Chongqing Captures China's Past and Future - Wall Street Journal

By TOM ORLIK

Chongqing represents the growth of China past. But a look at ousted Communist Party high-flier Bo Xilai's old stamping ground suggests that the investment and export-fueled model has a few more years left to run.

Growth in Chongqing from 2007 to 2011â€"while Mr. Bo was in charge before his March ousterâ€"averaged 15.8% a year, well above the national 10.5% growth rate. But if growth in the 29.2 million strong megacity was fast, it also looked off balance.

Fixed-asset investment rose to 84% of gross regional product in 2010, higher than the already supercharged level of 66% nationally. When Mr. Bo took charge of Chongqing it was 62%. Debt rose, with local bank loans as a ratio of regional output rising to 131% from 112% over the same period.

As the coast of China was suffering from slowing export growth, Chongqing's shipments to the rest of the world soared. A strategic location on the Yangtze, and the arrival of foreign manufacturers like Ford Motor and Hon Hai Precision Industry kick-started a boom that saw exports rise an astonishing 160% in 2011.

If that all looks like China's old, unbalanced, investment- and export-driven growth model, it is also a reminder that there's life in the old dog yet. That's because China's untapped western hinterlandâ€"to which Chongqing provides a gatewayâ€"has a lot in common with the eastern seaboard of 10 years ago.

Infrastructure in China's east-coast hot spots might already be built ahead of time. But infrastructure needs in Chongqing's undeveloped neighboring regions to the west remain. The World Bank estimates that China's capital stock per worker is just 8.7% of the level in the U.S. Most of the need for new transport, power, and water systems is in the inland provinces.

Rising wages have eaten into export competitiveness in the east, but in Chongqing and its neighbors labor costs remain low. Average wages in Chongqing in 2010 were 34,700 yuan a year ($5,510), around the same level as in coastal city Guangzhou in 2005.

For firms facing higher costs in the east, but wanting to retain a foothold in the China market, a move inland is an attractive choice, even if higher transport costs offset some of the benefits of lower wages. The domestic market is now growing in importance, and for sales to the rest of China a base in the center makes senseâ€"that's one of the reasons Ford picked Chongqing.

Mr. Bo's unseemly exit opens a window into China's creaking political processâ€"and it is not a pretty sight. But a look at Chongqing's economy suggests that China's capacity to grow isn't exhausted yet.

Write to Tom Orlik at Thomas.orlik@wsj.com