Richard Brubaker is the managing director of China Strategic Development Partners, a Shanghai-based consultancy that helps companies understand the local market and implement their China strategies. He is also the editor of the website, All Roads Lead to China. He has been working on a series of comprehensive reports on a number of China's most important cities and talks to FinanceAsia about the next generation of up-and-coming urban centres.
How important are China's second- and third-tier cities to China's economic growth?
Critical. Without them being developed, the country will not balance out in terms of raw materials, energy, people and transportation. China's entire transport system is designed to move stuff from the west to the east û it hasn't really developed a balanced structure. By developing strong regional economies, a balance of resources will follow, and that will reduce many of the bottlenecks found in the current system.
What kind of investment opportunities are there in the second- and third-tier cities?
There are tonnes. There's still a lot of real estate being developed, investment parks are looking for investment (and) they are still looking at increasing the manufacturing capabilities in a lot of these cities. If you go to Changsha, they're going to have a different niche than in Suzhou. But they are all trying to attract investment to develop their economies.
With regards to manufacturing, are there any areas which have become new manufacturing centres? Is Guangdong losing out to neighbouring provinces?
To some degree. I think what you're seeing actually is with the second, third or fourth investments of major companies, they are keeping [their operations in] Guangdong, they are keeping [their operations in] Beijing, and adding facilities to support other regions and cities like Xi'an or Chongqing. That's where you're seeing the movement.
There's a lot of talk about the Guangdong companies and how they're moving. Sure, there are some that are moving inland and leaving Guangdong altogether. I have seen that most firms that have a large presence, those which own their own factories, are really just adding second factories. The only people who can move quickly are those that are renting space from other people û they are not people who own assets. So, for example, Foxconn it is opening another factory in another city, they're not moving their Shenzhen hub.
Which would you say are the second- and third-tier cities with the best prospects?
Chongqing, Chengdu, Xi'an and Wuhan. I think these are my favourite cities off the east coast. You can talk about Dalian, Tianjin, Xiamen and Dongguan as the east coast second-tier cities, and they're all doing fine. They're taking a lot of spill-over from the major core cities. So if you look at Beijing and Guangzhou, and then look at the cities around them in the second-tier, that's a different second-tier from say Chongqing. Chongqing is not going to get the spill-over from somewhere like Hong Kong, so it has to develop separately, as opposed to Zhuhai, which is [benefitting from being] really close to Hong Kong.
Which city is going to resemble Shanghai and Beijing first?
Chengdu is going to be the first city that really develops as it becomes the focal point of the southwestern market. Chongqing will share some of that as well. Chengdu and Chongqing have really big consumer markets: Chongqing is strong in that it has the Yangtze and the shipping, while Chengdu has a strong airport. So they work together. But then the history of Chengdu is more on the soft goods - fast moving consumer goods and technology; while Chongqing has a very heavy industrial base. So they're going to specialise in completely different things - and will hold different levels of attraction for different groups - but in the end that will help to develop the southwest market as a whole.
How would you describe the economic development in Sichuan before the earthquake?
It was doing really well. Chengdu was getting a lot of investment, but even before the earthquake it was still at Beijing's level five to eight years ago. Now they are probably a little bit further behind, as some previously scheduled investments were put on the backburner. At the same time, they will bridge that gap fast because they are getting so much attention now.
In terms of business it didn't really affect Chengdu and Chongqing by wiping out their buildings. It might have invigorated the economies in some sense, because you've had people moving into the cities at a much higher level than before. But that has put a lot of stress on public infrastructure as well.
If there is a significant slowdown in the Chinese economy, do you think that the second- and third-tier cities are going to be hit first?
No, because they have been more isolated to the boom than the main cities. If there's a global downturn, the impact is going to hit the export markets on the east coast first. A slowdown in the demand for raw materials might hit the second and third-tier cities first, however, because you're not developing a lot of copper in Suzhou [on the east coast]. It's being mined in the west and shipped to the east.
From a labour standpoint and a company profitability standpoint, I think it's the east coast that is going to get hit the most. But from a raw material standpoint, it's going to be the centre that gets hurt.
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