Central China, initially overlooked by many foreign investors as being too far from the ports in Tianjin, Shanghai and Shenzhen, is emerging as an essential destination for multinationals in China.

While still lagging significantly behind the coast, the six central provinces of Anhui, Henan, Hubei, Hunan, Jiangxi and Shanxi have seen foreign investment take off over the past year, increasing more than 50 percent from 2006. The economies of the six provinces now make up 20 percent of the national total. While the region still needs further reform and opening up, increased investment in infrastructure, favorable government policies, and rising consumer incomes are driving many to branch out of the hyper-developed coastal regions and move inland.

Location, location, location

Central China boasts some of the most connected cities on the mainland thanks to a well-developed rail network. The network integrates dozens of trunk lines and hundreds of branch lines, accounting for 23 percent of the national rail mileage. According to regional authorities, the rail network handles 36 percent of the nation's passenger flow and 30 percent of the goods traffic.

The importance of the region as a crossroad for China was brought home earlier this year when much of south China up through Hubei and Henan provinces was brought to a standstill by severe winter storms that disrupted train schedules and brought down power grids, leaving millions stranded or without power. According to government figures, the region has seen a 40-percent increase in road and waterway traffic in the last 10 years. Passenger rail traffic has risen 70 percent while goods traffic is up by 85 percent.

Increased spending on infrastructure has allowed cities like Wuhan to better integrate with Beijing, Shanghai, Guangzhou and Hong Kong, as well as European and Central Asia capitals. But will this integration mean increased foreign investment? Moving inland brings with it major logistics costs for manufacturers.

For those that move inland, getting to the sea means turning to China's road, rail, and inland waterway networks to transport their cargo to the coast. While transport infrastructure has grown rapidly in recent years, it still lags behind industrialized countries-capacity constraints exist, and most of the infrastructure outside the developed eastern coast is not built to handle a modern transport industry.

China's rail map system can handle only around 30 percent of demand for the Yangtze corridor, according to a 2007 Jones Lang LaSalle study. A high proportion of the rail network is not double-tracked. Of 72,000 km of rail, only 24,000 km is dual-track, and priority is given to coal and raw materials rather than industrial goods, forcing many manufacturers to resort to trucks to ship their products.

When we conducted our initial study in 2006, it was determined that for export-based businesses, central China, with its burden of increased transportation costs, remained too expensive, with a lack of infrastructure and transportation monopolies offsetting any cost savings from moving inland. However, China implemented several policies that have made central China appear to become a viable option.

The government's move to restrict the processing trade in its heavily industrialized eastern provinces has sent many manufacturers looking for alternatives. While some are moving overseas to places like Viet Nam and India, others have taken a second look further inland.

Improvements to central China's transportation infrastructure are being made at a phenomenal rate. With the completion of the new, expanded Wuhan Tianhe International Airport-China's fourth major international airport after Shanghai, Beijing and Guangzhou-and the continued dredging of the Yangtze downriver, the region's transportation capacity has increased dramatically, allowing it to become better connected to the surrounding provinces.

(to be continued in Issue No.47)