Tianjin, China -- Second Tier City With A Bright Future

China's Pearl River Delta region makes up an outsized portion of China's GDP and Foreign Direct Investment (FDI).  The Pearl River Delta cities of Shenzhen, Dongguan, Guangzhou are common sites for foreign operations and outsourcing. All are thriving and all are relatively expensive. Beijing has been making clear its desire to spread the wealth into other regions and the Tianjin municipality has recently become the focus of much of that talk.   

Tianjin is located in the northeast of the North China Plain.  It is the closest seaport to Beijing and one of only four Chinese municipalities directly under Chinese Central Government control (Shanghai, Beijing, and Chongqing are the other three). Tianjin covers an area of 11,000 square kilometers (4,200 square miles) and its population exceeds 10 million.

Asia Times Online recently ran a story, entitled, "China's Tianjin push: Bright, but not dazzling," focusing on China's efforts to move industry, including foreign direct investment (FDI), into Tianjin.  Asia Times compares Tianjin today to Shenzhen and its Shenzhen Special Economic Zone (SEZ) in the late 1970s and to Shanghai's Pudong in the 1990s:

There are more than a few investors who missed out on previous opportunities to put their money in China: for example, in the late 1970s when the Middle Kingdom had just begun to open its doors to embrace capitalism; or in the early 1990s when the Chinese government decided to develop Shanghai's Pudong New Area, sparking a new wave of development in the country.

Now, there may be another good opportunity for aspiring China investors to get in on the ground floor of a new development wave: the development of the Tianjin Binhai (Seashore) New Area in the country's northeast.

Beijing intends the Tianjin Binhai New Area to become a new pivot to sustain the relatively high-speed growth of the national economy over the next decade or so. And the area could indeed offer some good opportunities, particularly for newcomers to China. However, the opportunity may not be quite as golden as those offered when China decided to develop the Shenzhen Special Economic Zone (SEZ) in the late 1970s or Shanghai's Pudong in the 1990s.

At the most recent meeting of China's parliament, the National People's Congress (NPC) endorsed Tianjin Binhai New Area development as part of the current five year plan.  The Binhai New Area consists of the Tianjin Port, the Tianjin Development Zone, and the administrative districts of Tanggu, Hangu and Dagang. 

There are more than 11,000 foreign companies in Tianjin with total investment exceeding 20 billion dollars.  IBM, AT&T, Texaco and General Motors have a presence in the area.  Motorola has invested more than one billion dollars in Tianjin and uses it as its major manufacturing base for mobile telephones, two-way radios, and wireless communications equipment.

Beijing sees Tianjin's development as boosting its efforts to revitalize the economy of China's "rust belt" northeast (Manchuria).  The hope is that the Bohai Rim region, with Beijing and Tianjin in the center, will catch up with the Pearl River Delta and Yangtze River Delta regions to become a new engine powering China's economic development.

Beijing recognizes China's development will inevitably be geographically uneven and it has chosen to employ the strategy of focusing development on certain regions for certain periods:

China is a huge country, both in geographic and population terms, so its economic development has never been, and can never be, homogeneous. Instead, some regions will outstrip others from time to time. Fully aware of this reality, the government has no illusions about even development across the country. Instead, its strategy has been to concentrate on developing a certain region for a given period, making it a pivot to turn on, or an economic engine to power, the rest of the nation.

When Deng Xiaoping launched China's open-door policy in the late 1970s, Shenzhen was China's first economic focus, due to its proximity to Hong Kong.  Shanghai's Pudong came next.  "In both cases, however, many overseas investors remained skeptical of Beijing's plans at the beginning and therefore missed the best opportunities to cash in." There is similar skepticism regarding the Tianjin Binhai New Area today:

Now that the Chinese government has set a new focus on the Tianjin Binhai New Area, will it become another Shenzhen or Pudong 10 years from now? Again, there are skeptics and optimists.

The optimists say that since it is now Beijing's policy to develop Binhai in coming years, it will no doubt give the project its full support as it did to Shenzhen and Pudong. China's economy is far larger today, allowing Beijing to give strong support to Binhai, so the chance of failure is very slim.

But skeptics argue that times have changed. China's economy today is increasingly market-oriented and, as such, very decentralized, so Beijing can no longer simply develop certain areas by administrative fiat, or order other regions to give substantial support to help Binhai's development.

Moreover, China now is a WTO member and ought to abide by WTO rules. China is now considering giving foreign investors the "national treatment", which would require domestic and overseas-invested firms to be treated equally. Hence China can hardly rely on giving tax incentives to attract foreign capital to Binhai.

I am betting on Tianjin.  I believe its growth will be led by increased FDI.  I believe FDI in Tianjin will increase because Tianjin has a relatively dynamic city government and a good and cheap workforce. Tianjin also tends to be generous with tax breaks for foreign companies. 

And it has government backing.  The National People's Congress has promised Tianjin "various support measures, such as allowing the area to pilot various new reforms, including financial reforms, and to grant some preferences with respect to finance, taxation and land acquisitions."  At an April 26, 2006, meeting chaired by Premier Wen Jiabao, the State Council, China's cabinet, stated its goal to turn Tianjin Binhai into a base for "modern manufacturing, research and development" and "an international shipping hub and a modern international logistics hub in north China" and formally empowered Binhai to experiment with "comprehensive reforms:"

In Chinese terminology, this means Binhai will have the autonomy to think creatively of making various changes in the current economic and social structures as long as such changes are necessary to attain the ultimate goal, following Deng's pragmatic methodology that "it doesn't matter if a cat is black or white as long as it catches mice".

The cabinet did not promise Binhai any financial support, though it has been reported that the China Development Bank, one of the country's policy banks, will provide Binhai a 50 billion yuan (US$6.24 billion) credit line.  To prepare for Binhai's development, the Chinese government lifted a 10-year-old ban on the establishment of new banks to let a new commercial bank, Bohai Bank, establish itself in Tianjin. British bank, Standard Chartered, holds a 19.9% stake in Bohai Bank, which opened for business in mid-February.

A Nankai University in Tianjin economics professor opines that support from Beijing will fuel Tianjin's growth:

"It is true that the central government may not be able to give huge funds to support Binhai's development following market rules. But Beijing can lend its support with favorable policies which will create opportunities that investors can cash in [on]," said an economics professor with Nankai University in Tianjin, adding that compared with other major coastal Chinese cities, Tianjin is much less developed, making the potential for growth greater.

For more on the benefits of doing business in Tianjin, check out "China is Expensive -- NOT. Go Second Tier and Life Will Be Good , Part II."