The twilight zone

A billboard bearing the smiling face of Deng Xiaoping greets visitors to the Yangpu Economic Development Zone. In fading print it reads: 'This is a rare opportunity, we must not delay.'

But the opportunities offered by Yangpu have largely slipped away and the zone in this northwestern corner of Hainan island has little to show for a decade of effort. Yangpu has become a symbol of big plans that don't quite pan out. It is all too common a story in Hainan, a province that has seen rather more bust than boom.

Yangpu was approved by the State Council in 1992 and inaugurated with considerable fanfare. It was the brainchild of the Hong Kong arm of Japanese construction firm Kumagai Gumi, which planned to turn a 31 sq km patch of unused land into a manufacturing powerhouse.

Convinced it could entice industry to this remote spot, the company pumped more than Yn5bn into the project, putting in roads, power and other infrastructure. Yangpu also had powerful friends. It had the backing of the nation's paramount leader Deng Xiaoping and was able to boast at the time that it offered investors the most favourable policies found anywhere in China.

But it ran into problems with leftist hardliners who were irked by the decision to give foreigners the right to use Chinese soil for 70 years. While no one would bat an eye over such a policy today, in the early 1990s it was a politically charged issue. Leftists asserted that it smacked of the detested treaty ports and foreign concessions won from a humiliated China after the Opium Wars.

Yangpu had other problems as well. Hainan has a population of only 8m and has a limited pool of skilled workers. It earned a reputation for corruption and political disarray and in 1995-96 was hit hard by a credit crunch that was aimed at ending the speculative frenzy in real estate. As if that wasn't enough, the Asian financial crisis took the remaining wind out of its sails. "I suppose we were a little bit unlucky," reflects Lin Xinhuang of the Yangpu zone's management bureau. "We experienced a lot of missed opportunities."

Kumagai Gumi eventually washed its hands of the ambitious project. The Ever-bright Group stepped into the breach after making a capital injection into Kumagai Gumi itself and took control of the company. However, Everbright also eventually abandoned the effort. The current operator is called Hong Kong Development but its key investor is Shanghai Jiangong, a construction firm. Like its predecessors, it is finding the going tough.

Just outside the zone, water buffalo wander lazily across a highway – but there is little danger to them or anything else as traffic is so light. Inside the zone, there are neat rows of streetlights standing amid freshly trimmed grass. Two part-finished 34-storey towers, one of them housing Yangpu's administrators, stare over the zone's mostly empty landscape, which is punctuated occasionally by an abandoned building.

"There are no big manufacturers here at the moment," says a receptionist at the Yingangwan Hotel, a building that was fortunate enough to be completed and now also serves as an office block. Only two of its dozen or so floors are in use.

Lack of manufacturing plants
Officials of the zone's management bureau say there are more than 1,000 companies registered there but they admit that only a handful are actually involved in manufacturing. The total includes corner stores, barber shops and karaoke bars – hardly the sort of thing that Kumagai Gumi or Deng Xiaoping had in mind when the project was first put on the drawing board.

It is a stark contrast to Shanghai's flagship development zone of Pudong – which got its start at about the same time as Yangpu. Pudong is now a thriving commercial and financial centre and has become a magnet for foreign investment. "The central government pulled money out of Yangpu and put it into Pudong," says a taxi driver as he surveys disappointment stretching in all directions. "If they had kept their money here we could have made Yangpu into something."

Government officials concede that Yangpu has not been a stunning success. "The provincial government has tried hard but it just hasn't been able to make this zone work," says an executive at a government real estate company in Haikou, the provincial capital. "The government alone does not have the resources."

Yangpu is not without assets. It has a port that can handle ships of over 10,000 tonnes and there is weekly scheduled service to Hong Kong, as well as unscheduled services to other ports. Hainan's west coast highway links Yangpu to the provincial capital Haikou and a new road connects it to the inland city of Danzhou, bringing within reach natural resources such as rubber, sugar cane and palm oil. And the zone still offers a number of financial incentives, such as reduced income and value added tax.

Officials of the zone management bureau maintain that they are making modest headway in attracting new investment. Wang Yanhui is an example of that effort. He runs one of the newer enterprises in the zone, a factory that makes PVC flooring. "We should be in production in about three months," he says, gazing proudly over newly installed production equipment.

The zone's paved road turns to mud about 100 metres before it gets to the front door of his factory. But Wang believes that he will soon be able to shut down a similar plant in Hebei province and shift production to Yangpu to save money, with lower taxes and no more winter heating bills. "We produce for the export market, mainly Africa, and we have a good port here," he says.

But this is an investment of only Yn1.2m. It is a sign of life but not enough to turn the zone around. Officials are pinning their hopes on another project – a flour mill that is trumpeted as the biggest in China, once it is in production. Luoniushan, a company based in Haikou, plans to invest Yn867m to build the mill, which will have an annual capacity of 500,000 tonnes.

However, even this project has its problems. "We are about six months behind schedule," says a worker at the site, adding that construction will take at least two years to complete. So far, the construction team has not broken ground. An official at the company's office in Haikou says that the first phase of the project would be finished in a year, but he declines to say what has caused the delays. Zone officials hope to make use of natural gas that is already in production from a field off the island's western coast. "We want to use the natural gas to generate electric power," says the management bureau. But so far there is no agreement on the projects that might use the power generated. Officials have previously talked of a major investment in a fertiliser plant, as well as plans to start oil refining in the zone. "We had discussions with a Saudi Arabian group about refining here but we never signed any agreement with them," says one. Plans to build a major paper mill have also stumbled. An agreement was signed in 1999 with a group that included Indonesia's Asia Pulp & Paper, but the project has been stalled by that company's financial problems.

A Yangpu official says the government still hopes to turn the zone into a success story. But asked about the lengthy series of setbacks, he says, somewhat defensively: "This is not something the Hainan government can control."