From East to West

On January 19, 2000, the Leading Committee of the State Council for Developing the Western Region was set up in Beijing, with Premier Zhu Rongji in the Chair, and first ministers of 18 major ministries and commissions under the State Council as the members (see Table 1).1 The formation of the high-powered Committee showed the determination of the Chinese government to develop the poor and backward interior areas, and signified the beginning of shift in focus of economic development from the eastern to the western region.2

The policy shift occurred at a time when China was suffering from sluggish domestic demand, particularly consumer demand, as indicated by the enduring deflation that has lasted for more than two and a half years since October 1997. Although the Asian financial crisis should be held partly responsible, a fundamental cause of the sluggish demand was the imbalance between over-capacity of production and under-capacity of consumption. The increase in production capacity was not accompanied by a proportional increase in the consumption capacity of ordinary people, particularly those in the western region who were somehow neglected in the coast-focused development in the last two decades.

The western region accounts for 23 percent of China's population, but only 13 percent of China's consumption (see Table 2). Residents in the region have only less than half of the consumption capacity of residents in the eastern region. If consumption of residents in the western region were to reach the same level as their counterparts in the eastern region, domestic demand would see an increase by a wide margin, so would the nation's GDP. The low level of consumption in the backward western region appears to be a bottleneck of China's economic development. To maintain growth momentum, the Chinese government needs to reorientate economic development to the most underdeveloped western region.

In addition to the imminent concerns over sluggish domestic demand, the policy shift was motivated by some deeper concerns as well. One of such concerns was the deterioration of ecological environment in the upper and middle reaches of the two largest rivers in China, the Yangtze River and the Yellow River, owing to excessive logging and reclaiming wastelands. The deteriorating ecology was held mainly responsible for the devastating floods in the Yangtze River and the partial dry-up of the Yellow River that did huge damage to the nation in recent years. As shown in Map 1, both of the Yangtze River and the Yellow River rise in the western province, Qinghai, with their upper and middle reaches in other interior provinces. It is, therefore, urgent for Chinese government to focus on ecologically sound development of the interior, particular the western region, so as to bring the rivers under control.

The deepest, and most predominant concern was, however, the legitimacy of the Communist regime. The widening of economic disparities between the east coast region and the interior regions contradicted the socialist principle of "prosperity for all", and would threaten social stability and national security in the long run.3 Chinese leaders were well aware of the danger right from the beginning of the economic reforms. In 1988 when the so-called "economic development strategy of coastal region" was started, Deng Xiaoping pointed to the limitations of the strategy, and put forward the idea of two stages of development. That is, the coastal region develops first, and then help the central and western regions catch up at a certain point of time. In 1992, Deng Xiaoping further confirmed the idea that socialism is to realize common prosperity, and proposed that the focus of economic development should be shifted from the eastern region to the western and central regions at the end of the 20th century.

To live up with Deng Xiaoping's design, the third generation of the Chinese leaders, headed by President Jiang Zemin, began to prepare for the policy shift as early as in 1995 when they called for coordinated regional development under the Ninth Five-Year Plan for National Economic and Social Development under the Long-Range Objectives to the Year 2010 of the PRC. In June 1999, Jiang Zemin put forward, for the first time, the idea of "grand development of the western region." As 90 percent of the poorest people and most of minority nationalities in China are located in the western region, it is understandable for the current Chinese leaders to focus on the western region, although the real target of the westward drive is the development of all poor areas in inland China.

What are the Features of the Western Region?

The western region is featured, first of all, by harsh physical environment. Only less than 5 percent of the land area of the region is cultivatable, with the rest covered by mountains, hills, plateaus, deserts and dry land. As a result, the region is extremely under-populated as compared with other parts of the nation. Being 4000 meters above the sea level on average, for instance, the Qinghai-Tibet plateau accounts for 25 percent of China's land area and the Xinjiang province accounts for 17 percent of China's land area, but only 1.3 percent of China's population.

Transportation and telecommunication facilities are underdeveloped in the western region. Railways and highways are sparsely distributed in this region. Up to 1998, for instance, railway coverage was 26 km per 10000 square km in this region while it was 153 km per 10000 square km in the eastern region. Until now there is no railway at all in Tibet. The poor telecommunication facilities can be shown by the number of telephone sets and internet subscribers. In 1998, for instance, there were 411 telephones and 1 internet subscriber in every 10000 persons in the western region, while the figures were 1002 and 10 in the eastern region, respectively.

Residents in the western region are the poorest in China. 90 percent of mainlander Chinese under the poverty line are now located in this region. In 1998 as shown in Figures 2 and 3, all western provinces were below the national average in terms of GDP per capita and consumption per capita. Illiteracy ratio was much higher in the western region (27 percent) than in the eastern region (14 percent). In Tibet and Qinghai, Illiteracy ratio hit as high as 54 percent and 43 percent, respectively. On top of that, owing to the previous coast-focused strategy, the region did not open up until 1992, and foreign investment and foreign trade only accounted for 3 percent and 4 percent of the national totals, respectively. The state sector built up in the planning period was still a heavy burden on the region, accounting for more than 80 percent of the economy in some western provinces such as Tibet and Qinghai. On the other hand, owing to poverty, labor and land are much cheaper in the western region than in other parts of the nation.

The western region is, nevertheless, abundant in natural resources. It accounts for, for instance, 58 percent of proven reserves of natural gas, 70 percent of proven reserves of hydroelectric power, 97 percent of proven reserves of salt, 62 percent of proven reserves of nickel, and 57 percent of proven reserves of platinum in China. The western region has become the main supplier of China's natural resources and raw materials, and has established a base for resource-related industries (see Table 3). Owing to the distorted price structure in China and the falling price of raw materials in the world, the western region did not benefit much from its rich natural resources.

The western region is also rich in tourism resources. There are seven world-class cultural heritage sites in this region listed by the United Nations Organization of Education, Science and Culture. They are the Mogao Crottoes in Gansu, the Qin Shi Huang Mousoleum in Shaanxi, the Valley of Nine Stockaded Villages in Sichuan, Huanglong in Sichuan, the Ermei Mountain in Sichuan, the Li River in Yunnan, and the Potala Palace in Lhasa, Tibet. In addition, the Three Gorges of the Yangtze River, the Terra-Cotta Soldiers and Horses and the Silk Route in this region are also famous sites for tourism. On top of that, 50 of China's 56 minority nationalities live in compact communities in this region, such as the Uighur, the Tibetan, the Hui, the Yi, the Bai, the Hani, the Zhuang, the Dai, and the Miao. Because of the cultural sites, the scenic beauties and the ethnic diversities, the western region attracted attention from tourists all over the world. The western region currently accounts for about 30 percent of foreign tourists visiting China, and has a great potential for developing the tourism industry.

Priorities in Development

Being aware of the difficulties associated with the adverse physical environment and poor infrastructure, Chinese government was prepared for a protracted battle to turn the interior into prosperous areas. A detailed long-term plan is still in the making, but the priorities in developing the western region were spelled out clearly at the first meeting of the Leading Committee of the State Council for Developing the Western Region held on 19-22 January 2000, and some preliminary measures were proposed soon afterwards. 4

The number one priority is to speed up the construction of infrastructure. The focus is on the development of highways, railways, airports, natural gas pipelines, electric networks, telecommunication, broadcasting and television, and facilities of water resource utilization. 180 billion RMB will be invested in the construction of highways and roads in the year of 2000, with a focus on some national highways and eight trans-provincial main roads in the western region (see Table 2). 100 billion RMB will be invested in the construction of railways in the next five years, with a focus on railways that link individual provinces within the western region, that link the western region to the eastern region, and that link the western region to neighboring countries in central Asia (particularly Kirghizia and Uzbek). More than 100 billion RMB will be invested in the construction of the natural gas pipeline between Xinjiang and Shanghai.

The second priority is to protect the ecological environment. A total of 200 billion RMB will be invested in projects related to ecological protection in the next 10 years, most of which will be allocated in the western region, particularly in the Yangtze River and Yellow River areas. The government will provide farmers with grains and nursery-grown plants so as to encourage them to turn farmlands back into forests or grasslands. Mountain passes will be sealed for afforestation. In the upper reaches of the Yangtze River and the upper and middle reaches of the Yellow River, logging in natural forests will be forbidden, and lumber markets will be closed down. A total of 6 million hectares of natural reservation zones will be built up in the western region, particularly in the Qinghai-Tibet Plateau, the headstream areas of the Yangtze River and the Yellow River, the mountain and valley areas in southwest provinces and the highland and desert areas in Xinjiang and Inner Mongolia. In the next five years, the natural reservation zones in the western region will increase so rapidly that they will account for 8.5 percent of China's total land area.

The third priority is to adjust industrial structure to the extent that the western provinces focus on the development of geographic-specific industries with prospective markets, as well as industries in which the western provinces have an advantage. The exploitation of natural resources will be conducted in an economic way, and attention will be given to the protection of the resources. Husbandry, forestry, plantation of herbs and green foods, and the tertiary industry (particularly tourism) will be among the priority sectors to develop, and will become new growth points in the western region.

The fourth priority is to accelerate the development of science, technology and education, and speed up the nurturing of talents. In addition to the introduction of advanced technology and trained personnel from abroad and other parts of the nation, scientific and technical resources in local munitions enterprises, research institutes, and universities and colleges should be utilized and developed to full potential. Attention will also be given to the development of education in poor areas at various levels so as to improve the quality of labour force.

Preferential Policy Measures

The grand plan of developing the western region requires a large amount of investment. The Chinese government is willing to make use of market forces to attract non-state investments and foreign investments into the western region. The Leading Committee of the State Council for Developing the Western Region announced that the government would speed up the reform and opening-up in the western region, and "turn enterprises into the main engine of developing the western region."5 A number of preferential policy measures were proposed to accelerate reform and opening-up in the western region.

With regard to domestic reforms, China planned to assign 62 percent of the 600 SOEs under the scheme of debt-equity transfer to the western region this year in order to turn SOEs in the western region from burdens to contributors to the development of this region. In the meantime, private and other non-state owned enterprises were encouraged to open business in western provinces. Cities in western region would be allowed to run lottery to raise funds for infrastructure construction. Restrictions on enterprise bonds were to be removed, and local enterprises would be allowed to issue bonds within the western region. Investment funds were to be established to promote industrial development in the western region.

With regard to opening-up, the Chinese government planned to grant various policy concessions to foreign investment in the western as well as the central region. On January 24, the first set of such policy concessions were released:

1. Foreign investors in the "promoted industries" in the central and western regions enjoyed a preferential enterprise income tax of 15 percent for an additional three years after the maturity of the current favorable terms;
2. In cases where export values exceeded 70 percent of the value of gross output, foreign investors enjoyed a further tax cut, but the total enterprise income tax cannot go below 10 percent.
3. For the western and central regions, the "promoted industries" include not only the "promoted industries" but also the "restricted industries B" in the Guiding Directory of Industries Open to Foreign Investments jointly released by the State Development Planning Commission, the State Economic and Trade Commission, and the Ministry of Foreign Trade and Co-operation in 1997 (revised in 1998). They also include so-called geographically specific industries and geographically advantageous industries, and a list of these industries in each of the western and the central provinces was published on 23 June 2000.

These concessions took effect on January 1, 2000. In the meantime, a number of other concessions were also proposed. Foreign-invested enterprises already established in the eastern region would be, for instance, encouraged to go to the western and central regions. Enterprises in which foreign investments exceeded 25 percent of total investments would be considered as foreign invested enterprises to enjoy related preferential tax treatments in taxation. Foreign investors would be encouraged to invest in technology updating and innovation in SOEs. Foreign banks would be allowed to set up representative institutions and business branches in the western region. It is expected that as the grand plan of developing the western region evolves, more and more preferential policy measures will be taken to encourage foreigners to invest in the western region.

The Challenges Ahead

China will face a number of difficulties in carrying out the ambitious plan for developing the western region. Owing to the harsh physical environment and the poor infrastructure, for instance, it is very hard to attract foreign direct investments and domestic private investments into the western region, particularly the rural and remote areas in this region. In the meantime, projects in the prioritized areas, such as infrastructure construction and ecological reservation, cannot make a profit in short run and, therefore, have no attraction to foreign investors and private investors. The Chinese government has to be the main supplier of financial resources for these projects, at least at the early stage of the grand plan for developing the western region. This will exert great pressure on China's public finance system, which is now in trouble.

To begin with, the revenue of the Chinese government declined relatively along with rapid economic growth. From 1978 to 1999, for instance, the ratio of government revenue to GDP fell from 31 percent to 13 percent. Most importantly, the financial power of the central government weakened significantly, as indicated by the decrease in the share of central government in total government expenditure. From 1978 to 1998, for instance, the share fell from 47 percent to 29 percent. By any standard, the Chinese government has become one of the "weakest" governments in the world in terms of financial power. To provide financial assistance to the western regions, the Chinese government has to find ways to increase its revenue in the first place.

Furthermore, the government debt burden increased rapidly. The Chinese government borrowed money year after year to meet increasing financial need, and found itself embarrassed by increasing domestic and foreign debts. Up to 1999, the accumulated domestic debts amounted to 21 percent of GDP, and the accumulated foreign debts amounted to 15 percent of GDP. To make things worse, the bad loans of state banks has increased rapidly, amounting to 25 percent of GDP in 1999. Added together, the total government debt burden was about 63 percent of GDP. In the face of the debt burden, it is very difficult for China to rely on issuing treasury bonds to finance projects in the ambitious plan for developing the western region unless the efficiency in fund utilization improves. To improve the efficiency, China has to reform the current system of treasury bonds management and fight corruption.

In recent years corruption became worse in projects financed by the government. In 1999, for instance, out of the 140 Treasury-bond-funded projects in the construction of railways, highways, power networks and irrigation system inspected by government investigators, 35 had the problem of misappropriating government funds.6 The corruption in the Three Gorge Project, the largest government-funded project in China so far, is more alarming. Up to the end of 1999, 138 cases of embezzlement and misappropriation of government funds were found in the emigration plan alone, with the embezzled and misappropriated funds amounting to 31 million RMB.7 The wide spread corruption will be the most dangerous enemy to the grand plan for developing the western region, and anti-corruption will become the most tough challenge to the Chinese government in the years ahead.

It is expected that the grand plan for developing the western region is a very difficult task for the Chinese government to fulfill. Nevertheless, the impelling forces behind the westward drive are so strong that they will push the Chinese leadership to find ways to overcome these difficulties, and make greater effort to make use of market forces to draw financial resources from the non-stste sector, particularly foreign investors. In addition to WTO entry, the westward drive will push China to further reform and opening-up, and provide more opportunities for foreign investors and domestic private investors.