Cities wrong to bank on free trade status

The future prosperity of most Chinese cities will depend on a diversified economy

So, as Chinese leaders said last week, there won't be a massive stimulus despite the economic slowdown. There won't be money for local governments to build more ghost towns (enough is enough). There won't be large increases in industrial output, which used to be the main driver of GDP. There won't be as much growth in exports either, according to merchants at the spring session of Canton Fair 2014 in Guangzhou.

And economists say things will remain by and large unchanged into the second quarter of the year, when GDP could fall further, to just above 7 percent year-on-year.

What else can we expect from China in the coming three or so months? One source of excitement, to be sure, will be the competition among local governments to ask Beijing to grant them more freedom on trade and capital imports. Since Shanghai was chosen to be China's pilot free trade zone last August, nearly every other province or municipality has reportedly started its own campaign for similar, if not equal, status.

What a joke, people will say. No rational government would turn all cities into a new system only six months after it named the very first pilot zone. But vying for a free trade zone is only the game on the surface. If there is anything that would be beneficial to the country, as well as to the local economy, why do they want to wait for their turn?

Local governments want to grab whatever new economic opportunities they can, even though they know it is unrealistic for all of them to get free trade zone status at the same time. However, why would all of them want such status? They seem to think that it is the only thing that can give the local economy a boost during a lingering slowdown.

Does this behavior mean that in the second-largest economy in the world, at least in the eye of some local officials, there is simply no other opportunity available for regional development except a free trade zone license from the central government?

One possible answer would be that, contrary to Beijing's original intention that the zone was to pioneer the use of more international business practices, some local officials tend to think the status would grant them greater freedom to work with overseas financial services, to perhaps attract investors and financiers for development projects that are either half-done or still on the drawing board.

During the past 35 years of reform, many great changes have been brought about by big capital and big building projects. Of course, the most crucial changes have been ideas, but people don't usually see them.

If the answer to the above question is yes, this would betray a deeper problem. Some officials simply don't know what to do to guide the local economy to further progress after years of vying for large projects and large financial incentives from higher authorities.

In the last 12 months they have been advised by many people, including Premier Li Keqiang, to work with the private sector, to be more accommodating to migrant workers in their towns, to support small and medium-sized enterprises and service industries, and to be more lenient toward competition from outside the region. Laws and regulations have been modified to make way for those changes.

But for some officials, doing any of these things is hard work. This is because local governments know that the changes won't bring them as much revenue as quickly as selling land rights to investors for large projects.

Perhaps, only the more intelligent local officials have realized that there is little chance for China to return to its old development strategy based on big capital and big building. Cities will have to learn to rely on local businesses, large and small, to flourish for sustainable revenue.

From now to the beginning of the third quarter, all cities that are waiting for their free trade zone campaigns to pay off will lose more opportunities for development. Investors won't show up in a time of low demand. Only cities that are trying to develop a diversified base of prosperity can become more competitive. Let's see which one will.

The author is editor-at-large of China Daily. Contact the writer at edzhang@chinadaily.com.cn

(China Daily Africa Weekly 04/18/2014 page15)