Westward Ho!

Can Chongqing's $200 billion upgrade shift China's center of gravity?

Until recently, there was little to distinguish Chongqing from any of a dozen other cities in China. Sitting astride the Yangtze River 1,500 kilometers inland from Shanghai, the city was a jumble of grimy, grey buildings climbing the steep riverbanks. Cement factories and steel mills spewed clouds of smoke into the air, while factories churned out cars, motorcycles, and heavy machinery.

But Chongqing is no longer ordinary. The city is the centerpiece of China's ambitious "Go West" program--designed to boost development of the country's vast interior. Over the next decade, the central government is planning for investments of up to $200 billion in the Chongqing municipality, a territory three times the size of Belgium. Much of that will pay for roads, railways, airports, and other infrastructure projects. "In 10 years, Chongqing will catch up to where Shanghai is today," vice-mayor Huang Qifan predicts boldly. Huang should know. He oversaw Shanghai's stunning transformation from a neglected former capitalist stronghold to a center of international commerce through a similarly ambitious scheme. A year ago, Huang was transferred to Chongqing. His assignment: Duplicate Shanghai's success.

Judging by Chongqing's crane-pocked skyline, Huang is doing his best. Much of the city has become a construction zone as old buildings are torn down to make way for new apartment blocks. Vast piers of concrete for the city's new light-rail train line tower above traffic. Wide boulevards and new bridges across the Yangtze speed taxis, buses, and a growing fleet of private cars throughout the city. The spending helped economic growth in the region hit 9% last year. Starting this year, it will top 10% annually "for a long time," predicts Huang.

By pumping up to $20 billion a year into the economy over the next decade, Beijing is hoping to turbo-charge local economic development. Farmers will stop growing rice and start planting fruits, vegetables, and other value-added agricultural products, since they'll be able to get them to market more quickly. Construction jobs will put money in the hands of workers. New apartments will create a class of homeowners, who will further fuel spending as they stock their dwellings with refrigerators and televisions. The policy has worked in Shanghai and along the coast.

Granted, Chongqing isn't Shanghai, and the whole thing could end up as a boondoggle. Shoddy construction and corruption have bedeviled many of China's infrastructure projects. And some of the gleaming new roads may become white elephants. Worse, China may simply run out of money as spending rises faster than tax collection. The country's deficit is projected to reach a worrying 4.3% of gross domestic product this year, compared with a planned 3%, warns Salomon Smith Barney economist Yiping Huang. "It is time for China to scale back the huge state investment programs it started five years ago," he says.

But China says it has a model that works: the United States. Leaders have studied the Tennessee Valley Authority, the Civilian Conservation Corps, and the Interstate Highway System. They're betting that the Go West policy will have the same effect in stimulating China's economy. Although they're eagerly courting foreign investment, this is primarily a bet on developing the domestic market. "As we carry out the Go West program," says Zhao Gong Qing, another vice-mayor, "internal demand in China will promote further development."

The last time the world paid attention to Chongqing was back in the 1940s, when it was known as Chungking. The city was the wartime capital for Chiang Kai-shek's Kuomintang government. Japanese bombers savaged it at night, following the silvery thread of the Yangtze up from their bases downriver, while Allied forces flew in supplies over the Himalayas. Since then, the city has had its ups and downs, but was largely untouched by the massive economic changes that swept China after 1978.

All that changed when Beijing split Chongqing off from Sichuan province in 1997. The area was awarded municipal status, which gives it far more clout with the central government. Despite its designation as a city, two-thirds of its 31 million people are farmers. It can take 14 hours to get from the city center to the farthest reaches of the territory. Part of the infrastructure plan is a $360 million road-building scheme over the next two years to cut travel time to the most remote areas to eight hours. A 58-kilometer expressway and a new bridge over the Yangtze have sliced the time it takes to reach the Hechuan cement factory, owned by Hong Kong-based TH Group, to just one hour from four. Hechuan Mayor Wu Daofan says that a high-speed train will cut travel time to just 28 minutes when it's finished in 2005.

Chongqing will need to extend those connections to the rest of the country if its makeover is to succeed. If Shanghai is China's financial center--its New York--Chongqing wants to be China's Chicago, serving as a logistical center and churning out goods for the rest of the country. So construction is underway on high-speed trains and expressways to neighboring provinces, cementing Chongqing's role as a hub in a growing nationwide transportation network. And everyone from party bosses to mayors is looking for foreign money to help remake the city. "There are a lot of business opportunities," says Zheng Ho, the 47-year-old Communist Party secretary who runs the industrial Jiulongpo district.

City fathers have already had some successes. Last year, Ford Motor Co. put $98 million into a joint venture with Changan Automobile Co. Starting next year, Ford expects to build 50,000 compact cars annually. Nearly a dozen suppliers are following Ford. Chongqing Yanfeng Industry Co., backed by a Taiwanese group, is putting $7 million into a joint venture making seats, steering controls, and instrument panel displays it hopes to sell to Ford. Ford joins two established auto makers and several major motorcycle makers--as well as hundreds of component producers.

There's more to come. In October, Hong Kong tycoon Vincent Lo will lead a delegation of potential investors to Chongqing. Lo has invested $175 million in his Xintiandi real estate project in Shanghai, and he believes the success of that city's Pudong district--where dozens of new skyscrapers have sprouted over the last decade--can be replicated 1,500 km to the west. "There's more room to grow inland," he says.

The incentives flowing from Beijing make investment profitable, too. Topping the list: A five-year tax holiday with just a 15% permanent tax rate after that for a long list of favored industries. That's less than half the normal 33% corporate tax rate in China and lower even than in Hong Kong. And there's a one-stop investment desk to help investors navigate through red tape.

That doesn't mean that Chongqing is hassle-free. Investors are particularly unhappy with the unpredictability of the tax office, which has broad discretion in deciding which companies qualify for privileges. "You never know when they will change their mind" about a ruling, says one foreign investor, "and then you have to catch up on your back taxes." And pollution remains a big challenge. This is a city where a decade ago the rainwater was black before it hit the ground. Things are improving, thanks to the shutdown of an outdated iron and steel mill and a ban on domestic coal use and leaded gasoline. But there's a long way to go, and the city's air and water pollution remains worse than Shanghai's or Beijing's.

It's not time for Shanghai to start looking over its shoulder--yet. But with $200 billion in government support behind it, Chongqing will have only itself to blame if it doesn't reach the big leagues over the next decade.

By Mark L. Clifford in Chongqing, with Dexter Roberts in Beijing

— With assistance by Dexter Roberts

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