WHEN it came to choosing between extra revenue for its coffers and attracting more foreign investment to fund economic development, Haicheng opted for the latter. The city of one million in Liaoning province has chosen to cut revenue in order to give more incentives to investors to explore its rich mineral reserves. The reason? It is desperately short of capital in the light of the national credit squeeze ordered by the People's Bank of China. Less than two hour's drive from Shenyang, Haicheng is estimated to have at least 300 million tonnes of magnesium reserves. It is also known for the production of magnesium oxide, which is essential to the steel-making process, and ranks third in the world in volume. To utilise its rich natural resources, the Haicheng government is keen to develop metallic magnesium manufacturing and paper-making industries, for which there is high demand in China. However, the austerity measures followed by a contraction in bank loans have put the brakes on development projects, although some have been nearly completed. Construction projects ranging from capital-intensive ones, such as the establishment of a machine manufacturing factory, to infrastructure development were all affected. Development of Haicheng's first power plant was also delayed for over a year until Hong Kong's Hop Hing group injected capital and took a majority stake in the energy firm early this year. Mayor Wan Fumin said the local government was still looking for foreign investment to complete the decoration work of the first three-star hotel in the heart of the city. Mr Wan, who has been Haicheng's mayor for 11 years, said local government had to introduce more incentives for foreign investors. Foreign investment and savings of wealthier farmers were among the sources of capital to fund economic development. To lure investors, a low rental rate for land use and a further cut in tax were offered. Mr Wan cited the Haicheng economic development zone as an example. According to the state tax policy, investors in Haicheng have to pay a 20 per cent tax on profit. However, to maintain the city's competitiveness vis-a-vis other development areas, such as Zhuhai in Guangdong, where the profit tax rate stood at 15 per cent, the Haicheng government decided to refund the difference in rates to investors from its own account. People can also get a 50-year contract for land use with electricity, water supply, communication, transportation and drainage facilities installed at the rate of 100 yuan (about HK$90) per square metre, which is at a discount of about 30 per cent compared with other coastal regions. Mr Wan admitted these preferential policies would no doubt reduce the government's revenue. 'Rather than keeping the money in our account, we prefer to give more incentives to attract investments. In return, an early completion of the development projects is guaranteed and we can then achieve greater earnings with a fast-growing economy,' he said. According to the mayor, Haicheng had an industrial output of 11 billion yuan last year. The total amount of trade reached 3.76 billion yuan during the year and retail sales touched 1.48 billion yuan. The fashion and textile wholesales market in Haicheng was the largest in northeastern China, with a daily turnover of five million yuan. However, government revenue was only 285 million yuan during the year. Mr Wan reiterated that growth in revenue would gradually keep pace with economic development. He expected the tax transferred to the central government to double this year, from 40 million yuan to 88 million. The mayor sidestepped the question of what would happen if the provincial and central governments did not lend their support to Haicheng, saying the approval for the city to become a pioneering region in economic reform was already a boost to its development. Mr Wan said he would strengthen efforts to promote Haicheng in overseas exhibitions. Following his tour to Hong Kong last year, he prepared to visit South Korea at the end of this month to introduce the Haicheng Economic Development Zone. To date, 10 per cent of the zone, or 1.5 square kilometres, had been furnished with basic infrastructure. And the management had so far signed 61 contracts worth a total of 1.18 billion yuan. Some investors, however, were worried about transportation fees as the city was in a remote area in northeastern China. However, it appealed to those with close business ties in Korea and Russia. Further, the supply of electricity is also another cause for concern. Even when Haicheng's own 26 megawatt power plant begins operations next year, it is estimated that electricity supply will still lag behind demand by 140 kilowatt-hours, which is expected to grow to 300 kWh a day next year.