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Dalian Booms During Downturn

 The financial crisis had little impact on Dalian and Northeast China

By Adam Livermore

Before 1979, China’s Northeast was one of the primary economic drivers within the country. The area drew upon natural resources (primarily coal, iron ore, timber and oil) to develop a base for heavy industry. Unfortunately, much of the traditional industrial base eroded during the 1980s, and the region slowly gained the unfortunate distinction of being called China’s “rustbelt.”

In recent years the situation has improved. Some old industries have been rejuvenated and new ones have emerged. Behind the transformation, the hand of the Chinese government can be seen more and more clearly. “Arranged marriages” of domestic automobile manufacturers to foreign suitors has attracted a mini flotilla of auto parts manufacturers to invest in the region. The government was also influential in persuading Intel to setup its semiconductor manufacturing plant in Dalian, where the industry is beginning to take shape.

Dalian’s diverse mixture of heavy and light industry, and high-tech and service companies have played a key role in the revitalization of Northeast China. The principal port for regional exports in Dalian will continue to increase as a center for logistics, finance and various other services.

The government is making massive investments into the entire infrastructure of the northeast. In the area of transportation, high-speed rail links are under construction between Beijing and Shenyang, Harbin and Dalian, Changchun and Jilin, and Qiqihar and Harbin. New highways will link numerous regional cities. Also,port cities around the Bohai Gulf area are developing for storage and delivery of commodities and products from Liaoning, Jilin, Heilongjiang and Inner Mongolia.

Changxing Island Harbor Industrial Zone

The fifth largest island in China (252.5 square kilometers and a population of 600,000), Dalian’s neighbor Changxing has been home to a small population of fishermen and farmers for thousands of years. At the dawn of the 21st century, Changxing’s appealing geographical features began to garner attention. Similar to other major trading locations, it is both surrounded by water and a natural deepwater port. Now, it’s becoming a major port for China, a base for shipbuilding, heavy industry and petrochemicals.

In 2006, plans were drawn to develop a harbor and construct fast transportation links to the neighboring cities of Dalian, Wafangdian and Yingkou. The government has also been making efforts to attract industry and create a bonded port on the island. A bonded port would be outside of China for custom purposes. Products brought into the port area from outside of China would not be considered imports into China until they leave the area. Products brought into the port from Mainland China would be considered exports, and value-added tax rebates could be claimed by “exporting” companies.

STX, the fourth largest shipbuilding company in the world, has already invested RMB 20.5 billion in Changxing. Last year, it completed manufacture and delivery of its first vessel, a 58 thousand ton bulk carrier. By 2012, STX intends to construct 70 vessels each year on the island. Dalian Shipbuilding Industry Company has also committed to invest RMB 22 billion in shipbuilding and repairing facilities, and RMB two billion has been invested in a joint venture with PRL of Singapore for repairing and green breakup of ships.

Although attracting direct investment from foreign companies is now more difficult due to the global financial crisis, government investment in infrastructure has continued apace in Changxing. Approximately RMB 40 billion has been spent thus far on roads, residences, schools, sewage plants, water and electricity supplies, and sub-sea tunnels.

Companies supplying peripherals for the shipbuilding market are already in Changxing and many more are expected to arrive. The government is also encouraging companies involved in auto parts production, as the island has convenient access to the main automobile manufacturers in Shenyang, Dalian, Changchun and even Harbin. Export processing is also expected to be a major focus of business on the island, although the container port is not expected to be operational until 2012.

Government investment is not limited to the creation of infrastructure. Companies basing themselves on the island are also provided with subsidies, in the form of lower land prices and are offered tax incentives including:

• Land can be purchased at half price by investors commencing projects with a registered capital of over US $5 million by the end of 2010.

• Corporate income tax can be entirely subsidized for three years. After the project turns a profit, taxes for the next three years can be reduced by 50 percent.

• There is a provision of subidized financing for purchase of land and construction of warehouses.

While STX and Intel are the largest single investments by foreign companies in Dalian to date, a number of others are investing in the region. German companies, such as Thyssen Krupp, have several automobile investments in Dalian’s Development Zone area. In the information technology outsourcing and business process outsourcing field, over 10,000 multilingual professionals are employed by companies such as Dell, HP, IBM, Accenture and Genpact. Japanese companies, such as Panasonic, Sony, Hitachi, Canon and NTT, also have long-established operations in the city.

Further into the heart of the northeast, General Motors has announced a US $293 million investment with FAW to make light commercial vehicles at existing plants in Changchun and Harbin, and to complete a new greenfield site in Harbin by the end of the year. Bombardier is producing subway cars from its joint venture in Changchun for subway systems all around the country.

Even as economic conditions remain difficult around the world, the Chinese government continues to play an active role to ensure the “rustbelt” rusts no longer.

These are just some of the broad strokes that outline the future of Northeast China for the coming generation. The fine details will be applied by the enterprises basing themselves in the region. It is too early to say what kind of a picture will emerge, but the early signs are encouraging.

 The article appears in the March 2010 issue of China Brief.

Adam Livermore is a senior associate at the Dalian Office of Dezan Shira & Associates, an international firm servicing foreign investment in Asia.