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"On my part, I remain committed to the process of dialogue. It is my firm belief that dialogue and a willingness to look with honesty and clarity at the reality of Tibet can lead us to a viable solution."

China for the Chinese

July 15, 2010

Why the Chinese themselves, and not outsiders,
will cash in on the next big wave of growth.
Isaac Stone Fish
July 12, 2010

New cars in a parking lot of Changan Ford Mazda
Automobile Co. Ltd, Ford Motor’s joint venture in China in January.

If there was ever a city that exemplified the
economic future of China, it’s the western
metropolis of Chongqing. A frenetic sprawl of 32
million people, it’s also a place where you will
find surprisingly few foreign visitors, or even
non-Chinese firms. At one recent trade show of
companies bidding for business in the
fast-growing region, some 80 percent of the firms
offering everything from heavy machinery to
automotives to financial services were
Chinese—up-and-coming names like Lifan, BYD, and
many others that may one day be global brands.
Most of the buyers were Chinese, too—many of them
government officials or executives from the
state-owned firms that increasingly dominate the Chinese economy.

All this speaks to China’s new growth trajectory,
one that is defined by Chinese companies and
Chinese demand, rather than outsiders. The
epicenter of the new growth is the country’s vast
western expanse, rather than its eastern
coastline. While economists inside and outside
China are bearish on export-oriented coastal
cities with worrisome property bubbles, they are
extremely bullish on the prospects of western
China, which enjoys higher growth rates, more
favorable government policy, and the possibility
of a huge consumption binge: western Chinese have
less than half the number of cars and air
conditioners per capita than their counterparts
to the east. Western China also happens to be
where 68 percent of the country’s natural gas, 53
percent of its coal, and 30 percent of its iron
ore are located. But while foreign firms are
salivating over the potential gains to be had
from all this, it’s the Chinese themselves,
rather than outsiders, who will likely tap them.

The shift is a function of China’s new place in
the world. When the country began opening itself
up to development in the 1980s and ’90s, its
economy was 8 percent the size it is today.
Beijing knew it needed both income and expertise
from foreign players. “The political thrust in
the 1990s was to integrate China into global
economic relations,” says Hans-Joerg Probst, ERGO
Insurance Group Beijing’s chief representative,
who was present at the time. Foreign companies,
buoyed by favorable policies and weak domestic
competition, thrived along with the coast itself.

Now the eastern seaboard has a respectable per
capita income, and development policy has shifted
west. Just last week the government announced new
western infrastructure projects totaling $101
billion, even more than the 2009 figure. But
unlike in the late 20th century, China has the
financial resources, experience, and confidence
it gained to build the west largely on its own.
What’s more, the fact that the region is rich in
natural resources (largely the purview of
state-run energy and power firms in China) and
borders politically troublesome areas like Tibet
and Xinjiang means that the government is more
likely to want to exert greater control in
commercial affairs there. “The central government
has definitely given the west more investment”
than it gave the eastern coast in the 1990s, says
Yu Hejun, director of western development at the
NDRC, the powerful Chinese government agency
tasked with economic reform. While eastern China
was more of a private-sector entrepreneurial
growth story, the development of the west is a study in state-led capitalism.

Witness this week’s massive IPO of the
Agricultural Bank of China, the major commercial
bank serving the western part of the country.
Unlike the public offerings of other state-owned
banks, this IPO was done without a foreign
partner, in part because of mistrust toward
overseas financial institutions that,
post–financial crisis, are increasingly perceived
as unreliable. The financial crisis has also
exacerbated the transfer of capital from West to
East, so that even if U.S. banks weren’t out of
political favor in China, the Chinese themselves
would simply have more cash on hand, both in the
public and private sectors, to fund their own
development. “Over the next 10 years, there’s
going to be a huge shift in the nature of private
investment in China; much more of the money is
going to come from Chinese rather than
foreigners,” notes one well-known American
consultant operating in the region. In fact, it’s
a change that’s already well underway. In 1996
foreign investment (not including Hong Kong and
Taiwan) represented 8.2 percent of total
investment in China. In 2008, the most recent
year for which figures are available, it was 4.9
percent, according to Roland Berger Strategy Consultants.

China’s current emphasis on rebalancing its
economy toward domestic demand (spurred in part
by American pressure for China to resolve its
trade imbalance) also means less of a golden
handshake for foreign companies. In the ’80s and
’90s local governments in eastern China would
attract foreign investment by providing
infrastructure parks where firms could put their
factories and outsourcing operations, says Ben
Simpfendorfer, chief China economist at RBS.
“Now, with the focus on domestic consumption, you
need to provide things like lower-cost housing,
and that’s not something that foreign companies
can do,” given that housing markets not only in
China but around the world are hyperlocal.

Beyond the sectors such as telecommunications and
steel that are explicitly off limits to
foreigners, local firms also have a leg up in the
fast-growing west, where few multinationals have
yet to venture (a Roland Berger study found that
only 6 percent of foreign firms registered in
China have a western presence). “It was really
not sexy to go out west until the economic crisis
hit,” says Dan Foa, COO of FairKlima Capital, a
Chinese investment company. Foreign firms’
relative lack of business experience in a region
where connections, trust, and relationships with
the local bureaucracy play an even larger role
than they do on the country’s eastern seaboard is
a major disadvantage. “The guanxi network gets
even thicker when you move to less-developed
places,” says a foreign business executive who
asked to remain nameless because of business
problems involving communication between Beijing and the western regions.

Even if all things were equal, basic geography
will always favor Chinese development of the
west. Transport costs are much higher for foreign
firms than they are on the coast, and the
proximity and cultural similarity of countries
like Singapore, Taiwan, and South Korea—the
so-called Asian tigers—favor regional
partnerships dominated by the Chinese, rather
than ventures run by Western multinationals.
“There’s a good reason why Shanghai isn’t 2,000
miles inland,” says Fraser Howie, an expert on
the Chinese stock market. And many good reasons
why the next Shanghai will be located inland.
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