VOLUME 12, ISSUE VII - JULY 2010

The Silk Road – Rediscovering China’s Northwest

IN BEIJING

Prior to my western venture I spent four days in Beijing consulting with the U.S. Embassy, the American Chamber of Commerce and a number of Chinese business and government officials I count among my friends and contacts.

Nine years earlier when I started my first sojourn to China’s Northwest, I similarly spent several days in Beijing taking the pulse of the capital. Those were exciting times to be sure. Beijing had just been picked to host the 2008 Olympics and China was in the final stages of preparation to enter the WTO. Then as now the world economy was gripped by recession, which had left China virtually unscathed (as now). In July 2001, I reported the following as a general observation:

(Begin quote) “Without question the mood in China is quite upbeat, and why not? China's economy (thus far, at least) has shown few if any ill effects from the global economic slowdown. Its national pride has been elevated by its imminent hosting of this year's APEC leaders meeting, by the likely prospect that it will soon be admitted to the WTO and, hugely, by its just announced successful bid to host the 2008 Olympiad. I detected a strong sense there that China is at last coming of age and along with it, is receiving growing international recognition of its enormous economic achievements and great improvements in the lives of its people. Whether this newfound international prestige will induce China to play a cooperative, or more assertive (even aggressive) role on the world stage remains to be seen. There are uncomfortable, if quite distant, parallels in history to China's current emergence. In any event, China – the good, the bad and the ugly – will be under the international microscope for the next seven years, probably to an extent unrivaled in the PRC's history. Seven years from now, not only will Beijing be substantially transformed, so will the size and structure of China's economy.” (End quote)

It is always comforting to a China analyst to go back and re-read one’s words of nine years earlier and find them prophetic. It would be hard to argue that Beijing seized the opportunity afforded it by the 2008 Olympiad to reset itself as a world class city. Similarly, who today would disagree that the size and structure of China’s economy has been transformed, or that for better or worse (and we’ve seen examples of both) China has emerged as a key strategic and economic player on the world stage?

Maybe it was because the action “center of gravity” had shifted temporarily, at least, from Beijing to Shanghai because of the 2010 World Expo there, or maybe it was simply the beginning of the “dog days of summer” in North China, but I found Beijing to be uncommonly quiet, almost to the point of torpor. I found no evidence of lasting tension or animus over the Sino-U.S. disputations earlier in the year, nor of alleged Chinese “triumphalism” (whatever that was supposed to mean) being casually tossed around by Western pundits as 2010 dawned.

This is not to say that issues aren’t there. Although China’s global trade surplus is declining, there is still plenty of fuss in the U.S. over our unbalanced bilateral trade and the role China’s undervalued currency is allegedly playing in this. There is also plenty of uncertainty and growing concern over China’s policy to promote indigenous technology development – itself a laudable goal for a country restructuring itself away from export dependency and toward greater reliance on domestic consumption. The devil, however, is very much in the details and what details have been revealed so far suggest (or at least have failed to rule out) that the drive for indigenous technology development could come at the expense of protection for foreign technology as well as adding to the burdens for foreign companies of investing in China and competing for Chinese government procurement contracts. Then, too, there is the puzzling Beijing reaction (or lack of one) to the North Korean sinking of a South Korean naval vessel in March, and its somewhat strident protests of joint U.S.-South Korean naval exercises off both coasts of Korea this summer. One hopes that Beijing is not seeking to declare the Yellow Sea its personal “pond” beyond the internationally recognized coastal limits.

So, the issues are clearly there and, redounding to the benefit of analysts such as yours truly, are not likely to go away anytime soon. It was rather that in Beijing in late June, there didn’t seem to be a great deal of urgency surrounding them. One reason for this might have been the fact that high level visitors from the U.S. have all but disappeared over the summer. The big bilaterals like the S&ED all took place this spring, or, like the JCCT, will not take place until well into the fall. With the U.S. administration and congress preoccupied by domestic issues like the Gulf of Mexico oil spill and by upcoming congressional elections, China and travels to it seem very low on the list of DC priorities at the moment.

One subject that did recur with considerable interest among my interlocutors was Chinese outbound investment. Interestingly the Chinese with whom I spoke referred uniformly to obstacles to such investment raised by target countries – particularly the U.S. and India. Among the recent examples often cited was the political opposition raised in congress and by U.S. steel companies to Anshan Steel’s efforts to buy into a steel plant in the U.S. I had no ready answers to questions why anyone in the U.S. would oppose this investment which, if it had gone forward, would have pumped needed capital into a struggling facility and quite possibly have saved hundreds of jobs in the process. (Begin editorial comment: It often seems to me that our trade and investment policies and actions with regard to China lack clarity at best and indeed must appear to most folks who follow such things as a mass of contradictions. End editorial comment).

Among my American interlocutors, the predominant view on the subject was that with a few noteworthy exceptions (which unfortunately have mostly come a cropper over political issues as noted above) Chinese investment in the U.S. is still for the most part small scale and focused on real estate. They did not see much Chinese enthusiasm (and even less know-how) for taking capital to the U.S. and creating or renovating productive enterprises. One major shortfall they noted in this regard was the lack of an active array of organizations and individuals in the U.S. that could build effective road maps for Chinese investment (even a Berkshire Hathaway cannot shoulder this entire burden!).

This simply reinforces my view that Washington State with its active program to attract and channel Chinese direct investment could be a model for the entire country while potentially benefiting Washington considerably from our forward looking position.

WESTWARD HO!

Nine years ago when I first ventured to China’s Northwest, Beijing had just launched a massive development effort, the "Opening the West" initiative. While addressing the situation that obtained at the time in Gansu Province, my observations could probably have been applied to most of the western reaches of China from Tibet east and north to Yunnan, Guizhou, Qinghai, Xinjiang, Ningxia and Shaanxi, as well:

(Begin quote) “Rich in still largely untapped resources including mineral deposits, hydro- and wind-power potential and cultivable land Gansu is still relatively undeveloped, but sees itself making huge strides over the next decade helped by rapid growth in domestic and foreign investment and foreign trade. The strategy for this devised by provincial officials focuses on:

• Further developing education, especially in the sciences;
• Sustainable development;
• Infrastructure;
• Environmental protection and remediation;
• Acceleration of economic and enterprise restructuring;
• Development of new materials, agricultural products, traditional medicines and tourism; and
• Concentration of development initially along the Xian-Dunhuang corridor, with secondary development radiating from either side of the corridor.

In implementing this strategy, the province has set forth a number of major projects to be completed within the next 4-5 years:

• Restore grasslands and forests;
• Upgrade the province's road network, including construction of five major expressways;
• Double-track the rail line from Xian to Lanzhou;
• Expand and modernize airports in Lanzhou and Dunhuang (note: a new, and much larger airport terminal in Lanzhou appeared to be almost ready for operations);
• Complete the Xining (capital of neighboring Qinghai Province) to Lanzhou gas pipeline;
• Improve and expand the province's electric power grid;
• Further develop infrastructure in the province's municipalities; and
• Concentrate on developing high-tech industries.

Provincial officials stated that more than RMB 46 billion (slightly over US$7 billion) has been earmarked for these projects, of which RMB 12.2 billion has already been utilized. (End Quote)

In fact recent figures released by Beijing show that total investment – government and private – in the West has totaled nearly renminbi 20 trillion (equivalent to nearly US$3 trillion) in the past decade.

While the constraints of time and the business at hand did not permit detailed research on the points above, from what I could observe in Gansu and Xinjiang much of what had been planned as described to me nine years earlier has already been accomplished.

To take Dunhuang in western Gansu Province, for example, nine years ago the town was a sleepy camel cross roads with one stop light, no hotels above the three star level (and even three stars would have been a stretch) and little evidence of industry or commerce beyond the strictly local. By the summer of 2010, Dunhuang had become quite a bustling city with all the infrastructure trappings (albeit on a somewhat smaller scale) of China’s larger metropolises more familiar to foreigners. In 2001, Dunhuang was connected to the rest of China by one, narrow and frequently sand-covered two lane road and a single railroad track of uncertain vintage. It is now joined to Lanzhou and Ulumuqi by a major east-west expressway the continuation of which all the way to Kashgar in far western Xinjiang is currently under construction. Eastward the expressway connects to Lanzhou and beyond to the east coast. As promised nine years ago, the rail link is now double tracked to Lanzhou and eastward.

In Xinjiang (where working oil wells were already very much in evidence), the spearhead of further development – in addition to investment in infrastructure – is the exploitation of the area’s enormous oil and gas reserves. The China National Petroleum Corporation (CNPC) announced recently that it will develop Xinjiang into the country’s pre-eminent base for oil and gas production as well as for refining and related chemicals manufacturing, oil storage and related engineering and technology services. In the process Xinjiang will also become a strategic route for oil and gas imports from central Asia and Russia, pipelines for which are already under construction. With further development, Xinjiang’s total output is expected to reach 60 million tons per year of oil equivalent by 2020, with a refining capacity reaching 30 million tons by then.

For better or worse, international business has also moved in. Joint ventures (or wholly owned foreign enterprises) were observed at almost every stop along the way. So, too, were Colonel Sanders, McDonalds and, in one or two places, even Starbucks. (Our gentle readers can draw their own conclusions about the value of such establishments proliferating through even the remote parts of China; personally I’d like to see Starbucks on every street corner, but I draw the line there.) In all, the region presented a very different and much more developed look than I recalled from my journey there in 2001.

Another change much in evidence this summer compared to 2001 was the growing presence of Han Chinese. The migration of Han from China’s core areas to its periphery has been encouraged in one way or another since the mid-1960s. It began during the Cultural Revolution (1966-1976) when Mao decided that the principle of governance through unrelenting revolution required moving massive numbers of citified Han to the countryside, including the border regions then predominantly populated by cultural and ethnic minorities. While many of the “down-to-the-countryside” youth eventually found their way back to the cities after the launch of the reform and opening policy establish in 1979, many remained where they had been relocated. They were joined in the 1980s and ‘90s by new waves of internal Han migrants, attracted by the economic opportunities spawned by reform and opening.

These opportunities have greatly expanded over the past decade in response to the central government’s policy of speeding up development of the western regions. Since the ethnic clashes that occurred in Tibet in 2008 and in Xinjiang in 2009 (we were in the Xinjiang capital, Ulumuqi, on the first anniversary of the riots there), the central government has offered even more inducements to the Han to move to these regions. This migration may well have contributed to the rapid development now very much in evidence in the west, but, one fears, at the cost of some degree of marginalization of ethnic groups native to the region. The Han appear very much in control of the important economic levers and deriving most of the benefits of the phenomenal growth now occurring.

Be that as it may, growth continues to be the name of the game out west. Even as we traveled through the Northwest, the National Development and Reform Commission in Beijing was announcing new “developing the west” initiatives totaling renminbi 682 billion (nearly exactly US$100 billion equivalent). While some of this no doubt reflects projects and funding already in the pipeline, the government identified 23 new projects focused on building roads, rail lines, airports and power plants. With this new round of projects, the “developing the west” program apparently will continue for at least another two years, with further profound changes in the West’s infrastructure development resulting.

It might appear that Beijing is overly preoccupied with the western region and its 12 (of a national total of 31) major administrative regions reporting directly to the central government. While the area comprises about 70 percent of China’s total territory, it contains barely 25 percent of the country’s population, after all. However, the West also comprises about 75 percent of China’s ethnic minority population and contains two-thirds of China’s official poor (i.e., with annual incomes of US$ equivalent 175 or less). The potential volatility of these two factors looms large in the capital’s calculations regarding domestic tranquility, or at least, political stability.

Although the cities we visited have become obvious points of light in the western developmental landscape, there remain vast tracts of land dotted with rural villages there that have yet to be touched by the gilded hand of development and rising prosperity. As much as anything, the ruling party has staked its legitimacy and future on a swelling tide of economic growth lifting all boats, but in the West, too many boats still remain dead in the water. Beijing can naught but continue to press on with western development and economic expansion and hope for the best.