measures to reduce the income gap. But now we’re seeing policies starting to come through,” said Yolanda Fernandez-Lommen, an economist with the Asian Development Bank in Beijing.

To sustain the trend, she said a fundamental overhaul of budgetary procedures was needed so more cash flows from Beijing to support provinces unable to meet social spending needs.

The government will also need to keep its promise to set up a basic health-care system if peasants are to be persuaded to spend rather than save for the day they fall ill: a typical hospital stay now costs a farmer 2- times his annual earnings.


Despite the challenges, some economists are confident that recent trends can in fact be sustained.

Based on the rousing start to a three-year scheme to subsidize the purchase by country folk of white goods such as refrigerators, Societe Generale economist Glenn Maguire calculates that 600 million home appliances worth 1.6 trillion yuan ($230 billion) could be sold in rural China by 2012.

Overall rural consumption should add 2.5 percentage points to growth every year between now and then, he said.

“We can now legitimately claim that the dawning of a vast legion of first-time purchasers of household durable goods is here,” Maguire wrote in a recent note to clients.

If he’s right, Beijing will have killed several birds with one stone: finding an outlet for surplus manufacturing capacity; stoking domestic consumption to make up for the collapse of exports; and narrowing the gap between China’s urban/coastal haves and rural/inland have-nots.

But what about China’s traditional engines of growth in places like Shanghai and Shenzhen? Will they fall by the wayside?

The evidence, again fragmentary, suggests that economic theory is working in practice: richer cities are shedding basic manufacturing to concentrate on higher-value activities.

Intel, for example, is retaining its headquarters and a research and development center in Shanghai.

Likewise, Whirlpool Corp said last week it would close a washing machine factory in Shanghai, eliminating 600 jobs, but would keep its regional headquarters in the city.

Smith at Measurement Specialties is thinking along the same lines. His firm is expanding at a 30 percent clip in the domestic market, making up for the evaporation of exports, and he reckons Shenzhen remains a good choice for the Asian headquarters of a technology company like his.

“We’re definitely not the lowest-cost place in the world or in China, but it’s a very attractive place from an engineering and product development standpoint,” he said.

($1 = 6.83 yuan)

Editing by Sonya Hepinstall