TRADING PLACES

If urban development can be used as a measure of economic strength, China’s urbanisation could be a cause for concern to its economic rivals. Look at cities with a population over one million: America has nine; Europe has 36; China has just short of 100. But, ask a Western businessperson to list just five of China’s 660 cities, other than Beijing and Shanghai, and they will probably struggle to produce more than a couple of names.

Many of China’s cities are already economically significant on an international scale. Take Shenzhen for example, a city of over eight million people just across the border from Hong Kong. Thirty years ago, this former fishing town was chosen by Deng Xiaoping to be China’s first Special Economic Zone, which opened it up to trade with the outside world. Now it is China’s largest manufacturing centre, it has the country’s second largest port, and is home to two stock exchanges. Further inland there is Chongqing, which, with a population of over 30 million, is the world’s largest municipality. This giant industrial furnace receives €15.8bn (CNY177bn) in revenue from the automobile industry alone, and it also has comparably strong industries in steel and shipbuilding. And, as the biggest inland river port in western China, it is ideally situated to transport goods to the east for export.

These cities, despite their size, have failed to capture any of the limelight from Shanghai and Beijing, but it is easy to see their international importance: Shenzhen has the world’s fourth busiest port and Chongqing has Asia’s biggest aluminium plant. But these are just two of many rapidly developing Chinese cities.

INVESTMENT DRIVES
These new cities will all grow into places with their own economic identity, dependent on a wide range of factors, such as geography, natural resources, and the qualities of the local population. However, among this diversity they are all modernising in a way that will attract the kind of foreign investment that has accelerated growth in Shanghai, Beijing and Shenzhen. This means strong investment in both the hard and soft infrastructure needed to create an environment attractive to a foreign business.

On the hard side it is ensuring there is sufficient energy to power factories, and enough roads and railway lines to get the end product from A to B. Regarding soft infrastructure, Kenny Ho, head of research at Jones Lang Lasalle Shanghai, believes much of it should be supplied by city or provincial governments – not only must there be enough professional services in an area, but local government must also offer a degree of transparency and be receptive to working with foreign companies. “It is better to do business in a city that takes the lead when it comes to solving problems, instead of just kicking you round the departments,” he says. “This helps lower the perceived level of risk.”

Potential communication problems – linguistic and cultural – need to be avoided too. The city of Chengdu employs 14 people, all of whom speak English and have lived abroad, solely to liaise with foreign companies. “They are very easy people to deal with, and if I were green to China, their experience in working with foreign companies in English allows for a much softer entry,” says Richard Brubaker, managing director of China Strategic Development Partners, a firm helping foreign businesses land in the remoter parts of China.

Local governments, which have a whole host of powers autonomous from the central government, also offer incentives to bring in investment, which often take the form of tax breaks or land deals. “There is definitely a pattern that the further you go inland, the more hungry cities are for development, and this will increase the likelihood that companies will receive these kinds of benefits. Go far enough, and a company might be offered land for free, but they may well not take it because it might be missing some important infrastructure, like power lines!” says Brubaker.

The zones where the government focuses foreign investment are crucial for a city’s development; and when an economic zone is successful, it can help change the face of a city. Tianjin, a giant port city close to Beijing, pulled in €3.87bn in 2007 in foreign investment as a result of the Tianjin Economic- Technological and Development Area (TEDA). There are already 62 Fortune 500 companies with operations in TEDA and it is the money and technology that foreign companies provide that is helping to propel Tianjin into the first rank of Chinese cities.

MAKING IT IN CENTRAL CHINA
At the core of China’s success is manufacturing; and if one area has traditionally been the country’s factory district, it is the south-east province of Guangdong, especially with items produced in a high volume, such as textiles, toys and plastics. Ever since the early 90s, migrant workers from all over China have flocked to the province in search of work, turning its two largest cities, Shenzhen and Guangzhou, into urban sprawls. The province has benefited from its proximity to the coast and early preferential treatment from the government, but demographics are making it lose some of its edge in favour of China’s other provinces.

The problem is that Guangdong simply isn’t as cheap as it used to be. Over the last few years, the provincial minimum wage has seen a number of increases. As of 1 April this year, it increased by as much as 17.8%, ensuring full-time workers a monthly salary of up to €77 (CNY860) a month. Compare this to five years ago, when a worker was only guaranteed to earn two-thirds of this amount, and it is possible to see why factory owners are complaining about higher costs. Also, as affluence rises in the inland provinces, less people are prepared to leave their home and take up the unattractive life of a migrant worker. This means that some factories in Guangdong have been finding it difficult to find enough people – an unthinkable situation a decade ago.

As a result, manufacturers are starting to look inland to find cheaper labour. “You will find pretty much the same wages within one province. To find something cheaper you have to go to the next one along,” says Ho. Central China in particular is going to benefit from this kind of shift; in the first three quarters of 2007, the six central provinces received €7.29bn of foreign investment. On top of the lower wages, it is still close enough to the coast to make it economical to transport goods there, and these areas are not built up enough to experience the frequent power shortages that have plagued the eastern regions

Ho highlights neighbouring Jiangxi province as one such place undergoing this kind of change. Cross the border from Guangdong to Jiangxi and you are in the city of Ganzhou. It is already a good size, at one and a half million people, but its real draw is the minimum wage – only €43 a month, cheaper than Guangdong five years ago. Hiring people in the provincial capital, Nanchang, is only marginally more expensive. Famous as the place where the People’s Liberation Army came into being, Nanchang lies along the China’s important north-south and east-west railway lines.

Another inland province that is already benefiting from the increased cost of manufacturing on the coast is Anhui, a six-hour drive to the west of Shanghai. With Shanghai’s neighbouring provinces, Zhejiang and Jiangsu, already considered by many to be too expensive for labour, manufacturers are moving inland to the next province. This is exactly what multinational Unilever did. It built its first factory in Shanghai in 1986, but after being stung by rising costs the decision was made to move into Anhui’s capital, Hefei. Its new factory opened in 2003, cutting costs by 30%, and will soon become its largest plant in Asia.

CLIMBING THE LADDER
This does not mean that all manufacturing is going inland – a batch of cities are exploiting their locations and heritage to capture the investment overflow and scale the technological ladder.

As Shanghai is becoming a pan-Asian services hub, manufacturing is being squeezed out and nearby cities, such as Hangzhou and Suzhou, are picking up the business of high-value industries. Both cities have historical associations with sophistication: Marco Polo declared Hangzhou to be the finest city in the world and Suzhou has long been a centre of the silk industry.

In just one of Suzhou’s high-tech business parks, Philips manufactures precision tools, Sony makes circuit boards, and Fujitsu conducts research and development. Good governance and the proximity to a major economic centre all help with the adoption of high-tech industries, but what really helps is having an educated workforce: Hangzhou and Suzhou have 36 and 13 institutions of higher education respectively.

A strong educational base can help a city take its manufacturing upmarket, even if it is too far from an economic centre to absorb its excess industry. Chengdu, the capital of the province of Sichuan, is one such city. With 35 universities, the local government has been successful in attracting foreign investment in the IT and financial sectors, especially in outsourcing. This is important because geography is not in its favour. “Chengdu is too far from a major sea port, so it has historically not been realistic to make something and put it on a truck to be exported. Goods for export need to be high-value goods, like microchips, that can be sent off by plane,” says Brubaker.

Liquid Capital Group is one company that has been attracted by what Chengdu can offer. When it came to establishing operations in China, with a focus on developing software for global businesses, the financial services outfit, which has its headquarters in London, chose Chengdu because of the local workforce.

“When we were evaluating which city was the most suitable place to establish our first office in China, we found that Chengdu was outstanding due to its low staff turnover rate,” says Zhengxing Jiang, head of technology at Liquid Capital in Chengdu. In Shanghai and Beijing, fast-growing businesses, and a shortage of talented individuals, has created a candidate’s market making it difficult for companies to find and retain qualified people. By locating in Chengdu, Jiang believes that Liquid Capital has avoided this thorny issue.

THE OUTSIDER
Understandably, it is easier for ports to become trade centres than inland cities, but there is one city, located in the south-west corner of China, for which many have high economic hopes. Kunming is the capital of Yunnan, a province that borders Vietnam, Laos and Burma and is famous for its ethnic diversity.

“In the next decade Yunnan is likely to emerge as China’s primary trade gateway to South-East Asia,” says Chris Horton, managing director of the Meridian Group of Hong Kong, a consultancy with operations in Kunming. The reason is that in 2010 the China- ASEAN Free Trade Area (FTA) comes into effect, removing tariffs on goods moving between China and countries such as Singapore, Thailand, Malaysia and the Philippines. “The FTA will be the world’s largest in terms of population and will have profound implications for everyone involved. Yunnan province, and Kunming in particular, is preparing to serve as the entry point for raw materials from South-East Asia as well as the last stop before finished goods in China make their way toward South-East Asian markets.”

So for Kunming, building infrastructure, not factories, is key. A highway connecting the city with Vietnam was finished this year, a railway that will reach Singapore is being built, and so too is China’s fourth largest air port. What Kunming shows is the diversity of Chinese cities, and that there is no model for their development. In the future there will be more like Kunming, taking advantage of their circumstances to become cities of economic significance.

DRAGON’S DEN
With the overall economy in China consistently achieving double-digit growth, it should be no wonder that there are corresponding figures in the housing market. But property speculators looking to make a quick buck in this still-attractive property market should be aware of two things.

The first is legal. Ever since the summer of 2006, foreigners have been limited in their property purchases. A foreigner can only buy a property if they have worked or studied in China for at least a year, and the property should be their primary place of residence. The law was introduced to curb foreign speculators, which the government considered responsible for the incredible price rises. It has subsequently been targeting domestic speculators by making it harder to finance buying a second home.

If you manage to overcome the legal hurdle, there is then the financial one. Although cheaper than nearby Hong Kong and other major finance centres, buying a high-end property in Shanghai isn’t as cheap as might be expected. A standard 100m2, two-bedroom flat can fetch €180,000, and luxury flats go for anything between €3,100 and €7,200 per m2.

This may seem cheap compared to London or New York, but for a young Chinese professional, who would be thought successful if earning €16,000 a year, buying is beyond their means. Those that can are called fangnu, or mortgage slaves, as so much of their income goes on the loan.

For those that are still eligible and interested, it is worth it. Hingyin Lee, director of research and consultancy Colliers International China thinks foreign buyers have little to worry about. “Lots of foreign people still don’t trust the property rights system here, which is based on leases, so the property rights might not be guaranteed. But after the new property law comes into place, things are going to get better.” The property law passed last year increases the rights of homeowners across the country.

Having an investment in renminbi is also attractive as it appreciates against the dollar: 6.5% in 2007. “People are attracted by appreciation in the renminbi, and if it keeps accelerating, there will be a rush to buy property. However, if there is a slowdown due to the slowdown in the US, this might lead to the appreciation to slow, too. This will stop people from buying,” says Lee.

Foreign managers are most likely to be able to buy a house – after a year they will meet the legal requirements, and they will likely have the cash to buy. Even on their short contracts, says Lee, the steady capital appreciation still make it worthwhile.