As Shanghai and Beijing draw the eyes of the world toward China and enter the lexicon of dinner conversations around the world, another drama is playing out in remote parts of the country where cities like Changsha, Chengdu and Wuhan, unheard of by most, seek to join the ranks of the world’s largest urban areas. These second- and third-tier Chinese cities are developing under a laissez faire central economic policy. While the four provincial-level municipalities of Beijing, Shanghai, Tianjin and Chongqing are administered directly by the central government, provincial- and township-level authorities manage local command economies that direct the development of most Chinese cities. Reluctance to implement market-driven development at the local level, combined with a lack of national oversight and coordination, have led to overlapping development strategies, causing industrial oversupply and preempting efficient industrial development.


While the prevailing view of China’s governance is one of authoritarian control, the history of economic development in China has actually been a story of tension between the central government and the provinces. This tension was most apparent during the early twentieth century, after the fall of the Qing dynasty, when several renegade provinces seceded from Beijing.


The early Communist period from 1949 to 1962 marked the golden age of centralized power, with Beijing using Soviet-style planning principles to maintain unprecedented control over the national economy. However, this centralization all but eliminated responsiveness to local conditions, exacerbating a famine during Mao Zedong’s Great Leap Forward industrialization campaign.


Beginning in the late 1970s, Deng Xiao Ping initiated the Reform and Opening policy aimed at establishing a market economy. This reform initiative released power to local administrators, with local government units constituting the key drivers of economic growth. While Deng’s reforms are uniformly credited with propelling the massive wave of economic growth that continues today, the accompanying decentralization allowed a resurgence of provincial power and the rise of “economic warlordism,” with provincial authorities neglecting central orders and competing for localized economic benefits. Today, local and provincial authorities continue to direct localized development schemes, resulting in structural imbalances in the national economy.


The Second- and Third-Tier Cities

While China is often portrayed as a single economic entity, the country actually comprises three distinct economic regions, each of which presents a unique economic landscape for urban development.


According to Xu Fei, professor of economics at Shanghai Jiaotong University, the eastern coastal provinces are the most developed, utilizing 71% of foreign direct investment (FDI) in 2007. These provinces include Beijing; Tianjin; the Yangtze River Delta regions of Shanghai, Jiangsu, and Zhejiang; and Guangdong in the Pearl River Delta. These areas comprise 14% of China’s land area, 42% of its population and 60% of its GDP. The manufacturing prowess of these provinces constitutes China’s economic engine, driving the country’s export-oriented growth model. The region’s combined GDP output was RMB17.0 trillion (USD$2.5 trillion) in 2007, and its per-capita GDP wasRMB30, 140 (USD$4,432).


In contrast, central Chinese provinces such as Anhui, Henan, Hubei, Hunan and Shanxi comprise 30% of China’s land area and 33% of its population, but only 25% of its GDP. This region relies on an outdated industrial base made up of state-owned enterprises. Fei explains that the central provinces “once had solid infrastructure, but since the introduction of Deng’s market economy in the early 1980s, insufficient investment has caused [these] provinces to fall behind the booming coastal region. Therefore, much of the infrastructure in the central region is outdated.” This has left the region largely dependent on agriculture and other primary industries, which together constitute 15% of its GDP. The total GDP output of these provinces was RMB7.0 trillion (USD$1.03 trillion) in 2007, and the per-capita GDP was RMB15,684 (USD$2,306).


Finally, western provinces such as Gansu, Qinghai, Sichuan, Yunnan and Tibet lack an economic base due to their rugged and inhospitable geography. Together, these provinces comprise 57% of China’s land area, 25% of its population and 15% of its GDP. According to Fei, “unlike the central region, the western provinces never had any infrastructural development.” Consequently, development of basic infrastructure through policy initiatives, such as Develop the West, has become a primary goal of the central government. Furthermore, the government-initiated stimulus of 2009 has allocated substantial resources to such infrastructure development. As of2007, the combined GDP output of the western provinces was RMB4.3 trillion (USD$632 billion), and the per-capita GDP was RMB12, 363(USD$1,818). The industrial production value was RMB974 billion, only 8% of the national total.


With the development of basic infrastructure in the western provinces, companies such as Intel and Toyota are moving their facilities inland from the coastal provinces, creating a potential windfall for local governments. One government official of a Hubei city, who asked to remain anonymous, states: “We are looking for investment in any industry, and we will work out a tax package to encourage investors to come.” Consequently, each province is attempting to develop its largest cities into economic powerhouses, boasting pillar industries such as steel, cement and automobiles. This phenomenon is creating product oversupply and the need for industrial consolidation.


Fei warns that locally controlled development, lacking an overarching, coordinated plan, can lead to redundant industrial investment across provinces. He cites the overabundance of automobile manufacturing as a prime example: “In 2002, over 100 motor vehicle manufacturers were competing in an increasingly saturated market.” The Chinese automobile industry stood as an extreme example of uncoordinated, locally driven development and has recently become the target of a centrally mandated consolidation.


Two Cities in Transition

The cases of Qingdao and Chengdu illustrate the localized dynamic of modern Chinese urban development. Qingdao is a coastal city attempting to correct structural and zoning issues stemming from rapid, uncoordinated development. Chengdu, a western city, also faces challenges from rapid economic growth. However, competent technocrats are running the city’s planning offices with input from the central government. This local-central collaborative effort may serve as a model for future urban development in China.


Qingdao, the birthplace of Daoism, is marked by a tumultuous past of invasion and re-creation. From 1897 until the outbreak of World War I, Qingdao was under German control. In 1914 Japan took over and continued colonial rule. When the May 4th movement was launched in 1919, protestors demanded the resumption of Chinese sovereignty over the city. Japan re-invaded in 1938 and maintained control until 1945, when the nationalist government overtook the city.


Since the Communist Revolution of 1949, Qingdao has enjoyed rapid economic growth. In 1984, the central government named Qingdao’s Huangdao district a Special Economic and Technology Development Zone (SETDZ). This district and the entire city witnessed the dramatic development of secondary and tertiary industries. As an important trading port, Qingdao has enjoyed abundant foreign investment and international trade. In 1994, it was named one of the country’s 15 vice-provincial-level cities.


In 2008, the per-capita GDP comprised RMB52,895(USD$7,616). The GDP has grown steadily at an average pace of 16% annually. Internationally, Qingdao is best known for the Tsingtao Brewery, founded by German settlers in 1903. It is also home to Haier, a large appliance manufacturer, and Hisense, a major electronics company.


By the end of 2006, Qingdao’s urban area was estimated to be home to approximately 8 million residents, about 3 million of whom live in Qingdao city proper. Another estimated 5 million live in satellite cities under Qingdao’s jurisdiction. Qingdao’s living standards are among the highest in China due to its strong export economy and relatively high per-capita GDP.


In recent years, the Qingdao government has initiated an ambitious development plan similar to those of second-tier cities across China. This plan seeks to transform the city into a commercial and financial center driven by tertiary industry, namely tourism. Implementation of this plan has forced the Qingdao government to remove existing factories from the central business district to allow for commercial and residential development.


The factory relocation process is characterized by a lack of national oversight, which leaves room for local adaptation and corruption. Currently, the local government undertakes a valuation of the land on which a given factory sits. Following the appraisal, the company receives 40% to 50% of the land value and has two years to relocate to a rural area. There location sites include Qingdao’s five satellite cities: Jiaonan, Rizhao, Pingdu, Jimo and Laixi. The company receives the remaining 50% to 60% of the initial land appraisal value after relocating, after which the Qingdao government publicly auctions the land.


In addition to the government taking advantage of land-value appreciation and controlling the appraisal process, private enterprise is frustrated by other side effects of relocation, e.g.,  retaining talent. Current government efforts to promote talent relocation have proven unsuccessful.


On the flip side, China’s rural areas are fighting for the opportunity to attract the relocating factories to their newly created development zones. Representative offices of the satellite cities have recently been set up in Qingdao to help attract these companies. The director of one such office notes that “[t] he office was set up in Qingdao because our city is too far away and the people of Qingdao believe that it is a very poor place, unsuitable for development. Our office facilitates communication and the opportunity to introduce the modern day situation of our city to more investors without forcing them to travel outside of Qingdao proper.”


Attracting outside investment is not the only purpose of the representative offices. They also facilitate building relationships with officials from Qingdao’s legal and trade bureaus, who are responsible for the factory-relocation process. This process is often influenced more by personal relationships and business interests than by a vision for what is most beneficial to the city. Building personal relationships with these officials is, therefore, essential for developing the satellite cities.


Industrial land prices are fixed by the provincial government at RMB96, 000 (USD$14,118)/Mu (1 Mu = 666.66 square meters), but industrial land is regularly sold at half that figure or less. In addition, taxes are reduced illegally and infrastructure fees are waived as local officials compete to secure investment in their districts. While the relocation process allows Qingdao to remedy past zoning mistakes, the lack of coordination and disregard for rule of law create a certain level of chaos for satellite cities.


One Qingdao official noted that “in order to attract more investment, infrastructure needs to be developed for service industries. Furthermore, government leaders need to view themselves as servants to investors rather than controllers, and strict regulations need to be formed by the central government to map development and provide guidelines for local government behavior.” The official also hopes to see a greater push for the education of China’s youth in order to meet the requirements of internationalization. “English and international regulations are key.”


Competition for Skilled Labor

In 1949, Chengdu had a population of 600,000. Today it has more than six million. This city has long been the standard-bearer of southwest China’s political, cultural and economic development. Its urban population has been growing at a rate of 5% for the last 15 years, and the population of undocumented workers has been growing at a rate of 17% per year. Over the same time period, the service sector has expanded from 50% of GDP to55%. Chengdu enjoys abundant natural resources, a well-educated population and low-cost labor.


According to the McKinsey Global Institute’s report Preparing for China’s Urban Billion, Chengdu faces three major challenges to its continued growth. First, there is ferocious competition for its skilled labor, particularly from the large coastal cities of Beijing, Shanghai and Guangzhou. Second, there is a growing economic imbalance between Chengdu’s urban and rural areas. Finally, the report notes the possibility of Chengdu’s low-cost labor advantage eroding over time. Pan Xin Chun, of the Chengdu Hi-Tech Industrial Development Zone, believes that many problems have arisen from short-sighted city planners combined with the blazing speed of development. “We no longer have one guy in the city planning office who sketches something up that is immediately implemented. Instead, we now use domestic and international design firms, hire respected consulting firms to evaluate proposals, and review all plans before they are implemented.” While Pan feels the situation has improved, he believes zoning problems may re-occur within the next 20 years as the city expands further.


In 2004 the Chengdu city government enacted the Three-Concentration Policy to meet the rising problem of rural-urban imbalance caused by rapid development. This policy promotes the concentration of the city’s industrial base, the development of large-scale agriculture, and the “townization” of dislocated farmers. This “townization” process provides displaced farmers and villagers with resources to create local businesses such as shoe-making and tourism. In addition, it promotes the urbanization of Chengdu’s outlying areas. The Three-Concentration Policy includes creating large industrial zones on the eastern and western peripheries of the city, closing factories near the city center and consolidating arable land. This policy has decreased the number of industrial zones from 166 to 20 and has resulted in increased agricultural productivity. Pan indicates that state-owned enterprises, having already been relocated from the city center, are moving once again to outlying areas. Although an attempt is being made to move polluting industries out of the city proper, all industry is to stay within the Chengdu municipality rather than be pushed to other cities. This placement of industrial enterprises, directed by the Chengdu municipal government itself, differs from the factory relocation system in Qingdao and reflects greater coordination in the implementation of national objectives.


As Chengdu develops, it continues to both shape a well-defined strategy that plays to its historical strengths and respond to ongoing development challenges. According to Pan, “Chengdu is targeting electronics, heavy machinery, cars, Chinese medicine, aviation, telecom, biology, and software companies.” To attract finance, commerce and trade talent, Chengdu’s government is supporting private firms in these industries to provide packages with higher pay and better social benefits. The city is also attempting to increase the number of college graduates to ensure that the future demands of Chengdu’s development will be met.


Most importantly, Chengdu’s strategic position as a center for western development has placed it at a level of national involvement that is uncommon outside Beijing, Shanghai, Tianjin and Chongqing. In particular, the city has benefited from the central government’s oversight, ensuring that the top administrative talent is given important roles within the municipal government, effectively coordinating local and national strategies. It is this coordination that has helped steer the city’s leadership and planning and makes it a potential model for other developing cities.


Challenges and Solutions

The single greatest challenge facing those who shape the modern Chinese economic landscape is the lack of coordination among local command economies. The effects of this phenomenon manifest themselves in a variety of ways that hinder the effective and sustainable development of second- and third-tier cities.


Leaving the fate of economic development in the hands of local governments can have adverse effects on the long-term prosperity of developing cities. This is due, in large part, to local officials’ evaluations based on GDP growth within the geographic area under their supervision. According to Fei, “this leads officials to be shortsighted in their development vision, attempting to capture as much short-term profit as possible in order to secure their political prospects.” In addition, environmental quality continues to deteriorate, and increasing numbers of college graduates find themselves highly educated, misallocated, and underutilized.


In combating shortsightedness, pollution, and corruption, the central government should enforce greater cooperation and coordination among all levels of government. Recent central initiatives –e.g., posting experienced Shanghai officials to leadership roles in such critical western cities as Chongqing and Chengdu – have proven successful