By: Steve Dickinson

On Monday, March 14, The PRC National People’s Congress approved China’s 12th Five Year Plan and the outline of the plan was released to the public yesterday. The full 105-page document can be found (in Chinese) here. I am now reviewing the plan and over the next several weeks I will provide a series of reports on its contents.

I can make some preliminary remarks at this time.

The striking thing about the plan is its lack of originality. In the policy documents that have been promulgated over the past year, the party and the National People’s Congress (NPC) concluded that China must boldly reform its entire economic structure. The idea was to have China move away from a export and infrastructure driven economy to a balanced, consumer demand driven economy. The Communist Party of China (CPC) issued an outline of a bold plan that would bring about this transformation. The conclusion of many Western economists was that 1) the transformation would be essential for the long-term health of the Chinese economy but that 2) the transformation would be extraordinarily difficult. See the recent writings of Michael Pettis on this issue.

Apparently, the NPC also concluded that the consumer driven economy simply would be too difficult to achieve. As a result, the 12th Five Year Plan basically abandons the concept of creating a consumer driven economy and falls back to the standard Chinese economic model of depending on massive infrastructure projects and export driven growth as the primary models. Though some lip service is paid to increasing household consumption, that concept is basically brushed aside in favor of domestic infrastructure spending.

The list of projects is breathtaking. In just a preliminary review, I noted the following:

  • Highways, conventional rail and high speed rail
  • New airports
  • New ports and port upgrades.
  • Oil and gas pipelines
  • Electric transmission lines, especially high voltage lines
  • Coal transport and storage
  • Environmental upgrades of virtually the entire system of coal fired power plants, together with constructing substantial new coal fired power plant capacity
  • Modernizing the entire heavy industry sector: steel, cement and aluminum, in particular
  • Expanding mineral mining, particularly coal
  • Oil and gas field development in Inner Mongolia and Xinjiang
  • Creating an entirely new industrial base, focused on seven strategic industries
  • Urbanizing rural China to allow at least 10,000,000 rural residents per year to move to the cities
  • Investing in massive amounts of new nuclear power and hydropower facilities
  • Major expansion of domestic oil refining capacity and LNG storage and transmission
  • Sewage and waste treatment facilities throughout the entire country
  • New hospitals throughout the country
  • Waterworks focusing on irrigation and water transport from the South to the North
  • Developing coastal marine resources, primarily focusing on maritime infrastructure
  • Developing the Central and Western regions
  • Redeveloping China’s Northeast industrial base
  • New jobs for 45,000,000 workers

Note that this set of projects is not designed to encourage the domestic household economy; all of it is designed to maintain China’s position as an export-oriented manufacturing powerhouse. It seems that the NPC has rejected the idealistic notion of reforming China’s economic structure and instead has adopted the easier plan of simply improving what China has been doing for the past ten years. No major changes here: just upgrades and refinements.

Of course, as is typical, there is no mention of how much this huge list of projects will cost and no mention either of from where the money will come to pay for all of this. If the past is any indication, the projects will feature a mix of direct central government expenditures and bank loans to local governments. The recent huge jump in bank lending supports the notion that the banks will be instrumental in funding this truly massive set of infrastructure projects. There is also no discussion of how this massive spending program will mesh with the China’s current concern with controlling inflation. Nonetheless, the basic plan is clear. Spend, spend, spend on creating manufacturing capacity and then export the surplus in order to pay for it all. 

In other words, we should be expecting more of the same.

What do you think?

 

 

I never knew writing this blog would give me such incredible power.

A couple of days ago, I did a post, entitled, The Basics of Getting Your Business Into China By WFOE/WOFE. That post briefly mentioned setting up a WFOE (Wholly Foreign Owned Entity) in “lesser known cities that encourage specific types of business development.” Kevin Smith of the Weifang Radish blog picked up on that line and posted a comment on how he thought his former town, Weifang, is a good place for foreign business:

I really love how “setting up in new industrial zones that are eager for overseas investment or lesser-known cities that encourage specific types of business development” is mentioned. When I was living in Weifang I got to know a number of businessmen engaging in or setting up business in Weifang. All of them expressed to me how impressed they were by the price and quality of office space and other resources available in and around the city. Furthermore, some of them had lived in or been in China multiple times on business over the years, and so weren’t just wide-eyed newbies. If I were an entrepreneur looking towards China, I would probably set up a business in a lesser-known Chinese city.

So in my follow-up comment to Mr. Smith’s comment, I “ordered” him to provide more information on doing business in Weifang:

You have two choices. Either you will write a long post on your blog, explaining why you would set up your China business in Weifang or some other second tier city (is Weifang, second or third tier?), and exactly what sorts of business make sense for Weifang and why. Perhaps 3 pages, minimum, single spaced.

Or, you will allow me to grill you on all of this via telephone or e-mail.

I am leading a one hour session in early May at a big time doing business in China Seminar in SFO and the session I am leading is on second tier cities. Pick your poison, big guy.

He wisely chose not to allow me to grill him directly and wrote the blog post instead. It is entitled, “Why Do Business in Weifang,” and it is excellent.

The post starts out listing some points as to why it makes sense to locate a business in China’s smaller cities:

  • It is easier to get to know top government leaders in small cities. For example, in Weifang I met and chatted with the Mayor and Vice Mayor on more than one occasion, and I’m just a foreign teacher. I think this is a major benefit. How likely would it be for me or a person running a small to medium sized business to meet and chat with the city leadership in Beijing?
  • Smaller cities have cheaper real estate prices. I don’t know about business properties, but for residential you’d pay about 2k RMB/sq meter in Weifang out towards the edge of the city (only about 10 minutes from downtown by car) and nearly 10k RMB/sq meter in Haidian in Beijing if you were looking to buy.
  • Smaller cities have lower wages. Teacher at Weifang University made between 1k and 4k RMB a month [roughly $125 to $500 USD]. No one made over 4k (officially anyway), not even the president of the university. I know this because I’ve seen the payroll. I’m not sure how much teachers at Beihang [in Beijing] make, but there sure are a lot of nice new cars on this campus, so I’m pretty sure that the answer is more than in Weifang, where the few teachers who had cars were the ones married to businessmen.
  • Smaller cities typically have less pollution and less traffic and thus are easier to get around in.

The post then goes on to describe Weifang as follows:

  • It is a third tier city.
  • Grade A office space for cheap prices.
  • Infrastructure is just as good as in larger cities – reliable electricity, Internet, telephone, cellular, roads, rail, even an airport (small but nice, not some scary relic of the Cold War) with daily flights to Beijing and Shanghai.
  • Located smack in the middle of the Shandong peninsula making it a major hub between the larger cities of Qingdao, Jinan and Yantai. Because of its location, it is a good place to set up headquarters if a company has branches or often does business in each of those cities.
  • Good hotels and conference space. Weifang has one five star hotel and at least seven four star hotels. Also, because most of the year these hotels are underused, good prices can be had.
  • Just under two hours from Qingdao International Airport, which has flights to Seoul, Busan, Tokyo, Osaka, Fukuoka, Nagoya and Hong Kong in addition to around thirty domestic locations.

Mr. Smith then lists the following as possible business opportunities in Weifang:

  • Outsourcing manufacturing for diesel – Weichai is a large SOE that manufactures diesel engines for China Rail.
  • Outsourcing manufacturing for toilets – Milim is a large company that manufactures toilets for Gerber.
  • Outsourcing manufacturing for pharmaceuticals – Yaxing Chemical is a large company that manufactures pharmaceuticals for Bayer.
  • Trade in textiles – according to an African-Australian friend of mine in this business in Weifang, there are lots of textiles factories in and around the city.
  • I have met American and South African entrepreneurs of medium-sized businesses who were outsourcing the manufacture of children’s furniture in Weifang and looking to outsource the manufacture of pipes used for plumbing and were strongly considering setting up a Joint Venture in Weifang with a local company there.

Excellent post and Since my law firm’s China attorneys are always working with American companies in trying to figure out where to locate in China and so any information like this is always helpful .My own thoughts:

  • Weifang has a population of 8.5 million. I have never been to Weifang, but I have spent considerable time in Qingdao and in Yantai (two of my favorite cities in China), both nearby and in the same province (Shandong). Co-blogger Steve Dickinson has spent even more considerable time in Zibo, also in Shandong, and he has told me much about it. This does not for a moment mean “I know” Weifang, but it does allow me to put it in some context.
  • I like and agree with Kevin’s point about it being easier to get to know the powers that be in smaller cities. Big companies get to know big city mayors, smaller companies rarely do. However, it is typically less important in the bigger cities for smaller companies to have dealings with the city’s higher ups.
  • I am certain Kevin is right that business space and labor will be far cheaper in Weifang than in Beijing or Shanghai. I am also not surprised by Kevin’s touting the benefits of Weifang’s high end physical infrastructure and reduced pollution and traffic. I am not surprised because all of this holds true for Qingdao and for Yantai as well.
  • But, unless your company has someone fluent in Mandarin with substantial business experience in China, I can see Weifang being very difficult. Weifang just will not have the experienced, bi-lingual China consultants, China accountants, and China lawyers of Beijing, Shenzhen, or Shanghai. Not really a reason to avoid it for OEM, but a very good reason to think long and hard about setting up an office there.
  • Weifang is also not going to have the expat social life of Beijing or Shanghai either. Granted, there are many who do not care about this, but it has to be tougher to find a good American manager for Weifang than for Shanghai.  I also think it would be tougher to find a good Chinese manager or engineer for Weifang than for, let’s say, Suzhou. Weifang also will not have the healthcare or the expat schools of a Beijing or a Shanghai.
  • Kevin did a great job outlining possible business opportunities in Weifang. It sounds like Weifang is doing just fine economically and I wonder about it as a location for foreign retail, like fast food, hotels and clothing. How much foreign retail is already there? Shandong is a big food production region. How connected is Weifang to that? Are foreign companies coming in for food?

As always, the comment lines are open, and I urge anyone with views on other second and third tier Chinese cities to pipe up.