A Tale of Four Regions-Part 1

Please note that this is a courtesy translation of the Italian language article originally published in the Panorama Magazine Issue at: https://www.panorama.it/economia/sviluppo-economico-cina-regioni

Covering an area of approximately 9.6 million square kilometers, China is the world's third largest country, along with world’s biggest population, 1.4 billion. China is so big that the gaps among different places across China are so wide that it is often said that one province in China is like equivalent to a country in Europe (China's third largest province of Sichuan's landmass is 485’000km², slightly smaller than Spain).


As every country in Europe is different from each other, in China, indeed, every region is also quite different from one another, with distinctive characteristics, and thus requires specific context of the economic and business environment.

Broadly speaking, we may divide the grandiose country of China into, Central & Western (notable areas include Guizhou, Yunnan, Chongqing) North-eastern (notable areas include Beijing, Tianjin, Liaoning, Jilin and Heilongjiang), North-western (notable areas include Shaanxi, Gansu and Qinghai) & the Eastern/Southern Coasts (notable areas include Fujian, Jiangsu, Shandong and Zhejiang, Guangdong, as well as Shanghai)


Since China’s accession to the World Trade Organization (WTO), which brought about much publicized and historical changes to the Chinese economy amid political reforms, China’s integration into the world economy as well as global society at large has been frictious, not to mention the levels of imbalanced growth across the country, with provinces in the East and southern coastal regions traditionally tending to have higher levels of income, more advanced technology, enhancements in human capital, and logistical advantages than those in Central, Western and North-eastern regions. However, in recent years, the gap has been closing in new and dynamic ways.


Turning of the Tide?


Central and Western regions have witnessed faster growth than the Eastern region in the past decade, as the costs of establishing in the more traditionally prosperous areas of Shanghai, Nanjing Suzhou etc. has risen, many multinational manufacturing companies in search of large industrial facilities and a skilled labour force have relocated to inland provinces. With the north-east, China’s rust belt, home to the country’s traditional heavy industry firms, moving past its toughest times, as structural reform is taking hold and the economy is picking up amidst incentives from the Central Government.


However, despite this progress, we can see that Eastern provinces are still leading ahead of these regions in terms of skilled labour, innovation capabilities & export performance, with less than 20% of China’s land area, Eastern provinces accounted for 51.3% of the country's GDP in 2020. Within this context, how are such regions expected to effectively compete?


Facilitated Regional Integration

Regional specific development goals, have been a cornerstone of developing these areas in the past, “Go West”, Revitalise North-east, Accelerate The Rise of the Central Region”, and “Promote Modernisation of the East”.  However, in terms of looking towards the future, Beijing is more concerned with the greening and digitizing of its economy, so how do these inland regions fit into this concept?


“Processing Eastern Data in the West” was officially launched after The 14th Five-Year Plan (Strategic Plan for National Economic and Social Development of the People’s Republic of China for the years between 2021–2025), henceforth referred to as “The Plan” was approved in March 2021. A major project which aims to gather data in the more prosperous cities along China’s eastern regions and send it to the more spacious computing hubs in the West, for processing and storage.

The project has already established four computing hubs in the Western region, with an additional ten national data centers also planned. The project is estimated to garner 400 Billion RMB in investment per year with the construction of computing hubs and data centers, as well as generating new job opportunities. We should note at this point that currently in China, European companies are carefully examining their data collection and processing activities in order to remain compliant with a large legal security framework under the Cybersecurity Law and other subsequent laws and measures which have been promulgated in its wake (the national laws in question are equivalent to the GDPR).


The considerations for foreign investors are either full data localisation, both for storage and use or building in legal compliance operations to fully comply with the data protection laws in the transfer of data. However, these options are also to be taken into consideration based on factors such as company size or whether the company is considered a critical information infrastructure (entities that process a certain volume of personal information).


Compliance with such data localisation requirements and cross-border data transfer restrictions that remain in these national laws will potentially have a hindrance on business operations and according to the European Chamber of Commerce’s Business Confidence Survey 2021, European companies expect the evolving Cybersecurity Law and its related legislation, to have a sizeable negative impact on their company in the next five years, with 33% expecting a negative impact.

Since promulgation, the European Chamber of Commerce in China has outlined concerns over the divergence of China’s data protection framework from those in the rest of the world, such as the aforementioned GDPR, which makes it more difficult for companies to comply with all relevant obligations simultaneously, in an increasingly globalized business marketplace.

With particular attention to the ICT industry, European companies within the sector have cited unequal treatment in comparison to Chinese companies, notably arriving in the form of the access to subsidies, with half of respondents from the ICT industry within the Business Confidence Survey stating that they cannot access subsidies that are available to Chinese companies. In addition to which, European ICT firms—of which a whopping 79% stated that they will be negatively impacted by Cybersecurity Law and its related legislation also often find themselves blocked from procurement for telecommunications and network infrastructure as their technology is not deemed ‘secure’ until a security review is completed.


Therefore, “Processing Eastern Data in the West” for European prospective investors, should firstly be sure to seek professional assistance in their data security management, both for the Chinese domestic marketplace and beyond, however, extensive advocacy in the further opening up of the ICT sector is required in China. By way of comparison, the treatment of Chinese ICT firms investing in Europe has been quite favourable in recent years, with Chinese tech giant Tencent investing in Finnish mobile games maker Supercell and Midea and Ant Financial, the financial technology affiliate of Alibaba, purchasing U.K.-based currency exchange WorldFirst. Clearly there is a considerable divide between the different approaches from both sides, something that needs to be addressed in order for reciprocity.

Another aspect which the Plan also highlights is high-quality, green development, as it aims to reduce the carbon intensity of the economy and to peak carbon dioxide emissions before 2030. The
West to East Power Transmission”, another project, although already running for decades now under China's "Go West" strategic initiative to boost development in the western regions of the country, has an emphasis on renewable energy and green electricity, with  a massive renewable energy base under construction in the West and with more green infrastructure investment projects set to come under the Plan, the Western regions seemed primed for the future goals of China for the foreseeable future. As China’s decarbonisation plan is well under way, this could open up increased investment for European companies that have long since been pursuing and prioritizing carbon-neutral strategies.