Opportunities and Risks in doing Business in Western Regions of China

1. What do you think are the opportunities and risks in doing business in western regions of China? Are they any different from those in the east of China? Executive Summary The economic development in Eastern China has grown dramatically after the reforms, however, the vast potential has seen in Western China which cannot be overlooked. Thus, this paper will examine the differences in opportunities and risks for business in China comparing eastern region to western region. China’s emerging markets in second, third and fourth tier business centers, from Harbin in the north to Kunming in the south, from Qingdao in the east to Urumqi in the west, which are now growing faster than the traditional Beijing, Shanghai, Guangzhou markets. Foreign investment in Western China provide tremendous opportunities, as Chengdu and Chongqing’s favorable central China positions, and the integration of Yunnan and Guangxi into the Free Trade Agreement with ASEAN. Moreover, the western region of China which is now a new hotspot for multinational companies due to its lower land and labor costs, rich natural resources.

Taking advantage of favorable government tax and investment incentives therefore makes great sense while these areas are still on the upward trend. Also, government implemented its Western Development Strategy (WDS) also known as the “Go West” policy in 2001. The lagging economic progress of the region prompted the Central Government to offer incentives for business development, including a much lower corporate income tax with 15% as opposed to the usual 25% for companies relocating. The plan also calls for massive infrastructure development both in urban and rural areas. However, hidden problems exist despite the economic development in the western regions. Introduction Since 1978 China has developed the “open up policy” to reform Chinese economic organization, its economy has been rapidly developing in the past reforming years, which enables it to own higher economical social status both regionally and internationally. Therefore, the Chinese economy has been rapidly increasing with an average 9.4 percent annual Gross Domestic Product (GDP) growth, one of the highest growth rates in the world (Zheng, 2005). China has made a great change to its traditional closed market and showed the world its great potential in work force, economic independence and power of consumption.

Moreover, internal migration and labor mobility in China are not only part of the transformation from a agricultural economy to an industrial as developing countries, but also part of a unique economic transition from a planned economy to a market economy. Also, China joined the World Trade Organization (WTO) in 2001 to become competitive in the global market. As such they have been important factors in China’s rapid economic growth during the reform era. However, it makes China faces the inequality problems from eastern and western regions.

Because eastern region is more developing region whose economic development level is higher than western region, who owns larger competitive companies both nationally and internationally. So let’s first examine the risks and opportunities of western region for business in detail, then it will compare those of eastern region. Opportunities in west -‘Go West’ policy China’s “Go West” strategy, launched just before the country’s entry into the WTO in 2001, has been a milestone in the nation’s economic development. It officially called the Western Development Program, covers the municipality of Chongqing and the provinces of Gansu, Guizhou, Qinghai, Shaanxi, Sichuan and Yunnan and the autonomous regions of Guangxi, Inner Mongolia, Ningxia, Tibet and Xinjiang. The aim was to boost the poorer western parts of the country that had so far not enjoyed the economic benefits of China’s opening up to the outside world. Since then, some $325 billion has been invested in major infrastructure projects in the western region, one of the biggest economic regeneration programs of all time. It has not been about relocating export-oriented, low-cost manufacturing from Guangdong just for the cheaper labor. Much of the emphasis has been on bringing in new science and technology industries. For example, the Xi’an High-Tech Industries Development Zone (XHTZ) is one of six zones nationally that the Chinese government wants to turn into world-class science parks. It solved a problem of local talent drain, many people returning from urban areas, as youngers used to prefer to work in Beijing and Shanghai but now they want to work here. -Economic Development Policies for Western China opportunities Wsetern China is often mistakenly dismissed as “desert” and, therefore, not perceived as any kind of profitable market opportunity.

However, China’s western regions are now as a new growth engine for the country’s economy when eastern regions are experiencing industrial overcapacity and falling external demand. The GDP in China’s western regions grew 10.7 percent year-on-year in the first three quarters of 2013, which is 1.6 percentage points higher than eastern regions. For instance, Lanzhou, capital of Gansu province as the role and responsibility of gateway of economic growth of the western, which is the first State-level new special economic development zone in the west to boost the development of Western China. Lanzhou locates in the favorable geographical center of northwest China, makes it the key regional transport hub for the entire region, allowing areas further west to maintain railroad connections to the eastern half of the country with a dramatic reduction in transport costs, which added further attraction as an investment center. – Narrowed economic gap Since 2004, the economic gap between China’s east and west has narrowed due to the central government’s supportive policy according to Tsinghua University report. The report showed that since 1990, the coefficient of difference or gap between China’s east and west per capita GDP fell from 0.75 in 2004 to 0.6 in 2008. Since the global economic crisis, China has directed a large portion of its stimulus package to the western region in an effort to improve people’s livelihood as well as to boost and support infrastructure construction, the ecological environment, industrial promotion, technological innovation and post-quake reconstruction there. Risk in west – Intraregional Disparities In recent years an exciting performance of China’s economic development is that China’s interregional disparities has put up a declining trend. But unfortunately, Western China’s intraregional disparities have enlarged significantly after WDS. Because western China includes 12 provinces and regions where there exist enormous natural, geographical and economic differences as well as comparative advantages, so uniform development strategy to western regions was ineffective within the regions. In 2009, Western China’s rural population still accounted for over 30% of the nation’s total rural population and over 60% of the total population in Western China.

While incomes from wages, salaries and properties in Western China are very low. Moreover, 60% of China’s rural poverty population is located in Western China, and poverty incidence rate and poverty intensity are also much higher than those in other regions (RSD, 2010). -Human capital shortage and brain drain Central governments made great efforts on education and personnel training in recent year. Due to disadvantages of income level, working and living environments, so that most of high level professionals tend to work in eastern coastal regions rather than western ones. For example, more than 90 percent of college and university graduates in Western China prefer to obtain employment in eastern regions. Thus, rural labor force drain in Western China is seriously, the western regions of China needed more people with better skills.

Since late 1980s, huge number of peasants began to leave their home and work in cities. More importantly, most of outgoing rural migrant workers are young and relatively better-educated, while the remaining ones are mainly old and poorly educated people. It will definitely cause negative impacts on Western China’s rural economy, especially agriculture development. -Backward Technology and Innovation Capability Technology progress is the source of long-term economic growth, it can not only improve factor productivity but also contribute to optimizing industrial structure. Generally, regions with higher technical level indicate higher economic development level. The problem is that both technology and economic development level of Western China are very low. Also, inefficient resource development and lower innovation capabilities resulted in serious resources waste and environmental damage due to backward technology.

Therefore, It is ineffective to promoting technology progress and eventually cannot be benefitting industrial structure upgrading. -Patterns for Infrastructure Construction The first problem is the allocation of benefits. Following the current construction pattern, most of social and economic benefits created by infrastructure construction flow out rather than localize in western regions.

The second one is the inadequate and backward public infrastructure, especially in the fields of education, transportation, health care service and social security. The last is that infrastructure construction excessively depends on state funds and bonds, while private investment in infrastructures has not yet been widely utilized. Opportunities in east -Market Opportunities As China is still a developing country with significant economic divisions between urban and rural areas, even China has been developing western regions, but we cannot neglect the rapid economic growth in the eastern urban areas, which has led to a booming consumer market for high-end goods and services, including tourism and education. China will account for about 20 percent of global luxury goods consumption by 2015, or US$27 billion. By 2020, China’s middle class is expected to account for around 45 percent of the population, or approximately 700 million people. -Income Since 1990, income disparities and the gap in development between the eastern and western regions of China have widened. As a result, in 2004, Beijing, Tianjin, Hebei, Shanghai, Jiangsu, Zhejiang, Fujian, and Guangdong accounted for 82.7 percent of the value of China’s exports and 45.2 percent of all jobs in manufacturing. Also, in 2011, the per-capita disposable income of urban residents was US$3,454 and the per-capita disposable income of rural residents stood at US$1,105. -Labour migration Reform of the ‘hukou’ system is essential for labor mobility and hence for urbanization and economic development. At the same time, markets became more important forces in allocating capital and labor.

The coastal regions took the benefit as booming areas to attract massive flows of labor, which in turn has stimulated economic growth in these regions and improved the efficiency of labor allocation. Due to vast potential in eastern regions, the number of migrant workers remains high. In 2011, the urban population exceeded that residing in rural areas for the first time, with 691 million urbanites and 657 million rural dwellers. In the long run, rural–urban migrants will be the main source of labor for industry in China, helping to maintain its low-cost advantage. Risk in east -Cost Increases Rising costs have been a concern in China for many years and become more seriously the increases may have outpaced company expectations of tolerable expense increases Conclusion In conclusion, even the long period development in eastern coastal regions, however, via the reforms in western regions, it can compete with eastern regions under the contemporary China. It is favorable for doing business either in Eastern China or Western China, as long as comparing and analyzing the different conditions among eastern and western. As China is now central to the world economy and is the world’s biggest trading nation as measured by the sum of exports and imports. The country is expected to surpass the US to become the largest economy by 2028. The last three decades of economic reform has made China not only the world’s factory, but also the world’s largest market for numerous products. China has been the most rapidly growing economy in the world since the reform in 1978. This growth has led to an improved dramatically in real living standards, expanded the scope of personal freedom, increased social mobility and to an unprecedented decline in poverty. The World Bank estimates that poverty headcount ratio had declined to 10% by 2004, indicating that about 500 million people have been lifted out of poverty in a generation. Nevertheless, the phenomenal rate of change has brought with it different kinds of stresses.

China faces serious natural resource scarcity and environmental degradation. It has also seen growing disparities of different kinds as people in different parts of the country and with different characteristics have benefited from the growth at different rates in eastern and western regions. As such, a basic understanding and comparison of the opportunities and risks of Eastern and Western China, is imperative for anyone interested in doing business in the global market. Table of Contents Executive Summary Introduction Opportunities in west ‘Go West’ policy Economic Development Policies for Western China opportunities Narrowed economic gap Risk in west Intraregional Disparities Human capital shortage and brain drain Backward Technology and Innovation Capability Patterns for Infrastructure Construction Opportunities in east Market Opportunities Income Labour migration Risk in east Cost Increases Conclusion References Appendix References Research Team of Ministry of Agriculture (2001), A Study on Change of Rural Population and Tenure System Reform in China, Project Report, Beijing. Meng, X., Gregory R., and Wang, Y. (2005), Poverty, Inequality, and Growth in Urban China, 1986-2000, Journal of Comparative Economics, 33(4). Ravallion, M., Chen, S. (2007) China’s uneven progress against poverty, Journal of Development Economics, 82, pp1-42. Lin, J (2004) Regional inequality and labor transfers in China, Economic Development and Cultural Change, 52(3): 587-603. Cai, F. (2004) Migration, unemployment and urban labour market segregation in China’s economic transition, The World Economy, 4. Dollar, R. (2005) Investment Climate and Firm Performance in Developing Economies. Economic Development and Cultural Change, 54(1), pp1-31. Lardy, R. (2002) The Economic Future of China. Retrieved March 10,2014, online available at https://www.asiasociety.org/speeches/lardy.html

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