Shock absorber

The Chinese government’s response to the massive earthquake in Sichuan province on May 12 that resulted in nearly 70,000 deaths has been extraordinary. Given the area affected – 500,000 square kilometers in Sichuan and neighboring provinces, about the size of Spain – China displayed a "remarkable" ability to mobilize domestic and international resources quickly and effectively, said Mara Warwick, an urban specialist at the World Bank in Beijing.

Warwick said Beijing solicited international institutions and foreign governments for advice on disaster recovery aftrer the quake, and has taken suggestions to heart. "It’s a very positive story."

The follow-up to the initial relief efforts has been just as impressive. The National Development and Reform Commission (NDRC) drafted a comprehensive blueprint for the reconstruction of the hardest-hit areas (about a quarter of the total) in Sichuan, Gansu and Shaanxi provinces three months to the day after the quake struck. According to Warwick, some refugees from rural areas have returned to newly built homes within six months of the quake.

Boosting growth

Since the financial crisis, reconstruction has taken on other dimensions as well. In November the NDRC’s plan comprised a quarter of the US$586 billion fiscal stimulus package announced by Beijing. Not just a humanitarian relief mission, the project is seen as a key part of China’s efforts to keep growth at healthy levels over the next few years.

"Reconstruction is going to be generating a lot of GDP growth [for Sichuan]," said Chen Xingdong, chief economist for China at BNP Paribas.

Chen estimates that, pushed along by the inflow of government funds and investment, Sichuan could account for 0.5 to 1 percentage points of China’s total GDP growth over the next three years.

Rebuilding collapsed homes and damaged infrastructure is the first part of the effort, scheduled to take about three years; the second phase – catching the areas up with the rest of fast-developing Sichuan – will be a 10-year project. Restoring tourism to the area, which includes the Wolong wildlife reserve, the natural habitat of many of China’s pandas, will be the spearhead behind which other industries can follow and be built up.

Sichuan’s provincial government estimates that US$438 billion will be needed to cover the full cost of reconstruction and development, of which the central authorities will be footing 20%. Other sources of financing, including donations, capital markets and loans from banks, will be required for the rest, said Sichuan Executive Vice Governor Wei Hong.

Continued investment in the province from businesses will be crucial. Inbound investment since the start of the central government’s Western Development Strategy in 2000 to bridge the gap between the poorer western provinces and the coastal areas has been "a major boon" for Sichuan, said a Western diplomatic expert in Chengdu, the provincial capital. As a result, Sichuan has recorded growth rates 2 to 3 percentage points higher than the country as a whole over the period.

The so-called "Go West" program has helped the province build on a wide industrial base, which includes autos, aerospace, electronics, power, steel, mining, gas and agriculture.

Much of the investment has found its way to Chengdu, which was mostly unharmed by the quake. Relatively isolated from the east (it has no major river port like its neighbor, Chongqing), Chengdu has focused on building up its high-tech prowess instead of manufacturing. The city’s twin high-tech zones house dozens of production and R&D centers for multinational electronics, pharmaceutical and precision machinery firms that followed early arrivals Motorola and Intel.

Sichuan has also been somewhat insulated from the shocks that have resulted in closures of low-margin coastal factories. Sichuanese migrant workers returning home from export-heavy areas like Guangdong and Zhejiang will be a valuable addition as the province develops local industries, said Chen.

Deep commitments

Rather than scaring off foreign investors, the earthquake has drawn focus to Sichuan, and many firms have deepened their commitments. In the earthquake zone, there are many opportunities for experts to advise on gas, heat supply and wastewater treatment projects.

Businesses that have chosen to come to Chengdu reliably cite business-friendly government and a skilled and affordable local workforce as a key edge over other western cities. Well-respected universities feed a capable talent pool that, due to the high local quality of life, is not easily lured to the higher-paying eastern cities.

"The turnover here is quite low, which promotes team stability," said Nathan Hu, chief executive of MaesInfo, a Silicon Valley-based software and IT outsourcing firm.

In line with Beijing’s drive to promote domestic demand and lessen dependence on exports, Chengdu will increasingly become the production and distribution hub for the western China market. Sichuan’s own market appears to be bouncing back. Despite a sharp slowdown from May to August, year-on-year retail sales growth rebounded to 22.3% in October, and 19.9% for the first 10 months of 2008.

A drawback of Chengdu has been poor links with the rest of the region, but the last two years have seen extensive construction of road, rail and air transport links, said BNP Paribas’s Chen. More companies, including KFC owner Yum! Brands, are using Chengdu as a base from which to penetrate markets in the west.

This will not happen overnight, as much still needs to be rebuilt. "The first year will be difficult," said Chen. "[But] once everything is in place, then there will be momentum for further growth."