China's Stimulus Package Aim To Enrich Peasants

Even if you follow news about China, it's possible that you've never heard of Chongqing, a sprawling municipality of 32 million people on the Yangtze River. A major industrial center and logistics base, Chongqing bills itself as the "Gateway to Western China." Seventy percent of its citizens are peasants. Per capita income levels, while growing, have never reached those of better-known cities such as Shanghai or Beijing. Yet Chongqing and a host of smaller inland cities like it are central to China's economic-recovery hopes. Chongqing is already outperforming not just the depressed coast but the rest of China, too. The city's GDP is slated to grow at an eye-popping 12 percent in 2009—beyond the wildest dreams of most Western countries, or indeed beyond China's own 2009 national target of 8 percent, which even Premier Wen Jiabao now admits will be "arduous" to achieve.

This unusual record is due largely to billions of dollars in government money. More than 60 percent of China's two-year, $586 billion economic-stimulus package will go to inland regions, and some $34 billion is earmarked for Chongqing—more than double the per capita share for China's 1.3 billion people. Ambitious rail- and road-expansion projects—such as the Chongqing-Lanzhou rail line—will help connect the Yangtze port and other inland cities to markets farther west as well as to big cities back east: $220 billion of stimulus money is for such projects. This accelerated spending will, in turn, drive up demand for coal and iron ore—two major commodities shipped along the Yangtze. In January the river's ports saw their first monthly increase in cargo in half a year. "Chongqing has entered a new growth cycle," predicts Mayor Wang Hongju.

The numbers back him up. Investment in infrastructure and other types of construction in 2009 has jumped 35 percent from the same period last year. And, with labor and property costs still relatively low, companies that once built factories on the coasts are relocating to Chongqing. (HP has begun building a new facility, as has the major Chinese electronics manufacturer Jiangsu Baixue.) It's a shift sanctioned by Beijing, which sees the city as the centerpiece of its newly reinvigorated "Go West" campaign, which aims to shift China's future growth from the coasts to the vast hinterland. Now, with the coastal export model well and truly broken, Beijing has political license to move full steam ahead with the plan, which is focused on bettering the lives of China's 750 million farmers in more than 400,000 villages, mostly in the interior—and, eventually, turning them into consumers.

The goal was front and center at China's parliamentary session in early March, during which Wen revealed plans to increase spending on agriculture and social programs in rural areas by 20 percent, to US$104.6 billion, and to boost a nationwide campaign to "send electronics down to the countryside" by giving a 13 percent rural sales rebate on TVs, cell phones and computers. The government is even offering farmers a one-time grant to upgrade farm vehicles to light trucks and cars. At the same time, new shopping centers, cinemas, sports halls and other entertainment venues are going up in Chongqing and other inland areas.

It's all designed to loosen the wallets of China's rural residents, whose incomes have risen 6 percent annually for five years, as well as to tap the wealth of the 20 million migrants returning home to inland provinces from coastal areas after losing factory jobs. There is money to spend—the average migrant returning to Chongqing brings $32,000 per household after working for five years on the coast, according to Prof. Pu Yongjian of the Chongqing University School of Management. But getting them to spend it has always been an uphill battle; the average Chinese savings rate is 20 percent, in large part because the lack of a social safety net means that citizens hoard for rainy days.

Chongqing has been scrambling to address such worries ever since grassroots tensions flared a few years back. Now more than 85 percent of its farmers have basic medical insurance. More recently, 9,000 taxi drivers went on strike, blocking roads and setting vehicles on fire to protest their lack of medical insurance, among other things. Chongqing Party Secretary Bo Xilai quickly met in person with the taxi drivers' representatives—a daring move for a top cadre—to hear their grievances. Right after the meeting, says taxi driver Tang Zhirong (who took part in the meeting), she and her colleagues began receiving monthly allowances and company-subsidized medical care.

Even as government officials try to bolster consumption, they are also trying to boost production in the hinterland, which still has the advantage of lower wages and less frothy real-estate prices. As a center for the automobile, aluminum and chemical industries, Chongqing is keen to prosper the way manufacturers in the east had done for so long. "For decades, the coast got more help from the government," says Yin Mingshan, the private entrepreneur who heads the Lifan motorcycle and car maker. "Now companies like us will get more government support." Indeed, this past December, Premier Wen visited Yin in Chongqing to announce Beijing's $733 million bankrolling of 13 percent discounts on rural motorcycle sales, a campaign titled "Motorcycles Down on the Farm."

It's one of many incentive programs already underway in the area. Lifan already receives government funding to develop a hybrid clean-energy car, which is slated for launch this year. Yin will also benefit from Beijing's decision to halve the sales tax on cars with engines smaller than 1.6 liters. Such incentives for the auto industry were part of Beijing's stimuli to 10 specific sectors, from metals to electronics. Lifan makes sedans—60 percent for the domestic market, 40 percent for export to places like Russia and Algeria—and soon it'll roll out a new model with a 1.4-liter engine: the Lifan 320, a kind of poor man's Mini. Likely price tag: less than $7,500—just right for a first-time car owner, which many Chinese aspire to be, but also well suited to a host of other increasingly frugal consumers in markets around the world. "I'm more optimistic than I've been for more than a year," says Yin. It's an optimism that's tough to square with the continual stream of bad news still coming out of China's major coastal export hubs, but one that China's leaders hope will reflect its economic future.