Editor's Note: This is the second piece in a three-part series on the geopolitical implications of China's move to transform the Yangtze River into a major internal economic corridor. Part one provides a broad overview of the geography and history of the Yangtze River region and its role in shaping Chinese politics and statecraft. Part two examines the strategic river city of Wuhan, and part three considers the political economy of Beijing's push to develop the Yangtze River corridor.
In a sense, Wuhan is the heart of modern China. It is not the country's most important economic or cultural hub, and aside from a brief stint in the 1920s as the Nationalist Party government's capital, it has never been China's official political center. But while Wuhan wields less heft than Beijing, Shanghai or Chongqing, its location at the intersection of the country's most important transport routes gives it a different kind of strategic significance for the Communist Party.
Just as important as these national-level axes are the numerous interprovincial infrastructure linkages that converge on Wuhan. These roads, waterways and highways bring goods and people from inland provincial capitals such as Xian, Changsha, Kunming and Zhengzhou down to Wuhan's ports and, from there, on to Shanghai. The city serves to integrate China's disparate geographic and economic macro-regions into one coherent economic system and helps enable the central government to enforce political control and social management over these regions.
Wuhan's Growing Significance
Beijing increasingly recognizes Wuhan's importance in the evolving system of infrastructure linkages and as a core from which to gradually expand urbanization and industrial activity out into the rural hinterlands.
As a result, Beijing has launched state-level policy initiatives such as the "Rise of Central China" plan inaugurated in 2004 and the Hubei-Jiangxi-Hunan "Central Triangle" development program, which seeks to transform Wuhan, Changsha and Nanchang into one contiguous urban conglomerate to complement the Yangtze River Delta. Through these programs, Beijing has sought to build on Wuhan's inherent advantages — its location roughly equidistant from both Chongqing and Shanghai; its physical, historical and economic ties to nearby urban centers such as Changsha and Jiujiang; an extremely high per capita distribution of top-level universities and research institutes; and well-established and influential steel and automaking industries, among others — to frame the city as both a driver and a model for future inland development. These efforts are most obviously manifested in Wuhan's substantial economic growth over the last decade.
Between 2001 and 2011, fixed asset investment into Wuhan (much of it centrally allocated) rose nearly eightfold. Gross industrial output grew by 760 percent over the same period, while local government revenue grew by 680 percent and the city's gross regional product more than quadrupled. In 2011, 418 million tons of goods passed through Wuhan, an increase of more than 255 million tons from a decade before. More freight passed through Wuhan last year than any other inland city besides Chongqing. (Notably, because Wuhan's population is one-third the size of Chongqing's, its per capita freight traffic is actually almost 70 percent higher.) Its economy is now larger than those of Bangladesh, Angola and Morocco. Alone, it contributes almost 35 percent of Hubei's provincial gross domestic product despite housing only 17 percent of the province's population.
Wuhan's story over the past decade is one of unimpeded growth, rapid infrastructure development (on Dec. 12, 2012, the city opened the nation's first cross-Yangtze River subway, and it plans to have eight metro lines in operation by 2017) and rising living standards (reported per capita income in 2011 was 4.5 times greater than a decade before). But this was not always the case. In fact, over the last half century, the city has seen its fortunes rise and fall in lockstep with changes in the national political and economic climate. For much of the past three decades, as Deng Xiaoping's Reform and Opening process got under way, local Party leaders in Wuhan have struggled against not only the natural disadvantages facing all inland cities relative to coastal metropolises but also against the direct and indirect burdens imposed by central policies and provincial-level politicking.
A closer look at Wuhan's history, ancient and modern, helps explain both the particular dynamics of Wuhan's current "rise" as well as broader elements in Chinese political and economic organization. Wuhan's many iterations over the years reflect the extremely tight relationship between politics and economy in China, and the ways in which policy — whether at the central or provincial level — has shaped and guided the development of the Chinese economy throughout the Reform and Opening period.
Wuhan and the Evolution of the Middle Yangtze Region
Over the next 16 centuries, the Middle Yangtze geographic region — bound to the west by the outer wall of the Sichuan Basin, and to the south, east and north by a patchwork of mountain ranges — further coalesced into a distinct and relatively independent political, economic and cultural unit. In times of dynastic unity, the Middle Yangtze was loosely subsumed under the center's control through bureaucratic and trade links. In times of disunity, it broke off into its own would-be state. Throughout, Wuhan remained the core around which the region's economic life revolved. Though the Middle Yangtze at times served as a supplier of raw materials (timber, cotton and grain) to the more advanced Yangtze Delta region, it relied far more heavily on its own internal commercial networks than on inter-regional trade. Like most parts of China before the mid-20th century, the Middle Yangtze had far more to do with itself — economically and culturally — than with other parts of the Chinese Empire.
It is critical to remember the degree to which geography imbued the inhabitants and rulers of China's regions with a strong sense of historical, cultural and political autonomy. As with the Middle Yangtze region, that autonomy was often undergirded by economic reality. Until recently, China has never had a truly unified economic system. Even today, these deep-seated regional differences manifest in strong competition between provinces for Beijing's "favor" — government investment and preferential tax policies — and low levels of interprovincial trade. In fact, though Beijing ultimately desires to build a genuinely integrated national economy, it often utilizes its ability, as the center, to exacerbate regional rivalries to solidify its own political and economic influence. Wuhan's experience over the last half century illustrates this strategy.
When Mao Zedong came to power, he sought to reassert central control over the economy by closing China to foreign trade. This entailed transferring much of the budding industrial plant around China's major international ports — Shanghai and Guangzhou — to inland provinces, Mao's primary power base. Some of that industrial plant went northeast in order to reinforce the region's role as a buffer against invasion via the Korean Peninsula. Much of the rest went to central China, and especially to Wuhan, which Mao quickly transformed into one of the country's most important industrial bases (founding, in the process, some of contemporary China's most powerful state-owned enterprises, such as Wuhan Iron and Steel Co.). When Mao died, Wuhan ranked fourth among Chinese cities in terms of fixed asset investment, industrial profits, tax revenue contributions to the central government and gross industrial output.
With the onset of Deng Xiaoping's Reform and Opening process in the 1980s, Wuhan's fortunes changed rapidly. By 1992, the city's gross regional product had fallen to 11th out of 35 cities surveyed by the State Statistical Bureau. Its gross industrial output fell to 13th over the same period, and its average annual growth rate dropped to 8 percent, below the national average of 8.7 percent and well under the 15-20 percent annual growth enjoyed by new coastal economic zones. In part, Wuhan's relative decline reflects the natural disadvantages of China's interior in a newly market-oriented system based on trade with the outside world. Distance and geography made export-oriented manufacturing in much of inland China economically unfeasible, especially given the region's poor infrastructure links to the coast at the time.
But in fact, Wuhan's shift in fortunes was affected, directly and indirectly, by the central government's decision to open coastal Special Economic Zones such as Shenzhen. These zones received enormous government investment in transport and power infrastructure, retained 100 percent of their foreign exchange revenues (compared to 25 percent for the rest of the country) and received significantly higher tax remittances from Beijing. In turn, the extra tax burden was shifted to cities like Wuhan, depressing local government revenue even as the central government dramatically reduced fixed-asset investment into interior China, thereby giving foreign investors even less incentive to look inland. And while Beijing in 1985 did officially grant Wuhan the economic powers of a province (meaning that Wuhan no longer paid taxes to the Hubei government, but only to Beijing), it did so without also implementing policies designed to attract foreign investment. In the end, this hindered Wuhan more than it helped. Not only was the city still unable to attract outside investment, but even its own provincial government came to view Wuhan as a competitor. Because it no longer drew tax revenue from Wuhan, Hubei worked instead to redirect resources and trade that normally would have ended up in the city elsewhere.
New Imperatives, New Policy Outlook
Beijing's policies in the 1950s grew from a strong need to reassert central control and move industrial activity away from the vulnerable coastline. As a result, cities such as Wuhan were prioritized and grew accordingly. By contrast, the central government's policies in the 1980s and 1990s grew from a need to attract the initial wave of foreign capital that would eventually give the central government the means to develop the rest of the country, even if it required temporarily retarding economic growth in — and in many ways actively undermining the competitiveness of — inland provinces. This need went hand in hand with the economic model now widely associated with China: high growth rates built on low-cost, export-oriented manufacturing clustered along the coast. In turn, the interior suffered.
As that model becomes economically, socially and politically untenable at a time of rising wages and input costs and weak external demand, Beijing is again working to reprioritize growth and investment into the interior. As a result, cities such as Wuhan, Chongqing and Hefei (the capital of Anhui province) have become sites for new Special Economic Zones (such as Chongqing's Liangjiang New Area), high-tech and industrial development zones (Wuhan's East Lake Zone and Anhui's "861 Plan" to develop eight new industries, including manufacturing) and large-scale transport and port development. Between 2011 and 2020, the central government plans to invest $28.6 billion to revamp Wuhan's port network, giving it a throughput of 200 million metric tons and 2 million 20-foot equivalent units by 2015 — up from 100 million metric tons and 650,000 20-foot equivalent units in 2012 — and adding a further 40 million metric tons and 3 million 20-foot equivalent units of capacity by 2020. In just the last two years, favorable central government policies have helped Wuhan attract investment from firms such as Honeywell ($60 million for a turbocharger factory), Ikea ($794 million for a shopping center), Lenovo ($790 million for research and development) and Shanghai General Motors ($1.1 billion).
The story these new investments help tell is not only or primarily one of natural economic cycles. Rather, Wuhan's ebbs and flows are a reflection of broad shifts in the balance of political power within the Communist Party, shifts in China's wider geopolitical environment and, ultimately, Beijing's evolving efforts to cope with fundamental constraints and achieve its strategic imperatives. Industrialization and urbanization of the Yangtze River corridor, of which Wuhan is just one node, is not simply an economic process, but rather one driven by a network of needs and interests.
Stratfor provides additional coverage of China beyond the website as part of our Custom Solutions offerings. Recent projects have focused on China's political, economic, infrastructural, energy and mining development. To learn more about these services, please visit http://info.stratfor.com/contact/.