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Thursday, August 28, 2003

Chongqing, China's Gateway to the West?

First of a series of pieces by Andy Xie that I missed while I was on holiday.

Chongqing markets itself as China's Chicago. It is situated at the upper reaches of the Yangtze River, about 1,500 kilometers from Shanghai at the river's mouth. Its population is 31 million, of which 11.3 million are urban. The city was part of Sichuan province and was elevated to provincial status to better handle the Three Gorges Dam project. It is quite hilly, surrounded by high mountains that trap the summer heat within, when temperatures hover around 40 degrees Celsius. Its population centers are separated into pockets by steep hills. Tourists usually come here to embark on the Three Gorges tour, but seldom spend much time in the city itself.

Chongqing probably came into existence as a trading port, linking the rich Chengdu plain with the rest of the country. Its culture has been shaped by the harsh working conditions at the port. The enduring image of the city is rows of coolies pulling boats from the shore into navigable waters. Cheap muscle power defined the city.

Chongqing is not rich, but people enjoy a comfortable life. We estimate that per capita income is about US$850 for 2003, or one-third the level of the coastal areas. However, prices are about 30-50% lower. Foodstuffs are plentiful, of good quality and cheap. Housing is still dominated by public housing compounds -- spartan concrete blocks with small units.

The local economy is totally dependent on investment. Fixed capital formation accounted for 47% of GDP last year and probably more this year. It was 35% in 1996. However, investment cannot support the economy forever, as the infrastructure set up would not be able to create value without competitive industries to take advantage of it. On that score, the jury is still out.

Huge investment in the Yangtze Delta eventually paid off in the form of that region’s export success. The region now accounts for one-third of China's exports. Chongqing's export industry, however, takes a week longer than the coastal region to turn around goods, and thus suffers a severe disadvantage in the export market.

However, geography does not rule out exporting goods. Although Chongqing cannot compete in bulky consumer products that require rapid turnaround, it could succeed in higher value-added products that are not time-sensitive. The city's exports reached US$1.1 billion last year, or 4% of GDP, but grew by 46% in the first half of this year. It is conceivable that its exports could triple in five years, which would go a long way to paying for the current investment boom. To achieve that, I believe Chongqing needs to overhaul its productive sector.
Source: Morgan Stanley Global Economic Forum

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