Investment nirvana

Apleasant two-hour train ride southwest of Shanghai lies a lakeside city known to many Chinese as "paradise on earth". But Hangzhou is also fast gaining a similarly mythical reputation among foreign investors.

While its tranquil flavor and relaxed pace of life are a world away from the hustle and bustle going on beneath Shanghai's towering skyscrapers, the effect may be nothing more than an illusion. Hangzhou is far from being a sleepy backwater. Not only is it one of the richest places in China, it has also seen double-digit growth every year for 15 years (12.5% in 2005 to US$36.5 billion) based around key industries of textiles, electronic information, foodstuff and chemical engineering.

Provincial heavyweight

As a regional economic center, Hangzhou accounts for nearly 25% of Zhejiang province's economic output.

According to a recent report by the World Bank, Hangzhou has the best investment environment in China based on a range of factors including political stability, consistent tax policies, foreign trade and investment, and the quality of infrastructure and financial services.

It is also rich by Chinese standards, with per capita disposable income of US$2,120 in 2005, not far behind Shanghai's US$2,381.

Wang Yin, an employee at a textile trading company, exudes the confidence common in the city, based around a lifestyle that combines an easy-going environment, well-paid jobs and affordable living costs.

"The only thing I am worried about is the United States," she said, referring to the ever present threat posed by US protectionism.

But even if a key trading partner shuts out Chinese textiles, Wang is confident her company can find new markets or that she could find a different, and "better paying", job in one of the new sectors taking hold in the city.

One of these sectors is IT. Software output totaled US$1.2 billion in 2005, almost 80% of Zhejiang's and 10% of China's total. The city plans to further develop this reputation by leveraging its large IT labor pool; more than 400,000 IT students graduate from 34 higher education institutions in the city each year.

Hangzhou is also aiming to position itself as a Regional Financial Center by 2020, focused on providing services to small and medium-sized enterprises and private clients, which already play a more of a role in the city's economy than they do elsewhere in China.

This was one of the factors behind Commonwealth Bank of Australia (CBA) taking a 19.9% stake in Hangzhou City Commercial Bank in 2005.

Entrepreneurial hub

"Hangzhou's got possibly 60% of its economy privately owned, so it has a strong entrepreneur and business orientation," said Garry Mackrell, an executive for CBA International Financial Services. "It has a diversified economy and is a beautiful part of the world. The affluent live in Hangzhou because it is an attractive place to be."

Affluence and open arms are a powerful lure to foreign firms.

"If you look at the makeup of the economy, what you have seen in Hangzhou is significant growth in the secondary sector," said Justin Kean, head of occupier research for Jones Lang LaSalle, Asia Pacific. "What you would naturally expect to follow that is growth in the tertiary sector."
According to JLL research, Hangzhou will build 2.5 million square meters of office space by 2011 to accommodate new arrivals. In 2010, a high-speed magnetic levitation train is set to link the city with Shanghai.

Zhang Guoshui, president of Tai He Guo Ji International, which is in the process of developing an office and residential complex, is counting on the link to boost the "economic complementation" between the cities.

But it could just as easily destroy what makes Hanghzhou unique, reducing it to little more than a Shanghai suburb with a lake.

If Hangzhou tries to compete with Shanghai, it will lose, said JLL's Kean.

"The strength of Hangzhou has got to be its ability to create something slightly different to Shanghai."