New Frontier for FDI in China

New Frontier for FDI in China

China’s Western Development Policy is aimed to unlock the economic potential of China’s Western and more remote regions. New highways, bridges, tunnels, (high-speed) rail connections and ports are proof of massive infrastructural investments by the central government. In addition, new schools, hospitals and affordable housing are part of the US$590 billion investment plan that will be spread over the next 10 years.

Up to a few years ago, foreign companies were reluctant to establish here due to unpredictable supply chains, lack of high quality suppliers, and a limited pool of talents. In other words, they took the higher operating costs in coastal regions for granted to mitigate the business risks of doing business in China.

Apart from socio-political reasons, of which reducing significant income disparities between Chinese ethnic groups is considered the most important one, there are also economical motivations why this policy could work. First of all, the recent examples of wage negotiations by huge groups of factory workers at several large domestic and foreign companies have had an upward wage pressure in general. Most of those companies are located in or near coastal areas. Secondly, pressure on existing resources (i.e. land and utilities) and skills is intense, driving up local prices. Thirdly, improved living standards and increased prosperity in western regions, increasingly led to migrant workers being reluctant to leave their families and work 1400 kilometers eastwards.

Up to now, migrant workers from China’s impoverished regions search for work in the more prosperous coastal regions. According to Chinese government statistics, the current number of migrant workers in China is estimated at 120 million, approximately 9% of the population. Already 5 years ago, China’s urban migrants sent home the equivalent of US$65.4 billion. Nowadays, after Chinese New Year, only 70 – 80% of all migrant workers return to their job in the coastal area. This means that 30%, equivalent to 36 million workers remain in their home town, and thus can be added to the labour pool of central and western provinces.

It is this unique combination of improved infrastructure, improved living conditions, an increasing labour pool and maximized incentives by federal and local governments that makes me bet on central cities such as Wuhan and Chongqing as next investment location. It is my strong belief that we will experience a large number of labour intensive activities being relocated to these cities.

Matthijs Weeink

Partner Investment Consulting Associates