An analysis of China's economic development policies and prospects

Business Economics, July, 1998 by Roger Chen

The West-Central Regional Development Strategy.

The recent economic development of China has concentrated mainly in the East Cost region. Between 1985 and 1995, more than 88 percent of foreign investment to China was on the East Coast (People's Daily, April 3, 1997). The economic development gap between the two regions has drastically increased in the past few years. For example, in 1978, the difference between the two regions in annual income per person was 70 yuan (about $8.75); in 1997 this difference increased to 2000 yuan (about $300). Table 1 shows the percentage of GDP contributed by the East and West regions from 1978 to 1994. From the table, it is clear that East region's share in China's economy has been steadily increasing, even though the region only accounts for 11 percent of the nation's land area and 40 percent of the total population. This widening gap between the two regions has caused some problems. Because of this, the development of the West and Central region has become a key economic policy.

Table 1

The Percentage of China's GDP Generated by East and West Regions

Year     Percentage of China's GDP Generated in:
         East Region     West and Central Region

1978       52.50                47.50
1980       52.17                47.83
1986       53.11                46.89
1989       54.43                45.57
1991       54.90                45.10
1992       56.55                43.45
1993       57.39                42.61
1994       59.12                40.88

Source: The Future of China's Economy by Weiming Zhang and Hongjie
Zhang.

Inner region development policies have several key components:

1. The region has abundant natural resources, e.g., Shanxi province accounts for 25 percent of the entire nation's coal output and 60 percent of China's coal exports. The Chinese government wants the region to emphasize its natural resources in the economic development strategy.

2. The government also intends to shift some labor-intensive industries from the East to the inner area as labor costs in the area are cheaper. This also will allow the East to focus on more advanced and capital-intensive industries.

3. The Chinese government has developed various policies to encourage firms on the East to invest, acquire or cooperate with firms in the West-Central region. So far, more than 10,000 investments or cooperation projects have been made or established by East Coast Chinese firms. GuanDong province has made more than $1.4 billion investments in the West-Central region, Shanghai has also made hundreds of investments in the inner area (People's Daily, February 11, 1998). Recently, this region has also received more investment from foreign companies, including large multinational enterprises such as Samsung and Siemens.

Many Chinese firms in the East view investing in the inner region as an important opportunity to expand and enhance competitiveness. Some of these firms face stiff competition from foreign competitors in the East Coast region. They move to the West either to reduce costs or to penetrate less competitive markets. For example, a Shanghai detergent manufacturer, after running into strong competition from foreign competitors in the East, entered Shicuan province in the inner region in March 1996 seeking growth opportunities. Now the company is doing very well in Shicuan and its neighboring provinces. A top Chinese TV manufacturer also successfully cooperated with firms in the inner region to produce TVs for the West. In addition, many textile companies in the East also moved to the inner region to reduce manufacturing costs. Because many foreign companies have not invested in the region, these East Coast Chinese firms are enjoying the advantages of being the early market entrants in the West. These advantages may help these Chinese firms gain competitive strength and be better equipped to compete with foreign firms in the future. Thus, the change and development in the Western and Central region will have strong implications for the emergence of new competitive markets in the inner region as well as in entire China.