By Hou Yongzhi

Research Report No 191, 2005

Strengthening the construction of energy and major raw materials bases and accelerating the development of competitive manufacturing industry is an inherent requirement for the rise of China’s central region. It is also an inevitable requirement for economic and social development in China for its opening up in the new period. This report attempts to deepen the understanding of the strategic and overall significance of building energy and raw materials bases and developing manufacturing industry in the central region in the new period, analyze favorable conditions and restricting factors, and put forward some strategic proposals for building energy and raw materials bases and developing manufacturing industry in central China.

I. China’s Entry into a New Period of Economic Development and Opening up Highlights the Strategic and Overall Significance of Building Energy and Raw Material Bases and Developing the Manufacturing Industry in Central China

1. China’s entry into a new period of economic development sets new requirements for developing the energy, raw materials and manufacturing sectors

First, the upgrading of consumer demand will bring about growth in the demand for energy and raw material products. Second, the advance in industrialization and urbanization will bring about growth in the demand for raw materials. As industrialization moves to a higher stage, the demand for intermediate inputs will continuously rise and the production of intermediate inputs will require more raw materials. There will also be the construction of municipal infrastructure on a large scale and this will also require large amounts of raw materials.

2. China’s entry into a new period of opening up requires a substantial change in the mode of Chinese economic growth and in the structure of its economy

First, the new period of opening up must emphasize greater national influence internationally. China must participate in international competition, and whether it can achieve its rights and interests depends on the adequate influence of the country. Secondly, increasing China’s industrial capacity for independent innovation and improving the country’s position in the division of labor in global industrial chains should become a strategic priority for economic development and opening up in the new period. China is already a big economy, but it is not yet a strong economy. To become a strong economic power, China must push forward economic development characterized by independent innovation.

3. China’s entry into a new period of opening up and development highlights the strategic and overall importance of building energy and raw materials bases and developing manufacturing industry in the central region

First, the central region has rich energy and mineral resources and is bound to become an important base for China’s resource security strategy in the new era. Second, energy and raw materials industries in the central region are already at a considerable scale and are bound to become important supply bases for energy and raw materials products in China. Third, the manufacturing industry in the central region, including the high-tech segments, has a solid basis and is bound to become an important force China can rely on to develop its manufacturing industry in the new era.

II. The Central Region has Excellent Conditions for Building Energy and Raw Material Bases and for Developing Manufacturing Industry, But Still Faces Grave Challenges

1. Capital is not as readily available as in the eastern and northeastern regions, although the situation is better than in the western region

We can analyze this issue from the following three perspectives. (1) Individual Savings Ability. Data indicate that residents in the central region clearly have lower individual savings ability than their counterparts in the eastern and northeastern regions, but a slightly higher ability than those in the western region. In 2002, per capita personal savings in the central region was 4,320 yuan, far lower than the 10,583 yuan in the eastern region and 8,828 yuan in the northeastern region. But this was higher than 4,160 yuan in the western region. (2) The Possibility of Agricultural Accumulation. When the terms of trade for industrial and agricultural products are reasonable, agriculture can accumulate certain capital for industrialization. Historically, agricultural products had long been in an unfavorable trading position. Even in recent years, the terms of trade have not changed in favor of agricultural products. With the opening of the market of agricultural products following China’s accession to the World Trade Organization, the terms of trade for China’s industrial and agricultural products could change in a way further unfavorable for agricultural products. As a result, agriculture will find it more and more difficult to accumulate capital for industrialization in the central region. (3) Foreign capital utilization. Compared with the eastern region, the central region is in a disadvantageous position in attracting foreign investment. This is because the industrial infrastructure in the central region is not as good as that in the coastal region and because regional governments in the central region have only limited fiscal resources and find it difficult to provide substantial preferential treatment for foreign investors.

2. The availability of low-skilled workers is higher than in the central region than in the eastern region, while that of high-qualified workers is lower

From the perspective of supply and demand, there is a greater supply of low-skilled labor in the central region than in the eastern region. This is manifested in the annual flow of tens of millions of able-bodied people from the central region to the eastern region as well as in the fact that labor cost in the central region is lower than in the eastern region. We can also see that the supply of highly-skilled labor in the central region is not as robust as in the eastern region. This is first of all because higher education in the eastern region is more developed in general and can train up more university and middle school graduates for society than in the central region. The eastern region is also noted for better living and working conditions and for higher wages and benefits, something which is highly attractive not only to Chinese returning from abroad but also to high-tech personnel from central and western regions.

3. The central region has more per capita land resources than the eastern region and its water resources per unit area of land is the highest in China

In a closed economy, land, mineral and water resources are all decisive factors for industrial development. But as the economy opens and transportation and other infrastructure facilities improve, the importance of mineral resources among all the decisive factors for industrial development gradually declines. However, given the fact that land and water resources are highly non-tradable, they are becoming bottlenecks to the development of non-agricultural industry. In terms of the allocation of land and water resources, the central region has an advantageous position when compared with other three major regional economic blocs.

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