In China, a New Inland Economic Zone

6 MINS READAug 29, 2012 | 11:00 GMT
In China, a New Inland Economic Zone
The city of Zengzhou, Henan province, in central China

Beijing is currently drafting plans for a Central Plains (known as Zhongyuan) Economic Zone. The Central Plains is a region that traditionally has served as northern China's primary grain belt and as an important transport corridor linking Beijing with coastal economic centers. The plans will not be finalized until the end of 2012, but according to initial reports, the new zone will focus on industrialization, urbanization and agricultural modernization.

Unlike coastal special economic zones such as Shenzhen, the purpose of the new zone is not only economic but political and social as well. It is intended to provide a buffer to any social fallout the diminishing economic activity on the coast may cause. Consequently, the zone's significance lies less in the plan itself than in what the plan reveals about China's shifting economics.

The new economic zone will cover approximately 290,000 square kilometers (112,000 square miles) in Henan and parts of Anhui, Shandong and Shaanxi provinces, an area with a total population of roughly 170 million and a collective gross domestic product larger than Sweden's. When the zone is completed, between 2015 and 2020, it will be the largest in China in terms of land mass and population.

Economic zones have been a hallmark of the "Opening and Reform" period that followed Deng Xiaoping's return to power in 1978. In 1980, Beijing created the first special economic zones in the coastal Guangdong and Fujian provinces, designed to attract foreign investment in low-end manufacturing by offering cheap land, labor and a variety of tax or other incentives. Success in southern cities compelled Beijing to expand economic reforms, first to the Yangtze River Delta area and later to cities along the Yellow and Bohai seas, such as Tianjin, Qingdao and Dalian. For most of the last 30 years, these coastal clusters acted as Beijing's experimental (and carefully monitored) interface with the outside world.

As forays into capitalism "with Chinese characteristics," the coastal zones would ultimately, Deng hoped, generate the wealth necessary to make development of China's vast, poor interior possible. In doing so, they would ensure social stability and, by extension, the Communist Party's grip on power. While Beijing has made significant progress in laying the groundwork for this process, it still faces enormous challenges, including inadequate infrastructure in many parts of the country's interior, low levels of education and endemic local government corruption.

The proposed Central Plains zone belongs to a less radical but no less strategic category of development plan. For Beijing, the function of Shenzhen or of Pudong in Shanghai was primarily economic. The Party needed capital, and coastal cities — as gateways to the global economy — could provide. It therefore viewed the first special economic zones as necessary but also risky.

By contrast, the impact of the Central Plains zone as an economic plan will be more limited, continuing — rather than breaking from — the "Rise of Central China" plan of 2005

Why the Central Plains?

China Central Plains Economic Zone map

China Central Plains Economic Zone map

In many ways, the Central Plains region is an ideal location for an inland economic zone. Spanning several provinces along the lower reaches of the Yellow River and the North China Plain, it is flat, easily traversable, fertile and well connected to most of China's major coastal economic hubs. For centuries, Henan and other Central Plains provinces have served as key conduits connecting Beijing with cities such as Nanjing, Suzhou and Shanghai. Moreover, as the country's most important wheat and soybean producers, these provinces historically were Beijing's agricultural power bases. Finally, the region boasts an enormous and relatively young population, which means it has both a large labor force and sizable potential consumer base.

The Central Plains' importance as a grain belt and transport corridor made it critical to post-1949 China. But these qualities became liabilities after Deng's "Opening and Reform" shifted the economy's focus from inland industry toward coastal, export-oriented manufacturing. Throughout the 1990s and early 2000s, Henan province struggled unsuccessfully to gain Beijing's support in modernizing its agricultural production and transforming its urban centers into more than stops on the way to somewhere else. As long as coastal manufacturing thrived, there was little incentive for investors — foreign or domestic — to look to the Central Plains. In fact, throughout this period, poor inland provinces such as Henan (with a population of 94 million) provided the migrant labor force that made cities such as Shenzhen work.

Rise of Inland China

The political and economic dynamics that shaped China over the past three decades are shifting. Coastal manufacturing is no longer as competitive as it once was, and soon, rising input costs and wages in places such as Guangdong, Jiangsu and Shanghai will make export-oriented manufacturing there untenable. Beijing has planned for this with development projects such as Go West and Northeast Revitalization and by creating inland economic zones in places such as Chongqing, Xi'an and now the Central Plains provinces. In this context, provinces such as Henan — which has a GDP roughly equivalent to Argentina's — are gaining importance, both as transport hubs linking population cores from places such as the Sichuan Basin and Loess Plateau to Beijing, and as potential destinations for foreign investment and manufacturing.

Foreign direct investment into Henan reached about $10 billion in 2011, up 45 percent from the previous year and nearly 10 times 2005 levels. Though a good deal of that investment originated in Hong Kong, it was boosted by significant investments from foreign multinationals such as Foxconn, which manufactures Apple products, and PepsiCo Inc. Moreover, during the first half of 2012, Henan registered a GDP growth rate of 10.3 percent, well above the national average of 7.8 percent — and, for that matter, Guangdong, Zhejiang and Shanghai, which grew at 7.4, 7.4 and 7.2 percent, respectively.

That growth, like Foxconn's decision to expand to Henan, is probably not accidental. Rather, growth rates will continue to benefit greatly from Beijing's strategic prodding, at least in the near term. Faced with the possibility that rising costs on the coast will trigger foreign capital flight to other regions (such as Southeast Asia or Mexico) where wage and transport costs are not barriers, and knowing that this process could cause enormous social and political instability if the country's 300 million migrant laborers have only family farms to return to, Beijing is moving urgently to develop the country's interior. Initially, manufacturing in the Central Plains zone — as in Sichuan and elsewhere — will be geared toward export-oriented manufacturing. But the Party's ultimate hope is to cultivate a domestic consumer base large enough to reduce China's current dependence on exports.

Doing so will require more than providing manufacturing jobs in inland China. The presence of jobs in Henan may help alleviate Beijing's growing concern over rising migrant labor flows to the coast by giving migrants incentive to return home. But unless this process is combined with significant efforts to develop entrepreneurial cultures in coastal cities — a process that will require major reforms to the education, housing, legal and health care systems — it will not help Beijing overcome the underlying tensions between regions and between urban and rural areas that have always shaped the rise and fall of dynasties.

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