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2019.09.25

The Actual Situation of Accelerating Efforts to Strengthen Regional Cooperation in China --Infrastructure Construction and More Advanced Industries Transforming Regional Economies--

The article was originally posted on JBpress on August 19, 2019

  • Kiyoyuki SEGUCHI
  • Research Director
    Kiyoyuki SEGUCHI
  • [Expertise]
    Chinese Economy and Relations among Japan/China and the United States
1. Background of stronger cooperation among regions

In these one or two years, efforts to strengthen cooperation between regions in China have accelerated.

The three leading examples of this are the Hong Kong-Zhuhai-Macao Greater Bay Area, centered on Guangdong Province; the Yangtze River Delta, centered on Shanghai; and the Jing-jin-ji region (Beijing, Tianjin, and Hebei Province), centered on Beijing. There are also signs that even Chongqing and Chengdu are strengthening collaboration with each other.

Even though each region possesses its own distinguishing features, the following common factors have been pointed for recent efforts to promote stronger cooperation among regions.

First, it has become more convenient to travel between cities as massive transformation infrastructure projects, such as high-speed railways and expressways, have been completed, which has strengthened cooperation within large areas.

Second, the limits on and contradictions of independent development by core cities have surfaced as China's economy has highly developed, making it more important to strengthen cooperation with surrounding cities in order to respond to these problems.

Third, attracting new large-scale industries has grown more difficult as urbanization has progressed and advanced industrial clusters have formed. Regions have to try to develop their local economies by leveraging the distinguishing features of their particular industrial structure.

Fourth, environment standards in major cities are growing stricter, and core cities are becoming the centers of service industries while surrounding cities and regions are becoming centers of the manufacturing industry, and each is playing a particular role.

Fifth, there is a desire for economic development over large areas in order to reduce the wealth gap.

These are the factors that have been pointed out for the greater cooperation among regions.


2. Hong Kong-Zhuhai-Macao Greater Bay Area

The Hong Kong-Zhuhai-Macao Greater Bay Area began to really take off in 2018. The completion of two transformation infrastructure projects symbolizes this rapid growth.

The first was launch of service on a high-speed railway line that connects Guangzhou and Hong Kong in as little as forty-seven minutes, which was completed on September 23, 2018. Until service on the line was launched, it took about two hours to travel between the two cities, but completion of the high-speed railway dramatically reduced the travel time.

The other infrastructure project was the Hong Kong-Zhuhai-Macao Bridge, which was completed on October 24, 2018.

The bridge is the world's longest marine bridge, stretching 55 km in total and linking Zhuhai, Hong Kong, and Macao. Before the bridge was completed, it took four hours to travel from Zhuhai to Hong Kong by car, but it now takes only forty-five minutes.

It goes without saying that the completion of this transportation infrastructure has further strengthened cooperation among Hong Kong, Macao, and Guangdong Province, centered on Guangzhou and Shenzhen.

In the past, the development of this area, which is referred to as the Pearl River Delta, occurred independently of Hong Kong and Macao.

At that time, China was economically undeveloped with low technical capabilities and income level, and Hong Kong and Macao possessed substantial economic advantages over the country.

Since 2005, however, China's economy has rapidly grown, and income levels have risen sharply. Furthermore, Hong Kong's economy has rapidly grown more dependent on China's economy.

In the past, many processing trade companies in Guangdong Province exported goods through Hong Kong, and because of the province's poor financial services, Hong Kong possessed a clear relative advantage in terms of both trade and finance.

As China's overall economy developed, however, a larger and larger number of companies started to export directly from China without going through Hong Kong. In particular, the amazing development of Shanghai in terms of both finance and trade undermined Hong Kong's advantages.

In recent years, there has also been an improvement in the financial functions of both Shenzhen and Guangzhou, and Shenzhen's IT industry has grown to such an extent that even Silicon Valley views it as a threat. This has further weakened Hong Kong's status and amplified its concerns.

Because Hong Kong and Macao's relationship with China, particularly Guangdong Province, has undergone structural changes, Hong Kong is strengthening its collaboration with Guangdong Province and aiming to undertake coordinated development by leveraging the competitiveness of its international financial services, which continue to have an advantage.

This was the background of the beginning of the Hong Kong-Zhuhai-Macao Greater Bay Area.


3. Jing-jin-ji Region (Beijing, Tianjin, and Hebei Province) and Tangshan

The most serious problem in the Jing-jin-ji region is the accelerated deterioration in the business, social, and living environment of the capital Beijing, because problems of traffic congestion, water shortages, air pollution, and rising housing pricesare growing more and more serious.

The Xiong'an New Area was created in April 2017 in order to solve those problems. Located about 100 km southwest of Beijing, the area was created primarily to decentralize the capital's functions.

Therefore, the construction of large-scale factories in the manufacturing industry is not being permitted in the Xiong'an New Area, and the goal is to move the offices of state-owned companies, education and research institutions, and other organizations in Beijing to the new area; to lessen Beijing's congestion; and to improve its urban functions.

When constructing buildings in the Xiong'an New Area, the focus is on ensuring a good living environment through various efforts, including keeping a large percentage of the area green and introducing strict environmental standards. As for transportation, the goal is to increase the convenience of public transportation through the use of subways, self-driving electric vehicles, etc.

Therefore, it is not expected that the Xiong'an New Area will become a massive industrial cluster that will play a leading role in the regional economy as Shenzhen and Guangzhou have for the Greater Bay Area and Shanghai (particularly the Pudong New Area) has for the Yangtze River Delta.

Even so, it is expected that the area will drive economic development in Hebei Province (the area around Beijing and Tianjin) with its low-income level due to retarded industrial development. It appears, however, that experts in the field of regional economies think that it will be extremely difficult to achieve that goal.

One alternative plan that is drawing attention is the idea of making use of Tangshan's Caofeidian District, where a good port was constructed through a massive land reclamation project in the latter part of 2000 and the skillful use of the natural sea bottom topography.

The region possesses a massive industrial zone and a good port with natural features (located near the deep part of the Bohai Bay and equipped with a wharf that 300,000-ton class tankers can dock).

Because it is located about 100 km east of Tianjin central area, it is easy to avoid the problem of environmental pollution and is appropriate for clusters of heavy and chemical industries, such as steel, petrochemicals, and shipbuilding.

It is hoped that by introducing facilities that clear strict environmental standards, factories spread throughout Hebei Province will be drawn to the Caofeidian District.

The Tianjin municipal government has traditionally not permitted companies within the city to conduct business with businesses in Tangshan on account of the bad relations between the two cities (Tangshan City adjoins Tianjin City).

Therefore, if a Japanese automobile part manufacturer launched operations in the Caofeidian District, it could not supply parts to the Toyota car plant in Tianjin.

However, Tianjin has been forced to change its policy as it struggles with low growth of about 3% this year.

In addition, the high risk of technology drains acted as an obstacle as foreign companies in the heavy and chemical industries were not permitted to establish wholly-owned subsidiaries or joint ventures in which they held a stake of 51% or greater.

Recently, however, even foreign-owned companies in the heavy and chemical industries have been permitted to set up wholly-owned businesses. In addition, it is anticipated that there may be a further relaxing of rules on investments, including traditional restrictions on the ratio of capital contribution in companies, because the Foreign Investment Law, which reduces disparities in the treatment of foreign and Chinese companies, will come into effect in January 2020.

If that occurs, it can be expected that there will be a dramatic improvement in the Caofeidian District's investment environment.

Relations between Japan and China have dramatically improved since last year, and China's Chairman Xi Jinping is expected to visit Japan next spring. With these developments in mind, one possibility is that a new Japan-China economic cooperation project will be launched to build an environment friendly heavy and chemical industry in the Caofeidian District.


4. Yangtze River Delta

Shanghai, a core city in this region, has an extremely high standard of living and population density for its limited area. Therefore, emphasis has been placed on environment considerations, and there are various restrictions on manufacturers launching operations in the area.

On the other hand, the city is the home to an extremely large number of European and US companies in addition to the more than ten thousand Japanese companies. Its trade and financial functions have risen to a level that the city threatens Hong Kong's position.

Many Chinese and foreign companies are clustered in East China region in order to leverage the advanced functions provided by Shanghai. Therefore, Shanghai and the provinces of Jiangsu, Zhejiang, and Anhui have established extremely close collaboration with each playing a particular role.

I visited Ningbo the other day, and there are plans to build a marine bridge that connects the city directly to Shanghai in the next several years, and this will make it possible to travel to Shanghai in thirty minutes by high-speed train.

As for the area around the Shanghai Hongqiao International Airport, Shanghai's transportation hub, there were plans to develop it as an industrial cluster for Shanghai, but recently the central government has issued orders to develop it as a hub for the whole East China region. A fundamental review of the area's function has been launched with that goal in mind.

Taking into consideration that the transportation infrastructure in the region will grow even more advance, it is hoped that the Yangtze River Delta area will become more unified, increasing the economic efficiency of the whole area and that this will spur on the economy.


5. Chongqing and Chengdu

Over the past decade, I have traveled to the Chongqing and Chengdu area on business once a year and have regularly observed the region's economy.

For some time, Chongqing has been the site of the Liangjiang New Area, a national-class development zone and one of the three major development zones along with Shanghai's Pudong New Area and Tianjin's Binhai New Area. The Liangjiang New Area boasted the highest economic growth in all major cities of China.

After that, however, Party Secretary Bo Xilai, a driving force behind the development of the city, lost his position in 2012, and his successor Party Secretary Sun Zhengcai also fell from grace in 2017. This not only slowed the pace of Chongqing's development but also weakened its growth.

Although not receiving strong support from the central government like Chongqing did, Chengdu has steadily grown into a major city in Western China in recent years as it is blessed with various advantages, such as extensive land and a cluster of universities that draw outstanding human resources.

When I met with the municipal leaders of Chengdu in the past, there was a strong sense of rivalry between Chongqing because Chengdu always came in second to Chongqing.

In recent years, however, Chongqing has grown at a slower rate than Chengdu. As the outlook for economic growth in the area around Chengdu has grown brighter, the sense of rivalry toward Chongqing has evaporated.

At the end of 2015, a high-speed railway line that connects Chongqing and Chengdu was completed, reducing travel time between the cities to ninety minutes and further strengthening cooperation between the two cities.

Although Chongqing possesses a cluster of heavy industries and port facilities along the Yangtze River, it is surrounded by mountains and has limited land area.

On the other hand, Chengdu is strong in the automobile and electronics-related industries. Blessed with extensive land in the surrounding area, there is substantial room for the city to expand its land for industrial use. The city's service industries, including restaurants, entertainment, and leisure, are also growing.

In this way, the two cities' industrial structures complement each other, and in recent years, both municipal governments have worked to promote cooperation.


6. Key to a successful China investment strategy

As discussed above, there are signs that cooperation among China's regions with major industrial clusters is developing in new ways because of the construction of infrastructure and changes in industrial structure.

Over the next several years, it is expected that the construction of transportation infrastructure that has a major impact on the industrial structure and investment environment of regional areas will continue on.

When Japanese companies formulate their business strategy for China and investment plans based on that strategy, it is extremely important that they build their bases in a balanced and appropriate manner with a long-term view of the major structural changes taking place in the various regions of China.

A unique aspect of China is that it is impossible to accurately ascertain conditions unless one actually visits the area.

In order to seriously conduct business in China, it is indispensable to visit the various areas oneself and directly gather information locally.

The key to successfully conducting business in China is for company presidents who make final business decisions to gain an understanding of actual conditions in the Chinese market by directly experiencing the conditions themselves.

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