All roads lead to Chongqing

 

With 102 cities in China with a population greater than one million people, estimated to reach 221 by 2025, the rate of urbanisation in China is unparalleled by any other nation. China’s urbanisation rate is expected to reach nearly 60% by 2020. There is no greater evidence of this than in the rapid transformation of Chongqing, the vast and sprawling metropolis in western China, and home to over 30 million people.

Often compared to Shanghai in the 1990s, Chongqing is the fastest growing city in China. Its booming economy is supported by the government’s “Go-west” strategy and the re-direction of investment and resources to the major western cities. In the 12th Five-Year Plan (2011 – 2015) the Chongqing government has pledged to maintain an annual growth rate of 12.5% p.a. over the five years.

NATIONAL SIGNIFICANCE

Chongqing became a provincial-level municipality directly subordinated to the Central Government in Beijing in 1997. The strategic choice positioned Chongqing as the central city of China, establishing it as the regional leader and distributing centre for central and western China. As the fastest growing city in China in 2011 with GDP growth of 16.4%, Chongqing outstripped the growth of the other major cities of Beijing and Shanghai (8%) which are maturing into more developed and established markets. Labor costs in Chongqing are 30% lower than that of the eastern coastal cities and, as further evidence of its growing importance, by 2020 Chongqing will be the largest airport for inner China with annual transit numbers reaching 75 million travellers.

ROLE IN THE GLOBAL ECONOMY

As Chongqing evolves as the ‘financial hub’ of Western China, foreign investors are looking to capitalise on this phenomenal growth opportunity. With the rest of the world stagnating, capital drying up and growth opportunities becoming harder to find, the city of Chongqing provides a unique investment opportunity as the next frontier of China. In January 2012, Chongqing’s foreign trade had increased by 70% year on year, further evidence of its growing importance in the global market and, during the first half of 2012, Chongqing’s foreign trade value reach US$25.04bn, up 170% year on year, ranking it as the fastest growing and 12th largest market in China.

Nearly half of this foreign trade was conducted by the private sector. Exports alone increased 2.5 times year on year and reached US$18.15bn in June 2012, primarily driven by high value electronics manufacturing such as laptop production (Chongqing exported 9.21 million laptops in FY2011/12, valued at $3.14bn). Chongqing’s role in the global economy as the hub of western China’s investment and financial services, will gain new significance with the emergence of the western Chinese consumer into the world’s retail and services markets.

INVESTMENT IN CHONGQING

Investment in world class infrastructure and technology has established Chongqing as a competitive commercial frontier for attracting international and domestic investment. In 2011, Chongqing overtook Beijing in terms of overall FDI (US$10.8bn) and is predicted to overtake Shanghai and Tianjin by 2014. Foreign Direct Investment levels are expected to grow at an average annual rate of 28.3% until 2015 when it will reach USD22bn. In addition, in 2012 it was announced that leading electronics manufacturer, Foxconn and Chongqing will collaborate to build and develop a world-class R&D centre.

The local government is committed to Chongqing’s development, with RMB181billion to be invested in 106 projects over the coming months. Chongqing invested RMB534million into hi-tech enterprises alone in 2011. Investment in Chongqing has already generated fruitful returns, particularly for the banking industry. One example is HSBC, which was one of the first foreign banks to establish a branch in Chongqing in 2004. HSBC’s client base has doubled every year since 2007 and its local business has grown to include four sub-branches and three rural banks.

LIANGJIANG NEW AREA

In 2010, the Liangjiang New Area in Chongqing was given the same status as Shanghai’s Pudong area and Tianjin’s Binhai area. It is located in the main city of Chongqing, north of the Yangtze River, and the core area of Jiangbeizui will be the new financial centre of the city. To illustrate the scale of the Liangjiang new area, the Yangtze River Delta (where Shanghai’s Pudong sits) covers an area of 210,000km² with a population of 90 million people. In contrast, the “West Triangle Area” where Chongqing is located covers 6.8million km² and holds a population of 400 million. The total output of the Liangjiang new area makes up approximately 14% of Chongqing’s total output, being home to over 646 industrial scale enterprises. There are over 70 projects invest by 60 Forbes 500 corporations in the Liangjiang New Area alone – yet this is only 30% of Chongqing’s total.

CHONGQING ATTRACTS FOREIGN BANKS

The strength of Chongqing’s financial sector is closely tied to the rapid state-backed economic development on the region. By 2015, the financial services industry will account for 10% of Chongqing’s total GDP, a 2/3 increase above the current level which is already the third largest in China.

Chongqing’s workforce is already well educated with over 300,000 tertiary education graduates entering the workforce each year. People employed in finance-related industries are expected to more than double to 160,000 by 2020. To support the growth of the finance sector, the National Government is offering tax subsidies and preferential policies to banking enterprises establishing their operations in Chongqing, including additional incentives for foreign institutions employing large numbers of laid off workers and exemption from city maintenance construction fees and extra education fees. There is a maximum 15% income tax rate for all industrial enterprises in Western China, as opposed to 33% in eastern cities.

Foreign banks have an important role to play in the development and growth of Chongqing as an international financial services centre and, unlike in the more established cities of Hong Kong, Shanghai and even Guangzhou, there is less competition, more opportunity and the potential for local Government support in the form of subsidies, incentives and concessions. Is this China’s final frontier for Australian banks?