Foreign investments flood Chinese inner provinces

Foreign investments flood Chinese inner provinces

Summary: Big high-tech players like Samsung, Intel, and Foxconn flock to central China to chase cheap labor and enjoy favorable policies.

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Earlier this month Samsung signed a $7 billion investment memorandum with the Xi'an municipal government, marking the commencement of a mega factory that would produce 100,000 pieces of 10nm NAND Flash every month by the end of 2013 and bring more than 10,000 jobs to suburb of Xi'an, one of the oldest cities in central China.

Chengdu, the capital of Sichuan province, is another economic hub in the area. Intel's Chengdu factory is the largest chip packaging and testing center in the world. Almost half of the world's new computers have Made-in-Chengdu CPUs.

By slashing jobs and moving factories up to Henan province, Foxxcon, Apple's biggest supplier, ended its 2011 fiscal year with an upbeat of $72.8 million in net profit.

After witnessing three decades of flourish development of their coastal counterparts, the inner provinces of China are finally getting their slice of the cake. Is it the case?

To come on top among competitors like Beijing, Shanghai, and Suzhou, Xi'an provides Samsung with the most favorable policies: one-time government subsidy of 30% of the total investment, free land use, free factory construction with an area of 1,300,000 square meters, 500mn yuan of annual government subsidy on water, electricity, greenery, logistics, income tax alleviation for 20 years, and infrastructures like highways and subways in the area.

"It was justifiable to have this kind policy to attract foreign investment 10 or 20 years ago, the country needed it back then," said iSuppli senior analyst Gu Wenjun. "Now the international corporations are taking advantage of heavy government subsidies to expand their market shares; this is not fair competition."

In the absence of uniformed national regulation on subsidizing foreign investments and the absolute power on budget planning, local governments can throw themselves at foreign investments by providing all kinds of favorable policies, often at the price of environmental hazards, low income and lack of social welfare for the employees, and huge government spending on infrastructures.

In light of foreign investments chasing cheap labor and lucrative contracts, the inner provinces of China cannot follow their coastal counterparts. Instead, the local governments need to avoid vicious competition, strengthen regulation and transform from a labor-intense, environment-unfriendly economy, to a capital-intense one with a focus on enhancing domestic consumption and sustainable development.

Topics: China, Banking, Government, Government US, Samsung

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