Opinion | To catch up with the wealthy east coast, China’s rising western cities should play nice with foreign enterprises

Paul Sives says Chongqing and Chengdu are joining the league of China’s top cities in terms of economic growth but there are still too many barriers to doing business in western cities, especially for foreign companies

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In 2017, while coastal regions still led the way in terms of absolute income, Chongqing (above) and Chengdu outpaced nearly every other Chinese city in terms of economic growth. Photo: Simon Song

Published: 2:04pm, 16 Nov 2018Updated: 6:01pm, 16 Nov 2018

For many years, China has sought to narrow the development gap between the wealthy east coast and the less-developed western regions. As part of a Go West strategy, the government has invested dizzying sums in hard infrastructure – roads, airports, railways and bridges – to better integrate the western regions into global production chains.

Now, these investments are beginning to pay off. In 2017, while coastal regions still led the way in terms of absolute income, two inland cities – Chongqing and Chengdu – outpaced nearly every other Chinese city in terms of economic growth.

Both southwestern cities are increasingly attractive to investors, too. Back when China first became the factory of the world, foreign businesses clustered in cities like Beijing, Shanghai and Guangzhou, taking advantage of low costs to manufacture and export goods to their home markets. Times have changed: coastal cities are reaching saturation point and can no longer offer the same low operational and labour costs as in the past; and, as Chinese consumers’ purchasing power grows, many foreign firms have pivoted away from the export-driven model to serve the domestic market.

Southwest China offers foreign investors a lower threshold for entry than coastal regions, due to less crowded markets and relatively low costs. Chengdu stands out in particular, due to the local government’s efforts to diversify economic growth and bring in outside investment.

However, there are still too many barriers to doing business in southwest China. Many might be initially drawn by the promise of subsidies and free office space but, in reality, the preferential policies may prove difficult to access, with little transparent information publicly available. Furthermore, while local governments can be extremely welcoming to large multinationals, especially Fortune 500 companies, the support is not guaranteed in the long term and is rarely extended to smaller firms.

For many, enforcing contracts can be a huge headache, and not just with wayward local companies. There have been instances when district governments have not compensated companies for early terminations of contracts. Although such issues can often be resolved through negotiation with officials, the process can be lengthy and costly for businesses. Even when firms willingly try to relocate, the competition for tax revenue between districts means deregistering a business can take many months or even years.