The CEQ on FT.com: Up the creek

A pressing question for China’s leaders is how to shift economic development inland from the booming cities of the east coast. The nation’s coastal cities, which feed off Shanghai and Hong Kong’s world-class sea ports, are plugged into the global economy. But the poorer provinces of the Chinese interior remain cut off from the export trade that has helped make the Pearl and Yangtze River deltas prosperous.

In central China, the key may be the Yangtze River. That is certainly what government planners believe. They calculate that by investing in transport infrastructure along the Yangtze, they will bring the interior closer to the coast, allowing the central swathe of China’s provinces to woo manufacturers with cheaper labour and production costs.

The fact that major domestic manufacturers such as home appliances maker Midea have relocated production capacity to cities along the Yangtze – in this case opening plants in Wuhan and Chongqing — suggests there is logic to the policy.

The river port city of Nanjing, gateway to the Yangtze proper, lagged far behind the coastal cities of the Yangtze delta during the 1990s. But China’s ancient southern capital is beginning to reassert some traditional muscle: its gross domestic product (GDP) surged more than 15 per cent in each of the past two years, and its residents now rank just behind Beijing’s in terms of personal wealth.

Nanjing is the front line beneficiary of the trend among manufacturers to reject Shanghai’s high land and labour costs and move their businesses further inland. In 2004, the city received a total of nearly US$15bn of inward investment, including US$2bn from overseas.

After years of stagnation, Yangtze river shipping is booming. The biggest port on the Yangtze, Nanjing handled the equivalent of 681,000 standard containers in 2004 and around 100m tonnes of cargo last year, slightly under half the amount that passed through Guangzhou’s sea port at the mouth of the Pearl River. City officials expect that, as a shipping and logistics centre, Nanjing will soon be to Shanghai as Guangzhou is to Hong Kong.

Upriver, Anhui and Jiangxi remain the two poorest provinces in central China, with GDP per head at levels commonly associated with the backward provinces of the country’s mountainous, isolated west. But their riparian towns are also showing signs of a take-off.

Local leaders talk optimistically about the region’s potential as a cheap manufacturing and labour base. “The towns on the Yangtze, like the cities on the coast, will develop,” says Sun Yongbin, an official in Anhui’s foreign trade department. “The problem, in Anhui and all over the country, is the places without access to water transport.”

In the middle reaches of the Yangtze, the biggest port is Wuhan, a huge, sprawling city set around the confluence of the Yangtze with the Han river. Positioned at the very centre of China, roughly 1000km from Shanghai, Chongqing, Xi’an and Guangdong, the city marks the intersection of the Beijing-Zhuhai and the Shanghai-Chongqing expressways.

This year, around 90 per cent of Wuhan’s foreign imports and exports – dominated by iron ore and the auto, electronics and petrochemicals industries – will be shipped along the Yangtze, testament to the rising importance of river trade. A few years ago, many products for export were carried by rail to Hong Kong. But this traffic dried up as shipping volumes increased. Wuhan’s foreign trade was worth US$6.7bn in 2004. The city’s rebirth is reflected in the sprucing up of its colonial era waterfront bund, now home to expensive cafes and bars.

Finally there is Chongqing, reckoned by some – though it is impossible to know how anyone can be sure – to be the fastest growing city in the world. What is certain is that Chongqing is following the Shanghai recipe of massive, central government-mandated infrastructure development. The scale of construction is difficult to comprehend.

The philosophy of ‘Build it and they will come’ that began at one end of the Yangtze is being repeated at the other end. In the middle, port city activity is at unprecedented levels. For those who believe that China gets a good return, by developing country standards, on its massive infrastructure spending, the Yangtze is the new proof of the country’s development model.

For anyone who disagrees, well, the Chinese government does not much care. The Yangtze river is set to be at the heart of Beijing’s efforts to spread wealth inland for the next decade and more.

The China Economic Quarterly is an independent newsletter devoted to analysis of the Chinese economy and business environment since 1997. It draws on the 25 years of combined experience of its editors, veteran financial journalists Joe Studwell and Arthur Kroeber, and also publishes articles by leading China-focused economists and journalists. This column appears exclusively on FT.com on alternate Mondays.