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A Legacy of Inland Development

by | November 27th, 2012 | 12:06 pm
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Many China analysts do not look fondly upon the Hu Jintao-Wen Jiabao administration. Coming from the high of state-owned enterprise and banking reforms in the Zhu Rongji era, the past ten years of gradual reform under Hu and Wen has been disappointing. However, the slowdown in the pace of economic reform does not mean that the Hu-Wen administration accomplished nothing, far from it.

Nowhere is the Hu-Wen legacy more apparent than in inland province development. Inland provinces are now growing faster than coastal provinces for the first time since the beginning of the reform era. In the period between 2008 and 2011, inland provinces averaged a real GDP growth rate of 13 percent compared to only 11.5 percent in coastal provinces. More interestingly the growth is also quite broad-based; not only the western provinces of Chongqing and Sichuan but also central provinces Hunan, Hubei, Anhui, Jiangxi.

Can this growth be attributed to Hu and Wen? There is certainly an argument for both sides.

Much of the explanation for the relative strength of inland growth is due to a slowdown in eastern coastal provinces, not the result of specific policies. After 2007, the global financial crisis severely impacted export growth in the relatively export-dependent coastal economy. On average net exports are now negative and a drain on GDP growth in coastal provinces in contrast to the six years prior to 2007. The impact of the slowdown in exports on the coastal manufacturing sector may also be to blame for a fall in fixed investment in the manufacturing sector. The result, average real GDP growth rate of coastal provinces fell to 11.5 percent between 2007 and 2011 down from 13.9 percent in the period from 2003-2007.

On the other hand, the rapid increase in fixed investment in inland provinces after 2007 could be attributed to policy. In contrast to the fall in fixed investment growth after 2007 in coastal provinces, fixed investment has continued to increase in the inland provinces at almost the same rate as the five year period prior. Fixed investment as a component of GDP in inland province rose by an average of 10.6 percent between 2007 and 2011, down only slightly from 11.3 percent over the previous five year period.

Inland provinces – particularly in the west – have received preferential support for investments. Nearly two-thirds of all national infrastructure projects financed by the state budget are in inland provinces. Private fixed investment in inland provinces already rivals that of coastal provinces. Foreign investment while small is growing rapidly thanks to a host of policy incentives, such as a three year initial corporate income tax break for enterprises in certain targeted sectors and a lower corporate income tax bracket for all enterprises investing inland. Banks are also encouraged to lend more to inland projects with bank lending now equaling coastal provinces as source of fixed investment financing.

The Hu-Wen administration was influential in creating the policy framework to support these initiatives. They elevated the importance of the initial Western Development Strategy introduced at the end of the Jiang Zemin and Zhu Rongji administration in 1999 and introduced many incentives for private and foreign investors to invest in those regions. Hu and Wen also added their own unique contribution to the party’s inland development strategy with the introduction of the “Central Rise” policy in 2004 to specifically support the expansion of the manufacturing sector from coastal provinces to central provinces. The success of which may be exemplified by manufacturers like Foxconn moving their entire iphone facilities from coastal Guangdong to inland Henan province.

Certainly the Hu-Wen administration had its faults – real estate bubbles and financial repression to name a few – but it deserves credit for inland development. The Hu-Wen administration may not have significantly reduced inequality at a national income level but they did make inroads in reducing regional inequality. With inland provinces continuing to outpace coastal provinces, the Hu-Wen legacy of inland development is significant and worthy of note.