Notable Regional Structural Changes in the Chinese Economy

Coastal areas are changing their industrial structures from reliance on export-led growth to domestic demand-led growth, while inland areas are focusing on domestic demand-led growth by creating new industrial clusters

China's real GDP posted 7.9% growth for the second quarter of 2009. For the quarter, the export figure in dollars dropped drastically by 23.5%, compared to the same quarter last year. In contrast, cumulative nominal investment in fixed assets for the first half of 2009 recorded an exceedingly large increase of 33.5%, compared to the same period in 2008. Considering the fact that the figure for the first quarter of 2009 had increased 28.8% over the same period last year, the growth for the second quarter must have reached almost 40%. Nominal consumption also grew steadily, by 15%. Given the fact that these figures for fixed asset investment and consumption are at a nominal base, and that the PPI (-7.2% for the second quarter) and CPI (-1.5%) were negative, the real growth rates were even higher.

In my June column, I explained why domestic demand remained strong even in the face of a drastic decrease in exports, and I presented two regions with an increase in industrial production prompted by a major increase in fixed asset investment, i.e. the Bohai Economic Rim and the Guanxi Beibu Gulf Economic area. From a different perspective, in this July issue, I'd like to present two areas demonstrating economic growth prompted by changes in their industrial structures.

The first such changes are seen in the coastal Guandong Province, which has been dependent on export-led growth. Since May 2008, the Guandong Province has been promoting the transfer of labor intensive industries, centering on Guangzhou and Shenzhen in the Pearl River Delta, to the east and west regions and northern mountainous areas of the province. Large scale industrial complexes are being built in these areas; they plan to rely on the local, agricultural labor force, shifting them to employment in secondary and tertiary sectors. At the same time, Guangzhou is concentrating on automobile manufacturing, with Japanese manufacturers, such as Nissan, Honda and Toyota, as leaders. The city is also engaged in infrastructure construction, including transportation and office buildings, in preparation for the Asia Games to be held in November 2010. Dongguan, which neighbors Guangzhou and Shenzhen, has been suffering from the decline in exports. With the aim of encouraging companies to switch from producing export goods to goods for domestic consumption, the Guangdong Provincial Government hosted a product exposition in May; it invited over 500 companies that are able to take advantage of domestic demand due to their domestic distribution networks. By combining multi-faceted policies, the government is trying to exchange its export-based industrial structure for one more domestic-oriented. Due to these policies, Guangzhou's economic growth rate is above the national average, thanks to the automobile manufacturing industry and real estate business. This growth is in contrast to Beijing and Shanghai, where the growth rates are drastically below the national average.

The second changes are led by Chongqing, which is aiming to build new industrial clusters inland. This January, the State Council designated Chongqing City the nationally important economic development area with the Two Rivers New Zone between Yangtze River and Jialing River as its center. Hereafter, with this new development area as its core, Chongqing will play a leading role in a new economic area called the "West Triangle" (West Delta), centering on the three cities of Chengdu, Xi'an and Chongqing. Chongqing's main industries are automobile, petrochemical and equipments - all producing for domestic consumption. While the 2008 export/ GDP ratios for Shanghai City and Guangdong Province were around 80%, the ratio for Chongqing was only 7.3%, indicating that export plays a small role and diminished effect from its decrease. The same can be said about Chengdu and Xi'an. The city government of Chongqing is in the process of formulating a concrete infrastructure improvement plan that will be suitable for building industry clusters centered on the new economic development area. As the mid- and long-range infrastructure construction projects are completed, these will trigger fixed asset investments, which will continue to add to Chongqing's growth rate. So, the Guangdong Province's structural transformation to domestic demand-led growth will mitigate the shock from a large decline in exports, and the establishment of the West Delta economic area with Chongqing as its center, will further increase domestic demand, led by the inland economy, where large scale industrial clusters are being built. Both of them invite the increase in infrastructure investment in the short run and the formation of large scale industrial clusters in the mid- to long-run, which will contribute to driving up China's economic growth rate.

For further details, please read "The Economic Situations of Export Dependent Guangdong Province And Domestic Demand-Led Chongqing City: A Report of A Visit To Guangzhou And Chongqing."