Entering the city of Dalian, shades of pre-reform China are still visible in the run-down apartment blocks, tall chimneys and coal-laden trucks. But a new city is fast emerging. Closer to the city centre, modern high rises look down on the colonial-style buildings that once dominated the city.
Dalian has a history of foreign occupation. The city fell under Russian influence late in the last century. Russia wanted to develop the nearby harbour of Liishun (Port Arthur) into a second ice-free harbour after Vladivostok, connecting the city by railway to Shenyang, then known as Mukden.
The Japanese took control of the city after the defeat of Russia in 1904 ? only to be expelled by the Russians in 1945. The Russians themselves stayed on for another decade, leaving somewhat reluctantly in 1955, three years later than was agreed in a communique with China's newly established communist leadership.
Today, there are several reminders of the Russian presence: facing the Dalian Government Building and the enormous People's Square is a statue of a Russian soldier; and Dalian's principal avenue bears the name of Stalin, as does the city's main square.
It was the Japanese who first to returned to Dalian after China opened its doors to foreign businesses in 1978. "During the Second World War there were 100,000 Japanese in the city," says vice mayor Li Yongjin. "They had been working in all fields of the Dalian economy. After their return to Japan, many of them got high positions in the government or industry. When China opened up, Dalian was their logical choice to come and invest."
They were actively encouraged by the Dalian government. Former mayor Wei Fuhai grew up in the city under Japanese occupation, speaks Japanese fluently and, in his current position as vice-chairman of China International Trust and Investment Corporation, forms a link between Dalian and the central leadership. His successor Bo Xilai, son of Deng Xiaoping ally Bo Yibo, enthusiastically continued the work of his predecessor. "He is everywhere", according to one investor. "If there's a problem with taxes, or if the city government fails to stick to certain promises, one call to the mayor can do the trick." Almost daily, Bo Xilai features on the front page of the local newspaper Dalian Ribao, receiving foreign guests, attending joint venture signing ceremonies or inspecting newly opened factories.
The mayor is also the force behind a recent campaign to make the city more attractive, both to locals and to foreign investors. Numerous parks and green spaces are being established, and at night the streets are illuminated by colourful lights. As a sop to the foreigners, local regulations state that traffic signs must be in English and Chinese.
Promoting the work ethic
The mayor is just as interested in promoting the work ethic as he is in improving the environment. After a city government meeting in late January, Bo introduced the slogan 'sleep less, work more', criticising the lax work environment to be found in many state-owned enterprises and government departments. This went down well with foreign businessmen. "In the West, he would be called 'acceptable'," says one Dalian-based banker. "So here, that means he's outstanding." Bo Xilai is tipped to become Party Secretary of Liaoning province or Tianjin municipality later this year.
Should Bo depart, investors will hope for continuity. According to Mr Tomoyoshi Sato, executive vice-president of Canon Dalian Business Machines, Dalian's last two mayors have been crucial to the development of the city. The decision by Canon to invest in Dalian's showpiece, the Economic and Technological Development Zone (ETDZ), provides one example. "In 1989, Mr Wei Fuhai strongly invited Japanese investors to come to Dalian," says Sato. "We accepted".
Since Dalian's opening up, 6,000 foreign invested companies have been established in the city, with a total contracted investment of US$19.9bn, of which US$4.2bn has so far been utilised. Some 72 projects are bigger than US$30m, thus requiring the direct approval of the State Planning Commission. Foreign companies are lured by the city's strategic location on the tip of Liaoning peninsula, its harbours, 13 small development zones, a high-tech industrial park and the ETDZ, which includes a bonded zone. The city's reputation is further enhanced by the presence of China's most famous football team (sponsored by local real estate developer Wanda) and the Dalian International Fashion Show, which is shown on television across the country.
A new highway, opened in January shortens travel time between Dalian's city centre and the ETDZ from over one hour to 20 minutes. The zone was the first of its kind to gain the approval of the State Council in 1984, after Dalian gained the status of one of China's 14 'open cities'. City officials now want the zone to become the best in the country. It consists of tree-lined avenues, modern high-rises, European villas, a range of international hotels and more than 1,000 foreign invested enterprises.
This is a remarkable transition in a short space of time. "It used to be just fishing villages," says Qin Xiaotong, deputy director of the ETDZ. Now, 200,000 people live in a zone which has secured contracted foreign investment worth US$7bn.
The French oil company Total has set up a joint venture oil refinery in the zone, together with a Japanese partner and five Chinese enterprises. It is the biggest joint venture project in Dalian and the first Sinoforeign refinery to be established in China. Total has a 20 per cent stake in the project, which has a contract value of US$1.1bn and production capacity of 5 million tonnes. Initially, the costs were estimated at US$450m, but when investment soared to over US$1 bn, the Chinese brought in a new partner ? Sinopec, the Chinese refining company. At the moment, some 6,000 workers are working on the project.
According to Qin, the ETDZ will form "the core" of a complete new city which in a decade will house over a million people. The area will cover some 220 square kilometres and, when finished, the city government hopes it will become "the Hong Kong of northeast China". The Singapore Port Authority has already signed a contract for the building of port facilities (see page 1.7). A design by Canadian firm Bing Thom Architects was chosen late last year as a blueprint for the new city. It is the largest such project in China to be awarded to an overseas firm. In keeping with the progressive outlook of the government, the design will include extensive public and pedestrian areas.
In spite of the government optimism, there are causes for concern. Since 1993, Japanese investments have started to shift from Dalian to Shanghai, southern China and even some inland regions.
By 1993, Japanese investments in Shanghai had surpassed those in Dalian. "It's a process that's natural", accepts vice-mayor Li Yongjin. "It's something which is good for the whole country, but of course it has some influence on Dalian."
Qin is not worried about the shifting Japanese investments. "In the last few years we've seen a surge of American investments starting in 1993, and in 1995 and 1996 a huge wave of South Korean companies come here." South Korea is set to surpass the US as the main investor in Dalian by the end of this year. Enditerm
Like all the main coastal cities, Dalian has a range of joint venture hotels, which will include a Shangri-La in September. They offer the usual karaoke, disco and bar facilities. The city also prides itself on having two golf courses (one of them reputed to be among the world's 10 most difficult courses), a yacht harbour and hunting grounds, said to be initiated by the omnipresent mayor Bo Xilai. But except for that, "there's not a lot to do", complains one representative of a European company. "Going back to Beijing is like going back to culture."
Mr Sato of Canon relates that "company policy forces us to become temporary bachelors" by discouraging Japanese expatriates from taking their families to Dalian. "It's difficult to get a drivers' licence and there is no proper education for the children."
All agree on the benefits of relative, clean air thanks to its seaside location. "Weary to make our foreign friends feel at ease," says Mr Qin Xiaotong, deputy director of the ETDZ, citing local amenities, housing and international flights. At the moment, 3,000 expatriates live in the development zone. Enditerm
Canon fears policy shift
Canon Dalian Business Machine was established in September 1989, four months after the Tiananmen Square crackdown. This was a period when most Western governments and companies were turning their back on China. "At that time, Beijing urgently invited Japan to come here and invest," says Mr Kazuo Sugioka, general manager of the logistics planning division of Canon Japan.
The company, which produces and recycles cartridges for photocopiers and fax machines, has a staff of 3,500, including 20 Japanese managers. It is one of the biggest companies in the ETDZ. "At the time we thought the possibilities here were very big," says Mr Tomoyoshi Sato, executive vice-president of the company, citing the planned harbour expansion and the road and rail links with China's north east. Thanks to the presence of educational institutes such as Dalian University, Dalian Polytechnic and Dalian Foreign Language School, it "'proved very easy to recruit people who can speak Japanese well''. Most of the first recruits in 1989 now work as managers.
By the end of 1996, some US$250m had been invested in the company. The factory floor is meticulously clean; employees (85 per cent female, average age 21 years) wear light blue work suits and caps. As well as good work conditions, the company has been anxious to provide accommodation — dormitories for employees, flats for the management and villas for the top leadership.
According to Sato, Canon provides the flats because of the shortage of housing in the area. Although the government did not force Canon to provide local housing, Sato said it was better for a smooth working atmosphere: "Most of the girls live up to two hours from here, in the `deep country' area. They can go home every weekend, and when they work, they don't need to travel." Mabuchi Motors, the biggest Japanese company in the development zone, also provides dormitories. Smaller Japanese companies in Dalian are said to have faced strikes and sit-ins by workers protesting against bad or non-existent housing facilities.
The Canon factory, producing seven million cartridges a year, started production in 1991. Profits of US$5m last year were relatively modest but, according to Sato, "would never have been higher in Japan if we had built exactly the same factory there". Canon chose to establish a wholly foreign-owned enterprise in Dalian because products are only made for export and, according to Sato, it makes management easier. This might change in the future since the factory plans to start selling its produce on the domestic market. Regulations would allow Canon to sell only 20 per cent of its products on the local market.
Although Sato is pleased with the current production level of the factory, he is worried about the looming cuts in the preferential policies. According to rumours, these could start as early as the beginning of 1998. This would mean that Canon and other companies in the ETDZ have to start paying import duty on machinery brought in for the production process. '"When we established the company here, the Chinese authorities said that we may enjoy a refund of VAT," adds Sato, "'but several regulations have changed without prior notice, which makes the stabilisation of our management very difficult." Canon conveyed its worries to the authorities, but until now there has been no clarification on the looming abolishment of preferential policies or the VAT rules.