Firms urged to look inland to gain a foothold in China

And for brave-hearted Yorkshire businesses, there are first-mover advantages to be found in the rapidly-developing inland rural areas, away from the increasingly costly coastal areas.

That’s according to China specialist Josh Wong, a Leeds-based partner at the international law firm DLA Piper.

“There’s a two-speed China,” he told the Yorkshire Post.

Latest figures back up his claim. Along China’s eastern seaboard, places like Beijing, Shanghai, Zhejiang and Guangdong had GDP growth of between 7.2 and 7.4 per cent in the first half of 2012.

Inland, it is a different story; places like Chongqing and Guizhou experienced growth of 14 per cent, while Sichuan and Shaanxi saw expansion of 13 per cent.

Mr Wong said: “The second tier cities are becoming wealthier. Therefore, there is an opportunity to sell to consumers there and also to businesses.

“Their costs of salaries, infrastructure and rents are cheaper. Therefore, there is a better lower cost area to have your manufacturing operation.

“The initial reaction from investors I see is to go for the coastal areas because that is where the information is and the support networks are.

“But the more sophisticated investors are moving inland.”

Coastal markets in China have traditionally seen a lot of foreign investment, said Mr Wong. Consequently, workers moved to the coast and salaries and property prices rocketed.

“For certain industries and sectors the market is quite saturated,” he added.

“As a result it’s difficult to establish anything new in terms of new products and new business.

“Increasingly, foreign investment is moving towards the rural areas, where it is still good value in terms of cost base, property and logistics.”

While China has seen a fall in international tourism, domestic tourism has expanded in line with the growth of the Chinese middle class, said Mr Wong.

He added: “People from coastal areas are investing in rural areas. There is much more government investment in rural areas as well.

“The government realises these areas need to catch up with the coastal areas in terms of foreign investment and manufacturing in order to ease some of the social pressures in China.

“It’s important to make these areas as prosperous as the coastal areas have been.

“Across China there has been a huge amount of wealth generated from growth and big investment from overseas.

“That has traditionally been focused on the coastal areas so it has been the people in the coastal areas who have benefited.

“There is still a large proportion of people living below the breadline in poverty and that’s focused around countryside and non-coastal areas.”

Incentives are available for international companies to invest in parts of inland China. These benefits can help to offset problems caused by less developed infrastructure and workforce. “You don’t have some of the high-speed rail networks, you don’t have the roads to ship your product,” said Mr Wong.

“There’s a pay-off in investing in areas that are less well developed. Having said that, the pace of growth is amazing.

“The domestic flight network is extremely comprehensive. Lots of airports are being built. The high-speed rail network is developing.

“Journeys that used to take 10 hours are now taking less than three.

“They are making China smaller with their transport infrastructure. It’s becoming much less of an issue now.”

Similarly, inland areas are producing more English-speaking university graduates, added Mr Wong.

At a national level, China is on track to meet this year’s target for economic growth, Premier Wen Jiabao said last week.

“China’s economic development trend is good, economic growth still remains within the target range set at the beginning of the year, and the economy is stabilising,” he said.

He added that the central government would tap a special stabilisation fund if needed to support economic activity.

China has set a 7.5 per cent target for economic growth in 2012, but some analysts have voiced fears that could be missed as a global slowdown hits activity in the world’s second biggest economy.

Growth in China has slowed for six successive quarters and some investors fear it could slide into a seventh in the third quarter of this year, despite the “fine-tuning” of economic policies that began in November 2011.

That aside, Mr Wong maintains that there is increasing demand for Western products in China.

“A number of businesses have first mover advantage by being there while other businesses are not,” he said.

Business leaders in Yorkshire should not expect quick wins, though, according to the China-Britain Business Council, which advises companies to prepare thoroughly.

• Follow Bernard Ginns on Twitter @bernardginns