How China's west will be won

Stratfor

More details have emerged about China's recent plans to infuse 682 billion yuan ($US100 billion) into the Western Development or 'Go West' strategy. The massive fiscal spending plan was originally launched in 2000 to develop and modernise the country's poorest and farthest-flung central and western regions with the goal of balancing its domestic economy and generating new sources of growth.

Maintaining the flow of funds

Though the State Council and the powerful National Development and Reform Commission (NDRC) announced the new fiscal spending in early July, the decision to renovate the Go West strategy appears to have been made on May 28 at a meeting of the Political Bureau of the Central Committee of China's Communist Party, chaired by President Hu Jintao. The meeting concluded with a call for increasing 'special policies' with 'greater resolution and force' to support the 'strategically important' western regions.

Hence the new spending over the next two-and-a-half years for 23 projects in the provinces of Sichuan, Yunnan, Tibet, Xinjiang and Inner Mongolia. These provinces have a combined population of 158 million and gross regional product of three trillion yuan, or a bit less than 10 per cent of China's 30 trillion yuan gross domestic product (GDP), and are among the poorest and most disaster-prone regions in the country.

On the national level, the new infusion into the Go West program amounts to about 2 per cent of China's GDP. Add to this the National Energy Administration's promise to devote 200 billion yuan to expanding rural electrical power and an additional 10 billion yuan specifically for Xinjiang funded by other Chinese provinces and the funds allocated in recent months for western and central provinces total about 892 billion yuan, or 2.7 per cent of GDP.

While the Go West program is thus receiving a sizable investment, the size of the package is misleading. The spending is not, in fact, new. The full amount is only a slight increase over the amount invested in the program's first decade. From 2000-09, the government invested 2.2 trillion yuan in 120 projects as part of the program. If the new pledge sets the rate at which investment in the program will continue throughout the rest of the decade, the total at the end of 2019 will amount to 2.7 trillion yuan. In other words, Beijing has not increased its commitment to the region's development so much as pledged to maintain it at a rate that will not be eaten away by inflation.

This is not to say that the program is unimportant. Strategically, the premise of the Go West strategy remains the same as 10 years ago: Modernise the western regions to stabilise them and create greater domestic demand to help balance out China's economy, which is otherwise tilted dangerously toward coastal manufacturing to serve foreign demand. The weakness of foreign demand for Chinese goods after the 2008-09 global crisis has impressed more deeply upon the Chinese leadership the need to accelerate the development of alternative sources of demand and growth.

Infrastructure and social stability

At present, few details are available about the 23 projects in the new spending package. Hu imagines that government investment into the west over the next decade will create centres for energy production, natural resource processing, equipment manufacturing, as well as improving the standard of living and environmental protections. Specifically, the program is expected to fund the construction of roads, railroads, airports, coalmines and water conservation facilities

-- Ten of the projects are devoted to transportation and communication — in particular advancing China's National Plan for Railway Construction, 2003-2020, which is designed to link eastern China with the western regions as well as with Central Asia, South Asia and Southeast Asia.

-- Four projects are dedicated to water conservation — a major concern in regions that suffer massive floods, shortages of supplies of drinking water (particularly in cities) and desertification.

-- Two projects in Inner Mongolia and Xinjiang will focus on developing new sites for coal extraction, while other energy-related projects will focus on green energy resources and nuclear energy.

-- The package includes provisions for expanding electrical power grids, especially for the purposes of construction and agriculture. The NDRC has publicly confirmed the Qinghai-Tibet High Voltage Transmission Line, a 1,100 kilometre power grid, which will by 2012 link Tibet's power grid to China's national grid as well as provide power for mining projects along the way (such as Canada's Continental Minerals Corporation's Xietongmen copper-gold mine).

One of the additional purposes of the plan is to curb social instability in these regions, a perennial source of anxiety for China's leadership. The regions covered in the Go West plan are especially problematic in this regard, not only because they are poverty-stricken and beset by natural disasters (causing sporadic unrest in places like Sichuan) but also because they are home to the highest concentrations of minorities in China, and the relationship between local ethnic groups and the dominant Han Chinese is often tense. Beijing is attempting to avoid at all costs explosions of unrest such as those that occurred in Tibet in March 2008 and Xinjiang in July 2009 — especially because separatist tendencies in these regions threaten China's strategic imperative of maintaining buffer territories around its historic core on the North China plain. Thus, the Go West plan contains lengthy promises to focus on quality-of-life issues for people living in the targeted areas, including access to utilities, subsidies and compensation for ecological damage.

New energy tax

Concerns about stability point to the one area where the newest phase of the Go West program will fundamentally differ from its predecessor: taxes.

Beijing recently announced that a new tax on energy production in Xinjiang that took effect in June will be expanded to the rest of the western and central regions to pay for provincial governments to boost public services. The taxes will not take effect outside Xinjiang until 2011 at earliest, and details are still being formulated and could vary from region to region. But based on the Xinjiang trial, the regional government would levy a 5 per cent tax on coal, natural gas and oil production based not on the volumes extracted (as previously), but rather on the prices of the energy produced. The tax would give provincial and local governments a reliable boost to revenues that is necessary because of the central government's capture of most tax revenues and prohibitions on local government bond issuance.

Xinjiang's government estimates it will raise an additional four to billion yuan per year from the tax while Inner Mongolia estimates eight billion yuan — roughly 2 to 3 per cent of gross regional product for these two. Thus, the energy production that is such a strategic aspect of the western lands will provide local governments with revenues they will — theoretically — use to procure better public facilities and services for people. This in turn — also theoretically — will ease financial burdens on families and boost household consumption in these regions to create new centres of demand in the otherwise underdeveloped interior.

The energy tax plan is extremely unlikely to run smoothly, however. One problem, for instance, is ensuring that energy companies receive special incentives to offset the new taxes so they do not cut back exploration and investment. Differences in the tax rate from region to region could spur unintended competition and tensions. Far more troublesome, however, is the endemic problem of government and party corruption in China. The resource tax may never succeed in transferring funds into the creation of a social safety net that calms social tensions and boosts consumption. It is not a good sign that no oversight mechanism to ensure that local governments use the funds appropriately has yet been established. Even then, there is little reason to be optimistic about its effectiveness.

Still, the energy tax marks at least an attempt at genuine reform that could change things for the better in China's worst-off provinces. At best, it could prevent a repeat of the first decade of the Go West program, which achieved massive expansions in infrastructure and higher regional growth but did not fully modernise society or create conditions for self-sustaining growth.