By Duan Ruolan Express Staff

As one of the world's more dynamic economic engines, China attracts a steady stream of global investors. While most of the capital flows into China's eastern regions, businessmen with a more strategic outlook are eyeing the country's vast western areas.
The western region has become a paradise for both domestic and foreign investors due to the special support it receives from the central government, its sound policies and legal and marketing environment.
Between 2000 and 2005, the central government allocated 460 billion yuan (US$55.4 billion) for the construction of infrastructure in the western region, along with over 500 billion yuan (US$60.2 billion) in transfer payments and special subsidies.
In the four years from 2000 to 2003, the region's annual GDP growth was 8.5 per cent, 8.8 per cent, 10.0 per cent and 11.3 per cent, respectively.
During the past five years, great strides have been made in infrastructure construction in transportation, water conservancy, energy and telecommunications with some 850 billion yuan (US$102.7 billion) being poured into 60 key projects in the region. This work included 91,000 kilometres of road and 4,066.5 kilometres of railroad.
The western region, which covers 5.4 million square kilometres, is made up of 12 provinces, autonomous regions and municipalities, including Shaanxi, Gansu, Qinghai, Sichuan, Yunnan, Chongqing, the Ningxia Hui Autonomous Region, Xinjiang Uygur Autonomous Region, Tibet Autonomous Region and Guangxi Zhuang Autonomous Region.
In addition to the State's efforts to increase support for the region's development, western provinces and cities have also grasped the opportunity to co-operate with domestic and international organizations.
In June 2004, the first Greater Pearl River Delta Co-operation and Development Seminar was held in Guangzhou in South China's Guangdong Province. At the conference, Sichuan, Yunnan, Guizhou and Guangxi, along with five other provinces, signed a framework agreement on regional co-operation with Hong Kong and Macao.
According to Zhang Zhongwei, provincial governor of Sichuan, preliminary economic co-operation between Sichuan and Guangdong has been established and capital now flows freely between the two provinces.
Since the implementation of the Agreement of Trade in Goods of the Framework Agreement on Comprehensive Economic Co-operation between China and the Association of Southeast Asian Nations (ASEAN) on July 20, 2005, tariffs between China and six ASEAN countries have been reduced. A free trade area between China and the six countries of Brunei, Indonesia, Malaysia, Burma, Singapore and Thailand, will be established on January 1, 2010.
According to officials from Chongqing, the economies of the city and most of the ASEAN countries complement one other.
Chongqing's strengths lie in machinery and electronics manufacturing, instruments, medicine and the chemical industry, for which there is a market in ASEAN countries. As tariffs are phased out, the markets for timber, rubber, iron ore and agricultural goods produced by ASEAN countries can be expanded to include Chongqing.
Guangxi also has a promising future in co-operation with ASEAN member countries. With ASEAN as its biggest trading partner, Guangxi enjoyed a trade volume of over US$1 billion with member countries last year.
As the only province in China that trades with ASEAN countries via both sea and land routes, Guangxi is an important logistical link between the inner landlocked southwestern areas and the world market.
A mere 1.8 days is all it takes for exports and imports to pass through customs in Guangxi thanks to the standards and computerized procedures in use at all the ports within the province.
Lu Bing, chairman of the autonomous region, pointed out that the government will redouble its effort to promote the annual China-ASEAN Expo as a way of driving foreign trade and investment in the province.
Meanwhile, provinces with fewer connections to the Greater Pearl River Delta and ASEAN have found positive and creative ways to bring in more capital.
In Shaanxi, the government improved the transportation and service sector and built a healthy and fair economic order and legal system as well.
The provincial government also encourages local enterprises to compete in the world market by holding seminars in Hong Kong and foreign countries.
Shaanxi also enjoys advantages in energy resources, the chemical industry, and its wealth of employable talent. Investors are lured by preferential tax and land policies as well.

Best of the West:

*Industry: Remarkable achievements have been made in industrial systems, transportation, telecommunications, technology and education in the region. Xi'an, Chengdu and Chongqing are the country's key industry bases.
Aircraft manufacturing in Xi'an, auto manufacturing in Chongqing, petrochemical manufacturing in Gansu and Xinjiang, the electronics, steel and iron industries in Sichuan and coal mining in Guizhou contribute to the country's industrial might.
Economic and technology zones in capital cities provide a favourable investment environment for global investors.
*Human resources: Education and technology are extremely strong in certain western regions. Xi'an is home to nearly 50 colleges and universities, while Chengdu has more than 160 research institutes.
With many large and medium-sized enterprises located in its big cities, the western region has an adequate pool of engineers and technicians.
Moreover, as the western region has a population of 287 billion, labour costs are half those in the Pearl River Delta.
*Market: As urbanization and industrialization are stepped up, the market potential of the western region expands accordingly.
The 15 ports located in the region connect China with Russia, Mongolia and countries in both Central and Southeast Asia, allowing border trade to flourish in recent years.
*Tourism: The region is rich in tourism resources. The Terracotta Warriors in Xi'an, the Three Gorges on the Yangtze River in Chongqing and the Mogao Grottos along the ancient Silk Road in Gansu are renowned internationally as popular tourist destinations.
Currently, tourism receives extra support in all western provinces. Local governments encourage foreign investors to engage in tourism infrastructure construction.
*Natural and agricultural resources: China's major agricultural and husbandry base, the western region produces grain and cotton to meet nationwide demand. Sichuan and Yunnan grow more than 50 per cent of China's herbs, ideally suiting the provinces to the development of traditional Chinese medicines.
*Energy and mining: The region's coal, crude oil and natural gas resources account for 36 per cent, 12 per cent and 53 per cent respectively of the country's total energy supply. The western region also abounds with hydroelectric power, precious metals and water resources. As much as 82.5 per cent of China's water resources are located in the region.

By Qiu Quanlin

A strong, stable private-equity market is critical to the economic growth of China as well as to global markets. How are China 's young capital markets developing?

Furthermore, despite China 's continued efforts to develop the capital market and expand direct financing, what are the barriers, both procedural and cultural, that investors from home and abroad need to understand?

A number of chief executive officers and top officials from the Chinese government shared their opinions on these and other matters at the 2005 Beijing Fortune Global Forum, which concluded in May.

In early March, Premier Wen Jiabao outlined specific measures to develop the capital market, including enhancing efforts to improve the quality of listed firms, which he called "fundamental" to the country's endeavours in developing the securities market.

China would also build an open, fair and transparent securities market, intensify supervision and crack down on any behaviour that violated the laws and regulations, the premier said.

Wen said China would also regulate the securities market with rules and regulations and better protect the interests of investors, particularly those of public investors.

With respect to these issues, China has been moving in the right direction in solving the major problems facing its stock market, which has been at a six-year low despite the booming economy, Kevan Watts, chairman of Merrill Lynch International Inc said.

Speaking on the theme of "Understanding China's Capital Markets," a general session of the 2005 Beijing Fortune Global Forum, Watts said the Chinese government has been addressing these problems very directly.

China has established six ministerial committees in the past two years to work on overcoming the stock market's main obstacles, focusing on listed companies, intermediaries and investors, he said.

China has also moved to improve the legal structure of the securities system and, earlier this month, began experimenting with ways to solve the non-tradable share issue.

The Chinese economy has been growing at an annual average of 9.4 per cent since 1978, but this has had little effect on the struggling stock market.

Stuart T Gulliver, chief executive of corporate investment banking and markets for HSBC, said the performance of the Chinese stock market had been very "puzzling" as it did not reflect the business cycle of the economy.

"Overseas, we generally expect the stock market to be the leading indicator of the economy; here, it is not necessarily the leading indicator at all.

"Most shares listed domestically are shares that perform quite badly. The SOEs (State-owned enterprises) are not the best SOE's, and the danger China faces is that the very best ones get listed in Hong Kong and New York , leaving the domestic market with less better ones. That causes enormous weight on the stock market," he explained.

Asked whether the Chinese government is moving in the right direction and at the right speed, Watts said the direction was correct.

"You can always debate about speed. But I am a gradualist, I would be in favour of doing more, but gradually," he added.

He then pointed out that the Chinese capital market was less than 15 years old and had undergone a remarkable revolution.

Zhou Xiaochuan, governor of China 's central bank, concurred with Watts .

"I agree that people should be gradualists on (that matter). However, Chinese capital market reform has been accelerated recently," he said.

He was referring to the experiments being conducted to find a solution to the non-tradable State or legal private individuals owning shares, which account for two-thirds of the total shares of China 's 1,400 listed firms.

According to Watts , China needs to educate its investors, intermediaries and companies. In the case of the countryˇs long-term health, the authorities need to develop institutionally based investors domestically.

Part of that effort includes strengthening brokerage firms and intermediaries. That process is underway, as indicated by the involvement of foreign firms through joint ventures.

"The beauty of joint ventures is that they ensure technology transfer. All of us in our joint ventures in the securities market will be working with local Chinese individuals and securities firms, and they will be learning very, very fast from how we run our trading business, and how we manage our relationships with institutional investors," said Watts .

He said the QFII (qualified foreign institutional investors) had similar price leadership, noting that foreign qualified investors would provide price leadership in stock selection as well.

Foreign companies, such as Merill Lynch and Morgan Stanley, can now operate joint ventures locally. "These are welcome developments (that are) very much focused on specific issues," Watts said.

On the immediate and short-term measures the country should take, he recommended that China move its B shares to its H share markets, and then allow the non-tradable shares, double the QFII quota and give the green light to QDII (qualified domestic institutional investors).

A number of international economists at the forum also urged China to step up development of its capital market, which they said was still in the early stages compared with those of developed countries.

Henry Paulson, chairman and CEO of Goldman Sachs Group, Inc, said that China needed to strengthen domestic securities firms, put priority on developing institutional markets rather than retail markets and have more high quality listings.

Paulson pointed out that Japan 's equity market equalled 3.6 trillion US dollars and Hong Kongˇs was worth US$600 billion, while that of the Chinese mainland was only US$400 billion.

China 's securities market includes 1,400 listed companies, 90 per cent of which are SOEs. "One of the huge problems in the market is the structural flaw," Paulson said.

One critical move for China , he said, was to move the economy from low-cost manufacturing to high-tech, value-added products and develop a strong private economy. Another crucial step would be to take pressure off the banks.

In some countries, such as the United States , two-thirds of the capital comes from capital markets, but in China the capital market generates only 4 per cent of all capital, Paulson added.

But Paulson said he was very optimistic about China , as its policy makers had so many bright ideas regarding the capital market.

In another development, China 's interbank foreign exchange market started trading eight overseas currency pairs on May 18, opening a new platform for the trading of foreign currencies and boosting China 's capital market development.

The new trading platform, based in the China Foreign Exchange Trade System in Shanghai , is an important step toward building a more mature foreign exchange (forex) market and will help meet the growing needs for funding and risk hedging among Chinese enterprises, analysts say.

Previously, the market only allowed trading between Renminbi and the US dollar, the Japanese yen, the euro and the Hong Kong dollar.

The trading of overseas currencies "will help develop China's interbank foreign exchange market, diversify products, activate trading and enlarge trade volumes," the People's Bank of China, China's central bank, said in a statement.

The move will also provide China 's smaller financial institutions with access to international financial markets, which they generally have been unable to enter, and help improve the risk management capacity of domestic financial institutions, particularly in forex transactions, it said.

"The globalization of trade means Chinese companies are no longer only dealing in US dollars. They also deal in the Japanese yen and the euro and need diversified trading opportunities," said Tan Yaling, a senior manager with the Global Markets Department of the Bank of China, the nation's largest forex bank.

The Chinese government has reiterated that, instead of resorting to a simple revaluation of the currency, it will improve the exchange rate mechanism itself, a move that requires a more mature forex market.

To provide satisfactory services for investors and projects, International Investment Express sets aside a special section aiming to make available information shared by global investment projects and investors.
Editorial Department of International Investment Express for the ninth China International Fair for Investment and Trade
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