China's growth hinges on wild west

Investors nervous about slower growth in China need to look deeper -- into the hinterland. China's interior is growing fast, and in a more balanced way than the richer coastal areas.

China's west contains 70% of its land mass, 30% of its population, but just 20 percent of its total economic output. Per capita GDP in the mega-city of Chongqing, which has a population of 27 million, was USD 3,500 in 2009, versus USD 10,500 in Shanghai. That leaves plenty of room for catch-up. Chongqing grew its GDP by 16% in the first quarter, above the national average. This month's successful trade fair shows how cheap labour is attracting multinationals and investment.

Investment is a main contributor to growth. Infrastructure spending in western China increased 22% a year from 2004 to 2008, outpacing that of the east, according to brokerage CICC. Admittedly, local governments have used bank credit to fund projects. But, at least they are getting richer.

Chongqing's fiscal revenues were 76% higher in the first quarter of 2011 than a year earlier, while fiscal expenses rose a more modest 47%.

As infrastructure improves, multinationals like Intel are shifting production lines westward. Foreign direct investment was more than double in Chongqing in the first quarter compared to a year earlier, versus a 9% increase in the southern manufacturing hub of Guangdong.

Japanese laptop manufacturers hit by the recent earthquake may move factories to Chongqing, which is courting them with a new direct flight and longer visas.

A relative lack of exports, once a hindrance, now looks a blessing. Traditionally, growth in coastal regions was boosted by exports, leaving the interior behind.

With external demand growth peaking, domestic consumption is now the country's goal. Retail sales rose 20% in Chongqing in 2010, higher than the national average of 16%. Even luxury brands like LVMH  and Tiffany's are opening stores there.

Meanwhile, relative neglect by the state-owned sector means credit can flow more freely to entrepreneurs and smaller services companies. The private sector makes up more than half of the GDP in western provinces like Sichuan and Shaanxi, versus just a third in Shanghai. The west's crouching tigers look like the country's next growth engine.

Context News

-- Chongqing's annual International Investment and Trade Fair from May 19 to May 22 attracted more than 1,000 multinationals, up 100% from last year. Foreign direct investment signed totalled USD 75 billion, up 122% from 2010.

-- China's 12th five-year plan, unveiled earlier this year, puts development of the western provinces at a priority over other regions. The country first launched a programme to open up the western provinces in 2000.

-- The policy covers six provinces (Gansu, Guizhou, Qinghai, Shaanxi, Sichuan, and Yunnan), five autonomous regions (Guangxi, Inner Mongolia, Ningxia, Tibet, and Xinjiang) and one municipality (Chongqing). This region contains 70% of mainland China's area, 30% of its population, and 20% of its total economic output.

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.