Land bridge

In a sprawling market at the foot of a three-storey mosque, dark-skinned, wide-faced men and women pitch in a distinctly Turkic tongue the kind of knick-knacks that only a tourist would buy. They sell thick hand-woven fabrics, straw hats, paintings of snow-covered mountains. The gangs of men, smoking cigarettes and squatting on the trash-strewn sidewalk, cover their heads with embroidered caps. And the only evidence that Urumqi, capital of China's Xinjiang region, is caught up in this country's economic transformation is the faint hum of construction and a layer of dust hanging in the air.

The skyscrapers, factories and five star hotels of now comparatively wealthy Urumqi have sprouted lushly in the middle of this far-flung desert region, the name of which in Mandarin literally means "The new frontier." The indigenous Muslim populace has at times been as hostile as the landscape to Han settlers, businessmen, and policies coming from the east. The integration of Xinjiang, strategically located and oil rich, into the national Chinese economy has often thwarted cultural preservation and movements for varying degrees of independence. But the capital that is being invested into what was once a rundown region, has reinvigorated the trade routes of the old Silk Road and turned Urumqi into one of Central Asia's most thriving economic centers.

In this way, with geography as both impediment and savior, Xinjiang is transforming rapidly. GDP grew over 17% from 2003-2004. And the presence of former US President Bill Clinton in Urumqi to open the Western China International Economic Summit in early September signaled to the world that this city is now on the global map.

Dominating Central Asia
Xinjiang entices capital – both Chinese and foreign – precisely because of its position – far from the development of the China coast – as an entrance to Central Asia's emerging markets. Around US$3.7 billion passed through Urumqi last year on the way to Kazakhstan, Kyrgyzstan and the rest of Central Asia.

Hualing Group, an Urumqi-based appliance manufacturer and a co-organizer (along with Global Dynamic Group) of the Western China International Economic Summit, has earned a significant chunk of its hundreds of millions of dollars in assets exporting refrigerators and microwaves to Xinjiang's western neighbors. Several Singaporean businesses have set up shop in an effort to tap the new consumer base, Urumqi is home to several Carrefours, and Wal-Mart is hoping to soon open its first Xinjiang store, according to Joah Sapphire, of Global Dynamic, a New York based consulting firm.

Urumqi's economy, which contributes a third of Xinjiang's total GDP, is strong largely because of the city's status as regional capital. But even Xinjiang's more remote outposts are benefiting from China's westward-facing trade. Trails through Xinjiang's mountains and deserts, once traveled by the Silk Road traders of yore, are now being laid with new railway tracks set to carry China-made consumer products west-wards.

The region borders eight countries and has 16 major border trade crossings in operation. Urumqi railway station is a distribution center between inland China and Central Asia, and provides access to 20 international train services. The land bridge passing through Urumqi connects China's Lianyungang to the Netherlands' Rotterdam by 10,900 km of rail.

Currently under construction in western Xinjiang is a 295 kilometer railway track that will help to link China's rail network with routes to Southern Europe. The line, scheduled to be completed in 2007, will run from Jinghe on the western end of China's major Urumqi-Lanzhou line, to Korgas, a crossing point on the Sino-Kazak border. Further, Kazakhstan and China are in talks to develop a free trade zone near Korgas and the border town plans to gear its industrial park towards exports to Europe and Central Asia, according to state media.

In an attempt to secure the transportation chain, Beijing has offered to foot much of the US$1.16 billion investment in a port in the Pakistani fishing village of Gwadar. The port, already in a second stage of construction that includes nine berths and terminals in addition to the three already completed, will increase Chinese access from Xinjiang to Pakistan. China now is pouring US$200 million into a Pakistani road connecting Gwadar to Karachi.

There is a lot of market potential in Xinjiang, according to Global Dynamic's Sapphire, but it is still a new market. And the prospect of getting in before the crowd, when there's big risks but perhaps bigger potential rewards, may be the opportunity he's touting as he courts Wall Street for a US$2.5 billion investment fund for Hualing Group projects in the region. But Xinjiang remains very much a niche market.

"If you are out in West China, especially that far west, then the market place is completely different," said Chris Devonshire-Ellis, founder of Dezran Shira, a tax consultancy working with foreign investors in China, "It's dealing with clients in Central Asia, as opposed to clients in Europe or the States." And the Central Asian clientele has unique needs.

Most of Dezran Shira's Xinjiang clients are European firms aiming to sell agricultural products in the region. Finnish farming equipment firm, Vestra, for example, sells tractors through Urumqi to buyers from neighboring nations.

And Hualing Group is augmenting its current hotel holdings, which include one five-star hotel and three three-star hotels in the region, with more three-star hotels – suitable for the less affluent Central Asian businessman.

In terms of getting goods over mountains and through desert, "there's a lot of room for improvement", Devonshire-Ellis said. With the Tian Shan Mountains as a formidable geographical barrier, it still takes 24 hours to get products from Urumqi to Almaty, Kazakhstan's largest city located only 1,000 km away.

Transportation in the region depends also on the infrastructure of China's western neighbors and the ability of the neighbors to work together. When the train crosses the border from China to Kazakhstan, for example, the wheels have to be readjusted, as Kazakhstan's Russian gauged rails and China's own standard do not correspond.

As much as the overland route to Europe is championed by state media it is probably not going to be practical for transport, according to Devonshire-Ellis. Which leaves Urumqi's isolation (36 hours by train to Xi'an, 48 to Beijing and 50 to Shanghai) as a major obstacle for exporters to non-Cen-tral Asian regions.

Robert Peckham, whose Silk Road trading company, an Urumqi-based start-up that exports Central Asian artifacts to the US, has found it most reliable to ship goods by post. But he predicts that as orders for his firm's goods get larger, shipping will be his business' main problem. US$2.5 billion investment fund for Hualing Group projects in the region. But Xinjiang remains very much a niche market. "If you are out in West China, especially that far west, then the market place is completely different," said Chris Devonshire-Ellis, founder of Dezran Shira, a tax consultancy working with foreign investors in China, "It's dealing with clients in Central Asia, as opposed to clients in Europe or the States." And the Central Asian clientele has unique needs. Most of Dezran Shira's Xinjiang clients are European firms aiming to sell agricultural products in the region. Finnish farming equipment firm, Vestra, for example, sells tractors through Urumqi to buyers from neighboring nations. And Hualing Group is augmenting its current hotel holdings, which include one five-star hotel and three three-star hotels in the region, with more three-star hotels – suitable for the less affluent Central Asian businessman.

In terms of getting goods over mountains and through desert, "there's a lot of room for improvement", Devonshire-Ellis said. With the Tian Shan Mountains as a formidable geographical barrier, it still takes 24 hours to get products from Urumqi to Almaty, Kazakhstan's largest city located only 1,000 km away. Transportation in the region depends also on the infrastructure of China's western neighbors and the ability of the neighbors to work together. When the train crosses the border from China to Kazakhstan, for example, the wheels have to be readjusted, as Kazakhstan's Russian gauged rails and China's own standard do not correspond. As much as the overland route to Europe is championed by state media it is probably not going to be practical for transport, according to Devonshire-Ellis. Which leaves Urumqi's isolation (36 hours by train to Xi'an, 48 to Beijing and 50 to Shanghai) as a major obstacle for exporters to non-Central Asian regions. Robert Peckham, whose Silk Road trading company, an Urumqi-based start-up that exports Central Asian artifacts to the US, has found it most reliable to ship goods by post. But he predicts that as orders for his firm's goods get larger, shipping will be his business' main problem.

China's power house

Xinjiang's Central Asian connection also means oil. And in China's far west region black gold is flowing. Xinjiang is home both to 30% of China's onshore oil assets, and to China's corridor for oil and gas transportation. And petrochemicals are at the forefront of Urumqi's growing industrial base.

Xinjiang is predicted to soon outperform China's northeastern province of Heilongjiang to become the nation's top oil producer. PetroChina and Sinopec spent about US$1.7 billion in Xinjiang last year. PetroChina is in the process of acquiring PetroKazakh, and is planning a US$3 bil-lion 3,040 km pipeline predicted to transport 20 million tons of crude from Kazakhstan to China by 2010.

Construction began last March on a domestic pipeline that will run from Dushanzi in Xinjiang to Gansu's Lanzhou and measure 4,000 km, China's longest. The US$1.8 billion pipeline is predicted to transport out of Xinjiang 13.59 million tons of crude and 8.68 million tons of refined oil by 2006. "

Every company in the world wants to be doing deals with Sinopec and PetroChina," said Global Dynamic's Sapphire. And with billions being thrown around in the northwest, foreign companies are scrambling to navigate central government red tape and bureaucratic approval for Xinjiang contracts.

But as is true everywhere in China, oil contracts for foreign companies in Xinjiang are a hard gig to get. Fluor Company, an international engineering company, applied for a project in the region but did not receive approval. Julie Hsu, vice president at Fluor, said Chinese petro companies will use their own contractors as long as their services are suitable. Only for the especially complex projects or for joint ventures with foreign companies do international firms stand a chance of winning contracts.

Sapphire suggests clients get involved in Xinjiang's coal industry to build the relationships necessary for oil contracts. And the coal industry, in itself, is enticing. Urumqi's location in the central part of Zhungar coal-accumulation belt, with coal reserves of more than 10 billion tons, has earned the city the nickname "The coal ship on the oil ocean", according to Kai Wulan of Xinjiang's Office for foreign investment.

And as power-hungry China looks for alternatives to oil, Xinjiang's vast sprawling desert is increasingly being used as a source of wind power. The steely white windmills punctuating the brown of mountain and land, today produce a signi.cant percentage of Urumqi's electricity. Vastra, a Danish company and one of Dezran Shira's clients, produces wind power turbines in Xinjiang for the region's mills.

Rugged beauty
Xinjiang's stark mountains, ancient ruins and indigenous ethnic minorities are just a few attractions that have made the province a tourist destination. "Tourism should become the most important economic sector for the region," Morgan Stanley economist Andy Xie wrote on the bank's website. "If expensive investment in the infrastructure is to pay off, tourism has to be the main source of revenue."

In 2004, tourism brought US$1.43 billion into Xinjiang, accounting for 5.3% of GDP. Nearly 320,000 foreign tourists spent more than US$90 million in the region as they toured ancient sites along the Silk Road and tasted local delicacies in Kashgar's open markets. There are an increasing number of Mandarin speakers due in large part to the growing benefits of the tourism business, according to Xie's report. And with 78 established domes-tic and international flights, it is becoming easier to get to China's western most region.

Still, high airfares remain an obstacle to Xinjiang tourism development. Xie noted that his trip to the region cost US$0.09 a kilometer, well above the average flight cost. Further, tourism in Xinjiang currently shuts down around November and remains dormant throughout the winter. Xie suggests an opportunity to explore the development of winter tourism, through activities such as snow sports.

Government support
The central government's 'go west' campaign supports Xinjiang's developing infrastructure and lures foreign direct investment through a variety of preferential policies. Indeed, government investment, which accounted for 47% of Urumqi's GDP in 2004, is essential to the region.

Beyond the roads, and the highways, and the cellular towers, and the broadband access, government support comes in the form of tax incentives and land discounts. Urumqi city is home to two national development zones and one export-processing zone.

Peckham, of the Silk Road Trading Company, said the local government has been exceedingly helpful. Silk Road has especially benefited from a long tax holiday.

Further, Peckham said the company chose to set up shop in western China, as opposed to another Central Asian country mainly because of reported corruption in other states in the region. But in China, "We have not faced any corruption at all ever", he said.

Regional Unrest
Beijing has strategic motives for investing heavily in infrastructure in Xinjiang, a region that has experienced independence movements and that has cultural ties to the unstable central Asian states and various extremist movements.

Resentment has on occasion triggered violence. Seven million of Xinjiang's 17.5 million residents are Sunni Muslim Uighurs. Independence groups, like the Uighurstan Society for Freedom, the Committee for Eastern Turkestan, and the Revolutionary Front of Eastern Turkestan have used a variety of tactics such as printing newspapers, blowing up railroad tracks, and fighting with Afghanistan's Islamic Mujahadeen, to further their goal of liberation.

While information on these movements is hard to come by, some specific incidents have been reported. But the unrest in Xinjiang is nothing compared to the wars and crises found among many of the region's neighbors, including such headline grabbing countries as Afghanistan and Pakistan.

A lot of money is being injected by the central government into Xinjiang to improve people's lives and increase regional stability, according to Devonshire-Ellis. "The Muslims in that area, a lot of them aren't really that interested in the fighting, and if they can get wealthy and have a nice lifestyle and drive around in Pajeros then I think they'd rather do that and you can certainly do that in Urumqi."

Some suggest the Xinjiang development strategy has benefited the Han minority much more than the indigenous majorities. While Han Chinese accounted for only 2-3% of the Xinjiang population in 1949, the proportion has grown to 38% today, due largely to government relocation policies. Urumqi, central Asia's wealthiest city, 'is very much a Han city', according to Devonshire-Ellis. The difference in standards between Urumqi's Han and Uighur neighborhoods is immediately striking.

The rapid development has also come at the cost of massive pollution. The energy industry in particular has left villages decimated in its wake. Traveling across the Taklamakan desert, one stumbles across small towns where the people look ill and the food tastes of oil.

Easy living
Expat life is, of course, more cheerful. Peckham, a transplanted American living in Urumqi for the last ten years, marvels that today he can get anything he needs, from air puri.ers to Skippy peanut butter, in one of Urumqi's department stores.

Still, in Urumqi there is no international school; there are few five star hotels, and only a small percentage of foreigners. "It's not Shanghai," said Peckham. No, it clearly isn't. But it is in that difference that Urumqi's future lies.

"Urumqi is just going to consolidate it's position, as it is at the moment, as an increasingly important trading and to some extent political hub for Central Asia," said Devonshire-Ellis. "I think that's what its destiny is going to be."