New frontiers

The fate of China s economic reforms will be determined locally. Our first

article looks at a wealthy city near the coast; our second, at a poorer one

inland.

Jan 11th 2014 | FOSHAN | From the print edition

THE furniture market in Foshan claims to be the biggest in the world. It boasts

a bewildering mix of things to sit on, sleep in and eat at. One shop, named the

Louvre , offers a range of styles from neoclassical to postmodern, which an

assistant defines as a cross between European and modern, suitable for

successful people .

The market, which sprawls over 3m square metres (32m square feet), showcases

the manufacturing powers of Foshan, a city of 7m people in the southern

province of Guangdong. The city is an archipelago of industrial clusters,

dedicated to furniture, textiles, appliances, ceramics and the equipment

required to make them. These clusters have produced some of China s most

successful private firms, such as Midea, a maker of household appliances, which

began as a bottle-lid workshop, and now employs 135,000 people, generating over

$16 billion in revenue in 2012.

Many economists worry that China will succumb to a middle-income trap ,

failing to make the jump from an early stage of growth, based on cheap labour

and brute capital accumulation, to a more sophisticated stage, based on

educated workers and improvements in productivity. But no economy, let alone

one the size of China s, moves in lockstep from one growth model to another.

Some regions always outpace others. Provinces like Gansu, in China s

north-west, are still struggling to wean themselves off state-owned mines and

smokestacks (see article). Other parts of China s economy are already

comfortably high-income, according to the World Bank s definition. For example,

Foshan s GDP per head was almost $15,000 in 2012, higher than in some member

states of the European Union.

Foshan best represents China s emerging economic frontier , according to the

Fung Global Institute (FGI), a think-tank in Hong Kong. With the help of

researchers from the National Development and Reform Commission, China s

planning agency, the institute is studying Foshan for clues about the rest of

the economy s future.

Foshan s example is relevant to other parts of China, it argues. Unlike the

nearby metropolis of Shenzhen, it was never a special economic zone. Unlike

neighbouring Guangzhou, it is not a provincial capital. It also shares many of

the country s growing pains. Lacking oil and coal, it is prone to electricity

shortages. It is heavily polluted and highly indebted: its government pays 47%

of its tax revenues on servicing its liabilities. Wages are going up, land is

running out, and growth is slowing down. To tackle such problems, China s

Communist Party endorsed a long list of bold reforms at its long-awaited third

plenum in November. Economists welcomed the list even as they worried that

officials would fail to implement it. But in China, implementation is often a

process of gradual diffusion not abrupt transition. Some of the principles

proposed by the plenum are already in practice in Foshan. Some may have been

inspired by it.

The third plenum resolved that the market should play a decisive role in the

allocation of resources. In Foshan it already does. In the early 1990s Shunde,

one of the city s districts, pioneered the sale of government-backed

enterprises to their managers, workers and outside investors. Foshan now has

about one private enterprise for every 20 residents. In 2012 they grew twice as

fast as the remaining state-owned firms.

November s party plenum also called for private capital to play a bigger role

in public infrastructure. In Foshan over the past nine years the government has

allowed private firms to bid for over 500 projects, including power generation,

water plants, and rubbish-incineration plants, according to Liu Yuelun, the

city s mayor. Ahead of the party s call to consolidate the state bureaucracy,

Shunde district had already slashed the number of its departments from 41 to

16.

Another national aim is to unify parts of China s land market, allowing rural

land to be leased on similar terms to state-owned urban plots. In the 1980s

Foshan had already created a shadow market in communal land, which villagers

leased to budding industrialists, contrary to national law that reserved such

land for rural purposes. Because these land rights were technically illegal,

many big firms eschewed them. But that made them all the cheaper for scrappy,

small firms willing to live in the legal shadows. This grey market allowed

Foshan s industrial clusters to grow organically, according to economic logic

rather than arbitrary land laws, argues the FGI. It also allowed villagers to

reap some of the gains of Foshan s industrial transformation. By 2010, the FGI

calculates, the average Foshan resident owned property worth almost $50,000.

Will Foshan s experiments inspire nationwide reform? Its lessons sometimes get

lost in translation. Shunde s sales of government-backed firms is one example.

It sold its most profitable firms before selling the lossmakers, a strategy it

likened to marrying off the prettiest daughter first, according to Linda

Chelan Li of the City University of Hong Kong. The national government, in

contrast, let small, loss-making firms go but clung tight to big, profitable

ones. These SOEs remain powerful and profitable and all the harder to reform as

a consequence.

Foshan s penchant for experimentation also reflects its unusual administrative

history. Until 2002 two of its districts, Shunde and Nanhai, were cities in

their own right. Their governments still collect more revenues than the city

itself. This allows decentralised and more responsive decision-making. When

the upper level of government gives more authority to subdistricts, they have a

stronger sense of responsibility, says Mayor Liu.

In response to the demand of local industry, for example, Shunde district built

an impressive polytechnic, which now teaches 11,000 students. Its

qualifications are not recognised as degrees by the Ministry of Education but

they are highly valued by local employers. A skilled graduate can earn up to

6,000 yuan ($990) a month, says Fu Qingju of Keda, an equipment-maker. The

quantity of workers will grow more slowly as migration to Foshan slows, but the

quality can always improve.

Do you copy?

Foshan s success may prove hard to imitate or to sustain. Its prosperity rests

on the benefit that firms derive from proximity to others. But these clusters

are hard to replicate. Why would companies flock to a new cluster when one

already exists? China is dotted with ambitious local governments keen to build

hubs of high-tech firms and services. Not all of them can succeed.

In addition, when industries cluster in one location, pollution also

concentrates in the same spot. Foshan has experienced the stark trade-off

between industrial growth and environmental protection. In the past the

government would approve a new company before the sewerage system was ready to

cope. Four of Foshan s inland rivers are heavily polluted. In 2003 it tightened

environmental regulations on its local ceramic firms, an industry with

centuries-old roots in Foshan. Ten years later, fewer than 60 out of 600 firms

remained. The rest did not pollute less. They just polluted elsewhere.

Pollution is now a barrier to Foshan s development, rather than a byproduct of

it. We understand that our poor environment does not attract talented people,

notes Mr Liu, the mayor. We want to provide greener lands for them.

Mr Liu hopes that new, cleaner clusters will supersede its older, dirtier ones.

The east of the city, which is connected to Guangzhou by underground, hosts a

cluster of back-offices for Guangzhou s finance industry. Foshan is also

building a new cluster dubbed the Sino-German Industrial Services Zone,

dedicated to the services that high-end manufacturing requires. The new zone

straddles the Dongping river. One bank represents Foshan s prosperous, tangible

present a busy port, loading and unloading containers full of manufactured

goods. On the other bank is Foshan s vision of its future: a pleasant ribbon of

parkland, decorated with cherry trees, mudflats to attract birds and a

skate-boarding rink. The park includes a man-made beach and pond, open to the

public, where up to 2,000 people can bathe.

In the past Foshan s enterprises made great leaps by assimilating foreign

technology. Its ceramics industry, for example, imported a German oven in 1983

that increased output tenfold. The Sino-German zone is an attempt to import

something else: not German kit so much as German credibility. The international

tie-in is a sign of Foshan s ambition to become a liveable city, attractive

to the kind of people that a sophisticated service industry needs. Like its

furniture, Foshan s new city aims to be somewhat European, modern and suitable

for successful people.

From the print edition: China