The global financial crisis has made it even more important for China to depend less on the rest of the world for growth and to rapidly develop its interior markets. While exports contribute only 20 per cent of China’s GDP, export growth accounted for half of 2008’s economic growth.
Yet, due to difficult or expensive logistics, more than 90 per cent of China’s exports are produced within a 250km of the seashore. These exports, the foreign investments and the know-how that foreign enterprises brought in have been the growth engines of the coastal regions of China. Meanwhile, the interior has mostly developed through infrastructure financed by the government and consumption growth, partially fuelled by the income that migrants working on the coast send back home into the interior.
As a result, disparities between regions are quite extraordinary. Shanghai’s average salary is twice that of neighbouring Anhui province. The minimum salary in Hefei, Anhui province’s capital city, is 35 per cent lower than that of Suzhou, in Jiangsu province, which has become the international manufacturing centre of choice, next to Shanghai.
One could imagine a development model where the coastal areas’ continued growth generates enough wealth to drive the development of the interior. However, in this case the wealth gap between regions will not be reduced, or will even increase. Besides, China’s middle class is only about 200-300 million strong. To count on their consumption to raise the living standard of the inland’s 800 million low-income citizens will take too long.
On the other hand, the direct inland development is also an opportunity to maintain export levels - while the coast has become expensive, minimum wages in Anhui and Hebei (the Chinese provinces along the Yangtze River to the west of Shanghai) are competitive with those of Indonesia. Besides, Vietnam’s minimum wages are catching up with this region, too. This is mainly due to high inflation in Vietnam during 2008 (of around 23 per cent), and an expected 10.5 per cent price increase in 2009. [Estimated Minimum Salary in China, Indonesia and Vietnam per month in 2009: Wuhan (China) USD83; Anhui province (China) USD80; Indonesia Average USD75.76; Vietnam (foreign-invested regions USD65.] China’s CPI is expected to stay around zero this year. As a result, Vietnam’s labour costs are not low enough to give it an important production competitive advantage, particularly when considering China’s superior supply chain. The range of components and materials available domestically in China is close to what is available in Europe. Additionally, the quality/price ratio is very competitive.
To make good on the opportunity, large container ports are being built along the Yangtze River that will make the shipping of goods almost as convenient as from the coastal cities. Wuhan, capital of Hebei province, already has a vast inland port, while Chongqing, 1,500km inland from Shanghai, is building its own. In addition, to ensure access to all the soft skills (such as management, knowledge of international markets and cultures, financial and insurance services), Shanghai, at the mouth of the Yangtze river, is building one of the largest people transportation hubs in the world. It will bundle conventional and magnetic levitation super high-speed trains (up to 400 Km/h), five new metro lines, and the newly expanded Hongqiao airport. The hub will start operating for the World Expo in May 2010 and, by 2020, it is planned to handle up to 400 million passengers per year.
In addition to linking Beijing to Shanghai by rail in under five hours, Chengdu, capital of western Sichuan province at the end of the Yangtze valley, will be reached in just seven hours away. Hefei and Wuhan, now too far to be considered as part of the Shanghai area, will be within 3.5 and 1.5 hours reach, respectively, of the Hongqiao hub. The new trains will allow day trips and actually make these large cities of almost five and seven million people almost part of the Yangtze Delta. Alone, these two Yangtze River capital cities and their provinces will add populations of 130 million inhabitants to the Greater Shanghai area.
As it develops, the Yangtze valley will add an inland coast of more than 1,500km, with Shanghai as its bridgehead to the world. In the coming decade, the greater Shangha area will become a formidable region gathering populations larger than those of the United States or the EU and able to compete internationally both in low-cost and high-tech exports. Watch out for the China’s interior development and the new opportunities that the inland coast emergence will bring in the coming years.
Nicolas Musy is Founding Partner of CH-ina (Shanghai) Co. Ltd. and Managing Director of the Swiss Centre Shanghai.
