By next year, the completion of the Three Gorges Dam will slash average river journey times between Shanghai and Chongqing, in south-west China, to no more than seven days. A non-stop container service on the 2500 kilometre route that takes as little as five days is already in operation.

Chongqing-based Yangtze River Acetyls, a joint venture between Sinopec and BP, says it has benefited from increased water depths since the construction of the dam. “This allows bigger vessels to reach Chongqing, which helps reduce costs,” explains Michael Zhou, BP spokesman in Beijing.

More foreign companies are expected to follow BP’s lead. “Every incremental increase in [shipping] capacity will translate into increased investment,” says Richard Brubaker, managing director of consultancy China Strategic Development Partners. Anticipating a surge in throughput, Chongqing will next year open the largest and most modern container terminal on the upper Yangtze.

With cities in central and western China now better connected to the sea ports, so the argument runs, investors can shift their attention from the coast, where rising costs are eating into profit margins. In 2007, Chongqing’s utilised FDI increased by 56% year on year to reach $1.085bn. However, most foreign investors are reluctant to move towards the interior until it can be demonstrated that the major logistical difficulties in the region are a thing of the past.

This may take a little time to achieve, according to Dezan Shira & Associates, a China-based business advisory and tax practice that has itself been evaluating the possibility of setting up an office in Chongqing. A study conducted by the firm last year found that the land and labour costs involved in establishing an export-oriented manufacturing business in Shanghai were 40% to 60% higher than in the interior. However, this cost advantage for inland cities was more than outweighed by the difficulties of transporting components and finished products to and from the coastal ports.

Fixing this problem will take more than just building infrastructure; transportation services also need to be improved. Monopolistic shipping practices in the Chongqing region, for example, result in restricted competition, inflated prices and delays, according to Chris Devonshire-Ellis, senior partner of Dezan Shira’s international practice.

“Transportation in Chongqing is inefficient, expensive and protected,” he explains. “That whole environment has to change before it can become a viable city [for export- oriented investment].”

Safe haven

Hilly and heavily polluted, Chongqing is the largest industrial centre in China’s interior. One of only four municipalities that report directly to the central government in Beijing, Chongqing has a population of 31 million, although only 6.6 million actually live in the city proper. Between 1937 and 1945, when Japanese troops occupied Nanjing, the city was regarded as a safe haven and was chosen as the capital of the Kuomintang government. Important military bases and factories were relocated here, laying the foundations for its current prominence in the automobile, iron and steel and aluminium sectors.

However, since the start of China’s opening-up strategy in 1978, Chongqing and other

cities in the interior have fallen far behind booming coastal areas. Alarmed by the widening wealth disparity, central government planners have initiated the ‘go west’ campaign, which aims by the middle of the century to eliminate poverty and help to close the yawning economic gap between the coast and the west. It involves investment incentives and a range of huge infrastructure projects to lay the groundwork for future development. Details of these incentives are expected to be announced in the next 12 months.

Since the start of the campaign, soaring land and labour costs on the coast have persuaded an increasing number of manufacturers, domestic and foreign alike, to consider moving to the interior. They are looking to the experience of pioneering investors in western China to see how they address logistics problems.

Changan Ford Mazda Automobile in Chongqing is one such company, with an annual capacity of 250,000 cars. In 2007, 42% of its output was transported at least partly by river, which the joint venture regards as the cheapest and greenest mode of transport. However, the company has suffered in recent years because of an increased incidence of extreme weather conditions. In the winter of 2006/07, for example, its barges were delayed on four or five occasions because the Yangtze was blocked by vessels that had run aground during a prolonged drought. Winter fog also causes supply chain delays, as do heavy summer rains.

An inhospitable climate, combined with high levels of pollution and an unfashionable location, contribute to what many foreign investors regard as Chongqing’s low standard of living. A more serious problem for potential investors, though, is the city’s reputation for being corrupt, inefficient and lacking in commercial expertise.

The task of turning around these problems falls to Bo Xilai, the city’s new Communist Party secretary and a former minister of commerce. Many experts believe he has the necessary experience, political authority and international profile to bring about a transformation. He has already set tough targets for inward investment and other key economic indicators. His presence should also reassure foreign investors who remember his time as mayor of Dalian in the 1990s, when the coastal city enjoyed a period of phenomenal growth and a marked improvement in its physical environment.

Bo selection

“He will be asked to develop public infrastructure, improve the investment procedures that firms go through, ensure that firms are in compliance with labour laws, and perhaps most importantly balance the environmental concerns of developing the south-west,” says Mr Brubaker.

Mr Bo’s arrival has already attracted international interest. In recent weeks, a number

of multinational corporation executives have been seen checking out the city. Both the US Chamber of Commerce and the Korea International Trade Association are organising fact-finding visits in coming months. Under pressure from their new boss, local officials hope that their interest can be converted into firm investment commitments in the coming months and years.