After over thirty years of break-neck economic development following Deng Xiaoping’s initial reforms, China has become the world’s second largest economy. The economic revolution was focused in investment in China’s coastal regions and its largest urban areas, particularly Shanghai and Beijing, which have emerged as fully developed “Global Cities” and set to match Tokyo and Singapore as their diversity, regulation and freedoms increase over time. Today, with national growth far below the double digit rates of previous years, and the economy in need of structural rebalancing following decades of high investment and low consumption rates, China requires a new growth blueprint if it is to continue to develop in a sustained fashion. Given the maturing of its established mega-cities and developed regions, the country’s tier two cities and central regions will need to be at the vanguard of China’s next wave of growth. This will require China to successfully develop and implement a replicable urban development blueprint that will transform not just the face of its tier two cities but also drive the restructuring of its economy for the next phase of development. China’s emerging cities have recognised this opportunity and are launching highly ambitious agendas for growth, combining bottom-up execution to the central government’s top-down objectives.
The central Chinese city of Wuhan has the history and the raw energy and is attracting the investment to seize the opportunity of China’s need to deepen and broaden its success. It is also a member of a small and select group of cities that aspire to join the mega-city club. Even a casual visitor to Wuhan cannot fail to notice the city’s ambitious build-out underway. High rise construction cranes blanket the horizon and on the ground it seems as if every road in town is being broadened, repaved and rerouted, all at the same time. The scale of the build-out of Wuhan, a city of approximately 10m people in the heart of China is impressive: The city for example currently has as many skyscrapers over 1,000ft tall under construction (four) as the entire city of New York has built to date. The investment costs associated with this build-out are equally impressive. On this topic Wuhan recently received some free press, albeit of the negative sort, when the British Broadcasting Corporation used an interview with the city’s mayor as the lead-in to a special report on Chinese over-investment titled, “How China Fooled the World.” In the article, the city’s mayor was quoted as spending CNY 2 trillion (about US $330bn) on infrastructure and real estate development during the next five years. While actually this number represents total budgeted government spending from 2014-2018, rather than just infrastructure investments, the amount of spending is no less amazing for this distinction. The average US$66bn of spending annually that this implies represents a fiscal budget equal in size to that of New York City’s, a city with approximately the same number of inhabitants as Wuhan, but nearly ten times the GDP. But Wuhan’s development ambition is even larger than the massive budget that is helping to finance it. Wuhan doesn’t just want to be just another leading Chinese city, it wants to be a major world city and the country’s, next Shanghai. With Shanghai today being a city with currently 25m inhabitants, the world’s largest port largest urban transport system , one of the world’s ten busiest airports, and a global financial centre that is home to over 800 financial institutions, not to mention a nominal GDP/capita higher than Russia’s, a member of the G8. ,the gap between it and Wuhan today, however, is clearly a wide one: Shanghai for example in 2013 alone received annual FDI inflows equal to Wuhan’s total stock of FDI. Nevertheless, Wuhan, somewhat inspired by its history as an independent nation (The State of Chu) within China, and its strategically and logistically central geographic location in China has set its sights high.
China’s Tier Two Cities: National Growth Engines
While Wuhan may have one of the most ambitious, if not the most ambitious development agenda in China, it is certainly not alone in dreaming big. A number of other cities are setting their sights on attracting the sort of growth that would propel them into global cities even today in the midst of a national economic slowdown and rebalancing. After decades of development focusing on China’s coastal regions, developmental focus has shifted to inland central and cities such as Xian Chengdu, Chongqing, and Wuhan. Most of the $300bn of fixed asset investment in China last year was injected into the country’s inland provinces, with large urban centres receiving the lion’s share of investment. With wages increasing in the country’s more fully developed coastal regions , Chinese and international companies are looking inland to more cost competitive regions for manufacturing and services. The development of China’s next wave of cities is critical to the country’s sustained economic growth, and urban development lies at the intersection of many of the major reform blueprints announced by China’s central government during the Third Plenum meeting last year, including urbanisation, reforms of the household registration system to drive labour mobility, the relaxation of the one child policy (for urban regions) and urban land reform These reforms individually and cumulatively are set to reshape the face of China’s cities in the next decade. Additionally, though China’s tier two cities themselves have recognised the need and opportunity to deliver long term economic growth and prosperity and have launched ambitious development agendas, many of which have been focused on traditional debt financed fixed asset investments and the attraction of foreign capital and companies, particularly in manufacturing. However, China’s next wave of emerging mega-cities will not be able to simply replicate the model that drove the development of its coastal regions. With economic rebalancing underway and a top priority for China’s leadership, the rate of fixed asset investment growth will continue to ease, reducing the amount of funds available to fund ambitious growth projects. Further, the loss of cost competitiveness and the emergence of scaled manufacturing in lower cost countries are forcing Chinese companies and industries to move up the value chain to high margin, higher cost products and services. This on the other hand requires significant investments in R&D and innovation, building the intellectual property to develop differentiated and innovative products. This process is already underway in China’s most developed regions. If cities like Wuhan are to succeed they will need to not only successfully copy elements of the plan of the coastal cities, but also innovate to leapfrog them ; this will require a comprehensive (potentially decade-long) strategy integrating public policy, private investment, and partnerships with industry. The prize for the city or region that can develop and execute such a plan is significant, with implications potentially reaching far beyond urban economic development.
Wuhan in many ways epitomises China today, representing a microcosm of the economic opportunities and challenges facing the country. Like China as a whole, it has relied heavily on fixed asset investment for growth, but also has significant potential for consumption growth. The city’s population has grown rapidly as the country continues to urbanise and it has incurred significant debt during the accompanying build-out, as well as facing many of the key environmental challenges created by the country’s growth, including air and water pollution. Most importantly perhaps, like China as a whole, economically the city is seeking to move up the value chain to innovation driven and high end sectors, while continuing to industrialise its base and remain competitive. Wuhan’s ambitions and objectives clearly align with the country’s as a whole and it has placed a large bet on the future, incurring significant debt and tying up valuable resources, in the process. Given the importance of cities in transforming China’s economy and the breadth and depth of Wuhan’s development commitment, it is clear that for China’s overall master to succeed, Wuhan itself will need to be a success. The stakes involved in Wuhan’s development agenda are clearly higher than that of an ordinary urban development plan.
Achieving Wuhan (and China’s) development objectives will require a comprehensive and integrated strategy for development that integrates industrial policy, fiscal policy, urbanisation, environmental protection, education and municipal services and governance. While it is clear than no city in China has yet developed such an integrated strategy, if Wuhan were able to formulate and execute one it has the potential to become one of China’s global cities within the next decade, in keeping with its stated ambition. More importantly, though, for the country as a whole it would also establish the benchmark for China’s next phase of development and its strategy will serve as the blueprint for next generation urban development in the decades to come, in China
The Opportunity for Wuhan to Create China’s Next Generation City Blueprint
Wuhan as a city today is well positioned to develop and execute an ambitious growth agenda. Located on the Yangzi River in the heart of China and at the intersection of the country’s main north-south and east-west transportation routes, the city has a history stretching back 3,500 year. Wuhan is culturally and historically significant and is famed as the siteof the epic Romance of the Three Kingdoms, one of the great novels of Chinese literature. Like Shanghai, Wuhan was turned into a treaty port by the British in 19th century following the Second Opium War. Unlike Shanghai, the city, an agglomeration of three smaller historical cities, was already one of the four largest commercial centres in the country at the time. The city has maintained this trading heritage and continues to be the trading and logistics hub of central China. The city has also seen the emergence of a number of scaled industrial clusters, particularly electronics and automotive manufacturing. Today, the automotive sector in the city generates sufficient annual revenues to make Wuhan home to 2% of the world’s automotive manufacturing capacity, than the entire country of France. In a bid to attract other industries and the workforce required to power them, the city has been engaged in an ambitious execution plan that includes (i) real estate development and infrastructure build-out, (ii) the creation of industrial development zones and (iii) the provision of soft incentives for companies and talent to relocate to Wuhan. Beyond the build-out of transportation, including airports and roads, and the utility networks required to support large scale industrial activity, Wuhan has acted as an effective real estate developer in the creation of ten national development zones, the largest being the Economic and Technological Development Zone, traditionally focused on automotive, electronics and high end manufacturing, the East Lake Hi-tech Development Zone, focused on healthcare and high technology, and the Wujiashan Economic & Technological Development Zone, focused on trade and logistics. In addition to providing infrastructure and real estate development, Wuhan is offering a wide range of soft incentives to companies and talent to relocate to the city. The table on the [right] captures some of the key incentive, monetary and otherwise, offered by the Wuhan Economic and Technological Development Zone.
In keeping with its historical role as a centre of trade, Wuhan has also successfully established itself as a regional banking centre with over 400 registered financial institutions (domestic and international), over 450 pharmaceutical, healthcare and life sciences companies and growing ranks of IT companies all doing business in and from the city today. The city’s mix of scaled industry, finance and trade and significant levels of investment have helped keep the city’s annual rate of GDP growth above 11% even as national growth has fallen to under 8%. Most impressive and perhaps over the long seven years it will take New York City to build a two-mile leg of its long-awaited Second Avenue subway line, [Wuhan] plans to complete an entirely new subway system, with nearly 140 miles of track. “ term the most important for a city looking towards the future is Wuhan’s position as a leader of higher education in China and globally: Wuhan is the world’s largest college town with a total of 1.2m university level students across 85 institutions of higher learning. With the student population the size of Dallas, Texas or Milan, Italy, the city has what seems like an inexhaustible source of talent across virtually every industry, while its universities have the potential to form the core of an innovation hub in the same fashion that Stanford was the seed from which Silicon Valley grew.
The Challenge of Differentiation
Given the above, Wuhan today clearly has a number of advantages, some of them unique, to leverage on its development path. However, even with strong economic performance, an advantageous geography and a unique competitive advantage in the creation of talent and innovation, Wuhan’s success requires it to differentiate from the other aspiring and highly promising cities for domestic and more selective foreign talent and investment.. As China moves beyond (simple) industrialisation to a services and consumption as well as innovation driven development model, the next generation blueprint for urban development will need to encompass and consider a number of additional strategic factors.
Foreign Backing Beyond the Global Budget: Securing Disproportionate Capital and Talent. The size of Wuhan (and China’s) ambition remains too large to fund and develop solely from domestic sources, considerable though those may be. Foreign investment, and equally important, the expertise that accompanies it, will be an important driver for self-sustainable growth and development for Wuhan. Wuhan’s total capital stock of FDI of There’s plenty of money in those second tier cities — most of China’s new growth will come from these cities (and Chinese growth represents 27% of all global growth this year)”US$22bn equals the amount of FDI received by Shanghai during the past year alone, Wuhan will clearly need to increase foreign investment in the city. Doing so will require positioning itself as investor (particularly foreign investor) friendly. The list of (cash) incentives above provides a great starting point for attracting investment and talent but needs to be followed up by an equally impressive list of policies designed to support businesses once they have arrived. Singapore, for example, was strategically located as a trading and manufacturing hub that offered low taxes and incentives to attract foreign investments. Its long term success as a centre for international business and living, however has rested in equal part on the overall favourable business environment it provides to local and international investors alike, including an effective administration, fair and efficient courts, transparent rules and regulations, etc. Further, cities such as Singapore provide or ensure that others provide international standard healthcare and education to attract top international talent. Sustained economic success for Wuhan will require its government to provide a similar experience and level of support to the companies it attracts.
Hyper-Growth: Attracting The Highest Growth Global Companies.. A key element of Shanghai’s past success has been its ability to attract the operations of leading scaled domestic and international companies and today the city is home to more China headquarters of multi-national companies than any other city in China and competes with Singapore and Hong Kong as an Asia-Pacific headquarters hub. Shanghai’s strategy of focusing on large MNCs paid off at a time when companies were establishing or building out China operations – and having attracted these enjoys the stickiness that comes with a scaled presence. Although occasional moves (particularly to China) still happen (e.g. AstraZeneca moving their regional headquarters from Singapore to China), it is becoming ever more challenging for cities like Wuhan to attract a second wave of Fortune 500 migration today. However, given the requirement to focus on high growth and future industries, the most disruptive innovation across most industries of the future will likely take place in small to medium sized businesses rather than in incumbents. Wuhan and its competitors will therefore need to refocus their efforts on attracting smaller companies which have been (relatively) neglected by established hubs like Shanghai and Beijing. By tapping into these companies today and providing a strong environment for growth, Wuhan can pick up the next wave of corporate leaders today.
Home to the Future Winners: Creating the Next Wave of Innovators.China’s 12th Five Year Plan has clearly identified the next generation industries and technologies the country is seeking to develop, including energy efficiency, biotechnology, environmental technologies, new materials, alternative energy vehicles, next “The so-called “second-tier” cities should actually be called “first-class opportunities,” given that these cities have been growth engines of the Chinese economy, boosted by huge amounts of investment, new infrastructure and an influx of new talent.”generation IT among others. These sectors are not only important as potential industrial drivers for the economy but also as a source for solutions to some of the largest problems facing China and world today. For example, China is one of the largest (and least efficient) consumers of energy globally and bridging the growing supply demand gap is a matter of national strategic importance. Similarly the cost of environmental degradation in China today is estimated to equal 3.5% of GDP annually. China therefore has a strong incentive to develop leadership in these sectors and there is an opportunity for Wuhan and other cities to establish themselves as hubs for these new technology-based solutions. This will require not just attracting the smartest existing companies but also creating the environment in which new companies and innovation can be created. Wuhan will need to initiate support and (at least partially) finance an ecosystem that will need to integrate research and academia, corporates, innovators and entrepreneurs, and investors.
New Rules of Engagement: Implementing a Business Values and Behaviours Charter. The Shanghai Free Trade Zone has the potential to create a new set of “rules of engagement” for doing business in China. Shanghai has been the first-past-the-post for the implementation of this new model. It is unclear who will be next and when. Wuhan and Hubei is respected and feared by other Chinese provinces as the home of the “nine-headed bird”, potentially more intelligent and more fearsome. The challenge for Wuhan is to not wait for the new business model that will come out of the Shanghai Free Trade Zone but to create a set of rules of engagement immediately; a values and behaviours charter that is backed by the government of Wuhan in a bid to leapfrog the process of change. Such a charter would simplify the rules of doing business for international companies and assure investors of transparent regulations, governance and processes.
Wuhan Abroad: Exporting Wuhan’s Companies to the World. China’s cities, much like the country as a whole, have been traditionally focused on attracting rather than exporting capital. The successful execution of the new development model, however, will require cities to balance or, even over the long run, reverse this trend by helping their companies go abroad. This will require the creation of incentives and a culture of, supporting at a local level the increasing national importance of overseas direct investments. By helping their companies to acquire foreign brands, distribution, technology and capacity, Wuhan will be supporting the international growth and competitiveness of its companies and industries, increasing not only its tax base with continued corporate growth, but increasing the importance and attractiveness of the city as the headquarters for China’s next wave of multi-national corporations.
Key Challenges for Wuhan - and Other ContendersThe successful execution of a comprehensive development blueprint will clearly be challenging, and Wuhan will need to successfully address a number of issues facing it today. However, these challenges are largely not specific to Wuhan and other cities seeking to scale during the next phase of China’s economic development need to overcome similar issues. These include:
Need to Create a New Urban Role Model and Plan Beyond New York. The New York skyline remains the epitome of success for aspiring Chinese cities. This is creating a scale that is almost daunting to the pursuit of normal human life and also leading to cities that drain natural resources. It is time for a city in China to create a model that better combines their history with modernity, London, Paris or Rome with shades of New York rather than a bigger version of New Work. The world’s top architects are innovating in the use of light, materials, space, technology and nature and will be attracted to an ambition to create something truly unique. If Wuhan is to displace Shanghai, if might find that doing that first through “livability” or “quality of life” - creating a Chinese city that is more livable than Shanghai – is a unique way to do it in today’s Chinese megacities. The parallel activity of building scale and volume of industry and GDP need not be displaced.
Need for Coordinated Planning and Execution. Wuhan’s growth push to date has created (intentionally or inadvertently) overlap between its different industrial zones, with multiple zones competing to attract for example healthcare and high technology companies. Competition between different regions in the city itself risks displacing value to the city if over time different districts are tempted to compete and offer more and more extravagant incentives to attract investment and companies (potentially away from each other). Executing a multi-decade comprehensive growth plan will require close coordination between different districts and arms of the local government, eliminating as much as possible the overlap in mandates and encouraging cooperation. Further given the number of big issues on the list that still need to be developed (such as green energy technologies), there is no shortage of themes for Wuhan and others to develop in their industrial zones.
Financial Structuring for Growth.Generally, tier two cities’ infrastructure strategy appears to have been “build it and they will come”. Given the enormity of Wuhan’s vision, it may well be too much of a stretch to finance upfront in a turnkey fashion to attract economic activity. The city today already spends more capital on real estate development than it does on actual municipal infrastructure and in doing so has accumulated significant levels of debt. At a current debt to GDP ratio of 186%, its indebtedness is the second highest of China’s 30 capital cities. Further, over the longer term, the city will need to effectively restructure its debt burden as China as a whole seeks manage it debt bubble (up from 125% of GDP in 2008 to currently 200%) and the over-investment that it has financed By way of international comparison, it’s relative indebtedness is 1.5x Wuhan] tells the story of how China's remarkable three decades of modernisation and enrichment, its economic miracle, is apparently drawing to a close, and why there is a serious risk of a calamitous crash.higher than the U.S. red line on government debt levels and its absolute debt is nearly twice as high as the burden which forced the city of Detroit into bankruptcy in 2013 ($18bn vs $33bn). The city government is indeed impressive and may well successfully manage the risk of servicing debt while it builds out its story. However, it is probably prudent to structure its finances with a greater proportion of private capital. The next step would be to develop an investment allocation agenda based on the strategic use of government funds, prioritising investment in projects with strong economic growth multipliers, such as urban transportation and utilities upgrades. The Qatar government is a good example of a nation that has rethought its investment strategy following the global financial crisis of 2008 and in pursuing a strategic allocation of capital has created one of the world’s premier investment capabilities.
Creating Differentiation - Competition from Other Cities. As Wuhan executes its ambitious agenda and addresses the issues laid out above, its competitors will not be standing still. There are at least three to four other cities in central China seeking to become regional hubs. Among these cities, Chongqing and Chengdu are also both strategically located geographically as gateways to the west and south of China, have significantly larger populations than Wuhan and also have thousands of years of history. Chengdu in particular has pushed hard with soft power internationally (it is the home of the panda bear, whose reserve it has successfully lobbied to have recognised as a World Heritage Site and the city has further been signified as a “UNESCO city of gastronomy”, for example) and it has leveraged this exposure in a series of aggressive international marketing campaigns. Although Chengdu to date has attracted nearly three times the foreign investment that Wuhan has, with half of global 500 companies in the city already and has attracted 71 international air routes (vs 30 in Wuhan) and 10 foreign consulates (vs 4), Wuhan’s GDP per capita exceeds Chengdu’s. Of course, Wuhan’s plan aims to scale rapidly and also maintain or grow its productivity and entrepreneurism. While Chengdu’s achievements are closely watched, cities like Xi’an and Hefei have also announced ambitious development agendas. Wuhan’s answer to this intensive peer group rivalry is differentiated. It has decided to pursue a strategy that has the twin tracks of competing aggressively with the peer group while seeking to leapfrog them to become a serious competitor to a leading city like Shanghai. This will require real innovation and may include big ideas that create a “Great Wuhan” like the redevelopment of its old city to recreate a sense of historic buzz, the rebuilding of some of its famed walled city, the creation of multiple city centres along various themes of historic and current interest, the reinvigoration of the old wharf area and the use of its c.450 lakes for lifestyle enhancement.
Turning Cultural Stereotypes into Advantages. Finally, Wuhan’s history and experience as a trading centre has provided its people with a reputation as hard-headed business people. Known in China as jiu tou niao, nine headed birds, the city’s citizens, although admired for their intelligence (nine heads, nine brains) and commerciality, are sometimes attributed with a trader mentality that might drive too hard a bargain. Although any stereotype can clearly be overcome through personal experience and positive interactions, they create an initial barrier that must first be overcome to facilitate constructive engagement. While foreigners obviously lack the local experience and context for Chinese regional stereotypes, Wuhan’s ambition will require it to attract talent and capital from all sources, foreign and domestic. Proactive engagement to overcome regional prejudices can only accelerate the city’s ability to strike mutually beneficial relationships with potential investors and entrepreneurs. Every positive experience for Wuhan’s annual 170 million visitors by rail, ship and air and its host of investors in particular, is an opportunity to create a friend of Wuhan that will tell the tale to hundreds of millions.
There is a hall the size of a large movie theatre in the visitor centre of Wuhan’s municipal government that houses, appropriately, the world largest model, depicting Wuhan as envisaged upon completion of its master plan. Looking down at the 150’ by 150’ scale model of the city, it is possible to discern from the balcony where visitors stand all of the skyscrapers, bridges, expressways, shopping malls, parks, high tech zones and residential developments that would help turn Wuhan into the next Shanghai. If Wuhan can in the coming decade execute on this master plan by not only building this hardware but also putting in place the “software” (a future city model), it will have also created an engine for the transformation of China’s economy. If successful, the “Wuhan Model” can serve as a key template for China’s continuing urban development. The central government recently introduced its long-awaited urbanisation plan, providing a blueprint for the orderly migration and integration of an estimated 120m people to China’s cities in the next decade. Cities like Wuhan have the opportunity to colour in how this will happen in a way that enhances the quality of the overall picture. Moreover, while China’s development has been faster and its urbanisation is progressing more quickly than others’, it is not the only country which requires an urban development blueprint. The level of Wuhan’s ambition and execution today makes cities, even capital cities, in other developing countries look lacklustre by comparison. New Delhi, India’s capital, for example has received praise for constructing, over the past 13 years, a six line metro, a new airport terminal, and an airport expressway, a similar period of time during which Wuhan is building two airport terminals and an eight line metro, not to mention an entire financial district, a cultural district and multiple high tech and healthcare science parks. With most cities lacking a municipal budget totalling ~40% of their GDP and Wuhan’s access to cheap government debt, it is clear than Wuhan’s formula cannot simply be replicated in other aspiring cities world-over. What is also clear though is that a successful Wuhan will have much to teach others in China and beyond. And without successful cities such as Wuhan, China’s success will be at risk.
- Official spending by the Wuhan municipal government on infrastructure and real estate investment in 2013 was 320bn RMB or US$52bn, and projected spending in 2014 is US$57bn
- Consisting of the world’s largest municipal bus system and the second largest subway system
- Coincidentally, perhaps, Shanghai has a similar sized annual municipal budget to Wuhan’s
- See the April 2014 Sign of the Times: China’s Changing Competitiveness to 2025– Far-reaching Economic and Political Implications
- See the May 2013 Sign of the Times: The Planning and Development Model of China
- Four foreign automakers — Nissan Motor Co., PSA/Peugeot-Citroen, Renault and Honda Motor Co. — have set up shop in Wuhan, where they do business with their Chinese partner, Dongfeng Motor Corp. A fifth company, General Motors, is on the way with its own joint-venture partner, SAIC Motor Corp. And yet another global player, Hyundai Motor Co. is considering building a plant here.
- For example: see the April 2013 sign: “ China’s Potential Green Future”
- The China (Shanghai) Pilot Free-Trade Zone is the first free-trade zone in mainland China, launched in 2013 as a pilot for potential economic reforms
Creating Prosperity for a Billion People: Re-architecting the System of Wealth Creation