Although the West and Japan increasingly show a reluctance to expand existing Chinese operations, China’s less developed interior still offers allure to foreign investors that might slow their departure and mitigate its otherwise ill effects on China’s economy.
Low wages and a reliable workforce—two things that once lured foreign money to coastal cities such as Shanghai and Beijing—may convince foreign money to go to central and western China instead of destinations such as Vietnam, India, and Mexico. Some of this kind of movement seems to be taking place, although this continued advantage is far from a complete answer to China’s economic woes.
In many respects, China’s poorer, land-locked western and central provinces resemble the China of the past, the China that grew at such astounding rates. Their populations are eager to work at wages far below those in Shanghai, Beijing, and other fully developed coastal cities. In general, Chinese wages have risen—by a striking 10.6 percent a year over the past 10 years, according to the National Bureau of Statistics—but most of the gains have occurred in the fast-developing coastal cities. In the less developed Guangxi and Hunan provinces, for example, labor costs remain some 30 percent below those in coastal and highly developed Guangzhou or Shanghai.
While Western and Japanese investment has begun to move from China’s coastal cities to places such as India, Vietnam, and Mexico, it has also moved inland to these cheaper provinces. Indeed, these now increasingly popular Chinese provinces seem to be doing even better than the foreign alternatives.
Since 2018, for example, production and exports from 15 of China’s central and western provinces have grown by a striking 94 percent. That exceeds exports from India, which have increased by 41 percent during this time, and Vietnam, which have grown by 56 percent. To be fair, the percent growth comparisons can be misleading. Vietnam, India, and Mexico start from a higher base than these 15 provinces, and over the 12 months before September, they had combined exports more than twice those of these provinces. But the trend toward these 15 provinces is nonetheless impressive.
No doubt, the allure of these central and western provinces will blunt the ill effects of Western and Japanese disenchantment with China. But an internal shift in foreign interest is, at best, an incomplete answer to China’s broad economic problem. Foreign disenchantment goes well beyond labor costs, and these now favored provinces, though lower cost, necessarily carry the rest of the baggage that is turning foreign interest away from China.
Even if there is no denying that these provinces offer lower labor costs that have long since disappeared from coastal centers, workers in these provinces lack the skills and education that typify the coastal regions. These western and central Chinese workers are, in fact, much like the Chinese workforce of decades ago, best suited to producing simple, low-cost products. It is noteworthy in this regard that the products coming out of these central and western provinces include little or even mid-range sophistication and center instead on textiles, toys, furniture, chemicals, metals, and vehicle assemblies.
And these provinces won’t avoid the longer-term economic impediments implicit in Chinese demographics. These previously neglected regions will ultimately face a shortage of young workers as decades of low birth rates across China slow the flow of young workers willing to work in the factories. Probably most significant of all is that a move to the interior will offer no relief for the major complaint of Western and Japanese investors—Beijing’s increasingly intrusive policies that make business in China more difficult and riskier than elsewhere. Those odious policies will exist in Hunan and Guangxi as they do in Beijing and Shanghai.
In part because of the low-cost allure of these central and western provinces, China’s economy will remain potent and continue to grow, albeit at a much slower pace than in the past. The relatively recent success of these interior provinces will mitigate the extent of this slowdown, but it cannot and will not reverse it. Nor can it bring back the rapid growth of past decades.
As should be clear, China’s economy, wherever production is located, has severe problems, many originating in Beijing. These aren’t contained in the coastal hubs. They will prevail across the country and will likely persist.
