A Talk with Dalian's Communist Party Boss

With a doctorate in economics and a résumé that includes a stint as a university president, Xia Deren represents the new breed of Chinese Communist Party official. As the Party Secretary of the northeastern coastal city of Dalian, Xia, 54, is in the vanguard of China's attempt to craft a new economic strategy to propel growth in the future. Over the past 15 years, the city has eased its dependence on polluting manufacturing industries and is now emphasizing software, financial services, and renewable-energy industries. Xia recently spoke with Senior Writer Pete Engardio about Dalian's new growth formula.

What is behind Dalian's search for a new economic strategy? The Chinese government has realized the challenges we face in order to maintain a sustainable economic model. We need to change the way our economy grows, and to embark on a new road of industrialization. Dalian actually started making an effort to transform its economy before other areas of China, and we have made great breakthroughs in this respect. More than a dozen years ago, Dalian was characterized by heavy and chemical industries. They consumed vast energy and resources. As a result, there was a serious pollution problem. It was very difficult even for trees to grow. In recent years, we have worked very hard to transform our industries and improve our competitiveness.

What measures have you taken? We have closed 200 factories and moved others. As a result, the environment has improved tremendously.

What has taken their place? We have devoted major efforts to developing new industries, like high-tech and a modern service sector. We also are promoting Dalian for shipping and logistical services. We have taken advantage of the fact that Dalian has a large number of universities and colleges, and a lot of human resources. As a result, the software industry has been growing by 30% a year, and software exports by 40% annually. The Western part of the city is a rapidly developing area for software and IT services. It has attracted more than 400 businesses in less than 10 years that employ 60,000 people with exports of $1 billion a year. We don't really regard that as a big figure. We want software to employ 200,000 by 2013. Financial services also are growing, and now employ 60,000 people as well.

What are you doing to encourage innovation? We are [promoting] policies to encourage the movement of research resources to businesses. For example, we have established partnerships between universities, [government] research institutes, and companies. One sector that is expected to grow fastest will be equipment related to green technologies, such as wind power and fuel cells for vehicles. First Auto Works has a factory making hybrid vehicles, for example. The Dalian Institute of Chemical Physics is engaged in research to develop hydrogen fuel cells. We hope they can succeed soon and commercialize their technology. Last year, investments in research and development equaled 2% of gross domestic product. Five years ago, that proportion was only 0.4%. I think this figure shows that the ability to innovate can improve a lot.

What kind of impact have these strategies had? We realized that industries involved in higher knowledge and innovation have not been affected very much by the financial crisis. In the first half of this year, exports of traditional products were down by 20%. But we saw 30% growth in high technology. We have done a projection of the value of high tech to our economy. Ten years ago, high tech accounted for 30%. Now, it is about 42%, and we expect it to be the mainstay of our economy in four to five years. We also think that there will be an even balance between industrial activities and services.

How is Dalian ensuring it has enough skilled workers for knowledge industries? Development of human resources is a key element of the government's work. Twelve years of free compulsory education is now available to everyone in the municipality, all the way through senior high school. In the 12th year, a major part of education is vocational training. The enrollment rate of senior high school students is about 95%; about 46% enroll in college. We also are seeing a bigger interaction with business. For example, we encourage colleges and universities to establish curricula in software, and encourage businesses to establish software institutes.

The growing imbalance between rich and poor is seen as a big problem in China. Is Dalian trying to address this? China is, after all, a large developing country; it's only natural for there to be imbalances in its development. I think we are doing a pretty good job in establishing an efficient and fair social distribution and social security system. The difference in wealth income between urban and rural incomes [in the Dalian region] is relatively good on Chinese standards. We are working hard to improve the social security system. For example, all 6 million people [in Dalian] get social security benefits. We do a lot of work in providing re-education, so people who are laid off can be employed again. Everyone working in a business can enjoy a pension after they retire. The unemployed have unemployment insurance benefits and medical insurance. For people with health problems who cannot make enough to support their daily lives, the government takes care of their needs. Social security accounts for the largest portion of our fiscal expenditures.

Has the time come for China to catapult ahead of industrial nations? I don't think so. China is still developing. The economy of China surpassed Germany's last year, and is likely to surpass Japan's next year as the second-largest economy. But there are 1.3 billion people. Given this huge population, per capita income is still low. After the crisis, we will pay more attention to the quality of development and whether it is sustainable. In this regard, we need to emulate the advanced countries.

    Before it's here, it's on the Bloomberg Terminal.