As the competitive advantage of low-cost, export-oriented manufacturing in China's coastal industrial hubs wanes, Beijing will rely more heavily on the cities along the western and central stretches of the Yangtze River to drive the development of a supplemental industrial base throughout the country's interior. Managing the migration of industrial activity from the coast to the interior -- and the social, political and economic strains that migration will create -- is a necessary precondition for the Communist Party's long-term goal of rebalancing toward a more stable and sustainable growth model based on higher domestic consumption. In other words, it is critical to ensuring long-term regime security.
The concept of developing the interior is rooted in the dynastic struggle to establish and maintain China as a unified power against internal forces of regional competition and disintegration. Those forces arise from and reflect a simple fact: China is in many ways as geographically, culturally, ethnically and economically diverse as Europe. That regional diversity, which breeds inequality and in turn competition, makes unified China an inherently fragile entity. It must constantly balance between the interests of the center and those of regions with distinct and often contradictory economic and political interests.
Currently, the Party's stated intent is eventually to achieve greater socio-economic parity between coastal and inland regions, as well as between cities and the rural hinterland. But Beijing also recognizes that underlying broad categories like "inland," "central" and "western" China is a complex patchwork of regional differences and inequality. Mitigating these differences will require more varied and nuanced policies.
Against this backdrop, the central government has targeted the Yangtze River economic corridor -- the urban industrial zones lining the Yangtze River from Chongqing to Shanghai -- as a key area for investment, development and urbanization in the coming years. Ultimately, the Party hopes to transform the Yangtze's main 2,800-kilometer-long (1,700-mile-long) navigable channel into a central superhighway for goods and people, better connecting China's less developed interior provinces to the coast and to each other by way of water -- a significantly cheaper form of transport than road or railway. By positioning this "second coastline" to become one of the nation's new economic cores, Beijing seeks to build what no previous dynasty could: a truly unified Chinese economy.
The Yangtze as a Core
The Yangtze River is the key geographic, ecological, cultural and economic feature of China. Stretching 6,418 kilometers from its source in the Tibetan Plateau to its terminus in the East China Sea, the river both divides and connects the country. To its north lie the wheat fields and coal mines of the North China Plain and Loess Plateau, which unified China's traditional political cores. Along its banks and to the south are the riverine wetlands and terraced mountain faces that historically supplied China with rice, tea, cotton and timber. The river passes through the highlands of the Yunnan-Guizhou Plateau, the fertile Sichuan Basin, the lakes and marshes of the Middle Yangtze and on to the trade hubs of the Yangtze River Delta. Its watershed touches 19 provinces and is central to the economic life of more people than the populations of Russia and the United States combined. The river's dozens of tributaries reach from Xian, in the southern Shaanxi province, to northern Guangdong -- a complex of capillaries without which China likely would never have coalesced into a single political entity.
The Yangtze, even more than the Yellow River, dictates the internal constraints on and strategic imperatives of China's rulers. The Yellow River may be the origin of the Han Chinese civilization, but on its own it is far too weak to support the economic life of a great power. The Yellow River is China's Hudson or Delaware. By contrast, the Yangtze is China's Mississippi -- the river that enabled China to become an empire.
Just as the Mississippi splits the United States into east and west, the Yangtze divides China into its two most basic geopolitical units: north and south. This division, more than any other, forms the basis of Chinese political history and provides China's rulers with their most fundamental strategic imperative: unity of the lands above and below the river. Without both north and south, there is no China, only regional powers. Only after the Qin captured the Yangtze's three primary regions -- the Upper, Middle and Lower stretches -- in 221 B.C., thereby gaining access to the southeast coast, did "China" as a single unit come into being. In the two millennia since, the Yangtze has continued to mark the boundary between kingdom and empire. The constant cycle between periods of unity (when one power takes the lands north and south of the Yangtze) and disunity (when that power breaks into its constituent regional parts) constitutes Chinese political history.
If the Yangtze did not exist, or if its route had veered downward into South and Southeast Asia (like most of the rivers that begin on the Tibetan Plateau), China would be an altogether different and much less significant place. Its population would be much smaller, isolated to the southeast coast, Loess Plateau and North China Plain -- the only parts of Han China where economic life does not depend on the Yangtze. The provinces of central China, which today produce more rice than all of India, would be as barren as Central Asia. Regional commercial and political power bases like the Yangtze River Delta or the Sichuan Basin would never have emerged. The entire flow of Chinese history would be different.
Three regions in particular make up the bulk of the Yangtze River Basin: the Upper (encompassing present-day Sichuan and Chongqing), Middle (Hubei, Hunan and Jiangxi) and Lower Yangtze (Jiangsu and Zhejiang provinces, as well as Shanghai and parts of Anhui). Geography and time have made these regions into distinct and relatively autonomous units, each with its own history, culture and language. Each region has its own hubs -- Chengdu and Chongqing for the Upper Yangtze; Wuhan, Changsha and Nanchang for the Middle Yangtze; and Suzhou, Hangzhou and Shanghai for the Lower Yangtze. Each region has its own internal market networks, and each historically is more interested in protecting its autonomy and prosperity than uniting under the north's control. Conquering and integrating them from the outside therefore required not only overwhelming military power -- historically, northern China's advantage -- but also complex bureaucratic and internal security apparatuses. Finally, it required a transport and communications infrastructure comprehensive enough to make the exercise of central authority over vast distances and diverse populations feasible.
Between 1949 and 1978, the Communist Party expanded those networks and laid that infrastructure with brutal efficiency. In many ways, China was more deeply united under Mao Zedong than under any emperor since Kangxi in the 18th century. After 1978, the foundations of internal cohesion began to shift and crack as the reform and opening process directed central government attention and investment away from the interior (Mao's power base) and toward the coast. Today, faced with the political and social consequences of that process, the Party is once again working to reintegrate and recentralize -- both in the sense of slowly reconsolidating central government control over key sectors of the economy and, more fundamentally, forcibly shifting the economy's productive core inland. The first phase of this process will be driven in large part by urbanization along the Yangtze River corridor, especially in the provinces that make up China's traditional Upper and Middle Yangtze regions.
Politics and Economy of the Yangtze
Today, the Yangtze River is by far the world's busiest inland waterway for freight transport. In 2011, more than 1.6 billion metric tons of goods passed through it, representing 40 percent of the nation's total inland waterborne cargo traffic and about 5 percent of all domestic goods transport that year -- up 250 percent from 2004. Over the last decade, dramatic increases in waterway freight traffic have been seen in some provinces along the Yangtze River corridor, such as Anhui (840 percent, to 364 million tons), Chongqing (640 percent, to 117 million tons) and Hunan (500 percent, to 179 million tons). By 2011, the nine provincial capitals that sit along the Yangtze and its major tributaries had a combined gross domestic product of $1 trillion, up from $155 billion in 2001. That gives these cities a total wealth roughly comparable to the gross domestic products of South Korea and Mexico.
This growth, since roughly 2003, has been underpinned by a massive expansion in centrally allocated fixed-asset investment into the interior, and specifically to those parts of the interior Beijing considers most viable as potential alternative or supplemental industrial bases to the southeast coast. Unsurprisingly, areas with ready access to the Yangtze River system have been targeted as cores of future inland urbanization. In part, this is because cities like Chongqing and Wuhan already possess well-developed urban industrial infrastructures, the legacy of Mao's intensive focus on inland industrialization. This legacy in turn gives these cities comparatively more influence and leverage than less developed parts of the interior when it comes to extracting central government financial support. Finally, cities along the Yangtze benefit from geography: Transport by road is roughly 30-35 times more expensive than transport by water, and rail is 3-3.5 times as expensive, meaning that cities without direct access to the Yangtze are inherently less viable as manufacturing and trade hubs.
Investment in further industrial development along the Yangtze River reflects not only an organic transformation in the structure of the Chinese economy but also the intersection of complex political forces. First, there is a clear shift in central government policy away from intensive focus on coastal manufacturing at the expense of the interior (the dominant approach throughout the 1990s and early 2000s) and toward better integrating China's diverse regions into a coherent national economy. But how that policy shift plays out on regional, provincial and local levels is shaped less by dictates from Beijing than by the political maneuvering of local and provincial governments for central government favor. Access to navigable waterways enables the cities of the western and central stretches of the Yangtze River to lobby more effectively for credit and tax rebates that might otherwise have gone to less competitive, landlocked provinces.
Investment in the interior accelerated rapidly in the wake of the 2008-2009 financial crisis, when the sudden evaporation of external demand revealed just how fragile and imbalanced China's economy had become. Thirty years of export-oriented manufacturing centered in a handful of coastal cities generated huge wealth and created hundreds of millions of jobs. But it also created an economy characterized by deep discrepancies in the geographic allocation of resources and by very little internal cohesion. By 2001, the economies of Shanghai and Shenzhen, for instance, were in many ways more connected to those of Tokyo, Seoul and Los Angeles than of the hinterlands of Sichuan and Shaanxi provinces. For most of the 1990s and 2000s, this lack of cohesion was viewed as an unfortunate but necessary and temporary byproduct of an economic model that was otherwise doing its job. After the 2008-2009 financial crisis, internal economic disunity -- like the growth model it embodied -- became a social and political liability.
The foundation of this model was an unending supply of cheap labor. In the 1980s, such workers came primarily from the coast. In the 1990s, when coastal labor pools had been largely exhausted, factories welcomed the influx of migrants from the interior. Soon, labor came to replace coal, iron ore and other raw materials as the interior's most important export to coastal industrial hubs. By the mid-2000s, between 250 million and 300 million migrant workers had fled from provinces like Henan, Anhui and Sichuan (where most people still lived on near-subsistence farming) in search of work in coastal cities.
This continual supply of cheap labor from the interior kept Chinese manufacturing cost-competitive throughout the 2000s -- far longer than if Chinese factories had only had the existing coastal labor pool to rely on. But in doing so, it kept wages artificially low and, in turn, systematically undermined the development of a domestic consumer base. This was compounded by the fact that very little of the wealth generated by coastal manufacturing went to the workers. Instead, it went to the state in the form of savings deposits into state-owned banks, revenue from taxes and land sales, or profits for the state-owned and state-affiliated enterprises that controlled not only many of the major coastal factories but also the various inputs that made manufacturing possible: roads, rail and port construction; power generation; mining; and oil and natural gas. (Notably, state-owned enterprises continue to dominate heavy industrial manufacturing).
This dual process -- accumulation of wealth by the state and systematic wage repression in low-end coastal manufacturing -- significantly hampered the development of China's domestic consumer base. But even more troubling was the effect of labor migration, coupled with the relative lack of central government attention to enhancing inland industry throughout the 1990s and early 2000s, on the economies of interior provinces.
Remittances from the coast kept families in the interior alive and paid for children of migrant workers to attend school, but they did little to improve the overall vitality of inland provincial economies. As a result, when the children of the first generation of migrant laborers reached working age, many of them followed their parents to the coast, where employment opportunities were far more abundant. However, unlike their parents, who had families to care for back in Henan and Sichuan, the new generation of migrants had far less incentive to one day return inland, let alone send money back. With the possible exception of a handful of inland cities (Hefei, Wuhan, Changsha and Chongqing, all of which saw marginal to moderate population growth between 2001 and 2011), the interior came to represent poverty and backwardness, a place to abandon rather than to develop.
Beijing has long understood that it will have to change that perception -- and the economic and policy realities underlying it -- before it can hope to address the growing structural imbalances of its current economic model. But in China, this is easier said than done. In trying to urbanize and industrialize the interior, Beijing is going against the grain of Chinese history -- a multimillennia saga of failed attempts to overcome the radical constraints of geography, population, food supply and culture through ambitious central government development programs. Though its efforts thus far have yielded notable successes, such as rapid expansion of the country's railway system and soaring economic growth rates among inland provinces, they have not yet addressed a number of pivotal questions. Before it can move forward, Beijing must address the reform of the hukou (or household registration) system and the continued reliance on centrally allocated investment, as opposed to consumption, as a driver of growth.
Read more: The Geopolitics of the Yangtze River: Developing the Interior | Stratfor
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