China Rebalances Economy by Shifting Focus Inland

A gleaming new $1.4 billion airport extension, a $5.2 billion bullet train and Samsung's planned $7 billion electronics plant, touted as the largest single high-tech foreign investment in China, are sure signs of economic intent in ancient Xi'an.

 Along with a $1.4 billion subway, a crane-cluttered skyline and rapidly rising tower blocks shrouded in industrial smog that cloaks the 3,000-year old former dynastic capital, they show that fixed asset investment remains the main route to growth for China — trod for three decades and likely for decades to come.

For all of China's talk of economic rebalancing to shield it from internal and external risks, the only real re-orientation in the medium term is geographic — shifting infrastructure spending west to replicate rewards reaped by 30 years of coastal development.

That is likely to stoke concerns already voiced by the International Monetary Fund about China's unprecedented rate of investment spending and confound investor expectations that rebalancing would be a swifter shift towards the consumption-driven growth of developed economies — not 20 more years of inland infrastructure creation.

"There are experiments everywhere in China. Some good points emerge and the best points are what the centre tries to identify and encourages others to learn from," Zhang Wei Wei, a leading scholar of China's development model who was translator to its architect — Deng Xiaoping — told.

China's rise, in Zhang's analysis, depends on a conscious effort by Beijing to perfect an urban development model that eases rural poverty and cements power in the capital.

It implies fixed asset investment on a scale as enormous as that which has generated around half of China's growth in the last decade — when it amassed a foreign reserves fortune of $3.3 trillion, became the world's second-largest economy, the biggest exporter and the most important driver of global growth.

Indeed, intensive urbanization is the only way Xi'an and dozens of similar cities can grow fast enough for the Communist Party to make good on pledges to raise incomes for the poor and achieve social stability, thereby justifying its grip on power.

During the 2005-2010 five-year plan, average annual urban income in Xi'an roughly doubled to 22,244 yuan ($3,530). The plan is to double it again by 2015. But that still leaves wages way behind Shanghai's 71,874 yuan average — China's highest.

Asad Khan
Financial Analyst  (CFB)
050-8774861
asad@cfb.ae