The Chinese city of Urumqi, and Xinjiang province in general, has been largely off the radar when it comes to foreign investment. Its remote inland location, social tensions and lack of legal and physical infrastructure led the region to garner the moniker the ‘wild west’ of China. And while these problems still persist to some degree, Chinese government initiatives to promote the region and its abundance of resources are making it more attractive for investors.

At the heart of China’s efforts to promote growth in frontier areas such as Urumqi is the ‘Go West’ policy. Launched in 2000, it was designed to give the more remote areas of western China the benefits that the rest of China has been enjoying from its ‘Opening Up’ policy.

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Since then, more than $325bn has been invested in major infrastructure projects in the region, including the 4000-kilometre west-east natural gas pipeline and the Qinghai-Tibet railway. China’s investment in the region has helped create the basis for a potentially lucrative future economy, based on its vast resources and links to central Asia.

Improving infrastructure

The Go West policy has seen Urumqi itself become ever more connected to the rest of China. The opening of a new terminal at Urumqi Diwopu Airport in 2009 means that 21 international airlines now operate out of Urumqi. For a city that is more than 2200 kilometres inland – further than any other major city in the world – this is an important step on the road to greater accessibility.

And it appears development of infrastructure is unlikely to stop there. The government has identified 520 key construction projects for 2013, with total investment planned at Rmb79.28bn ($12.76bn). This includes new roads, a metro line and a high-speed railway. It is hoped that this will boost 2013 industrial added value by Rmb90bn, which would represent 17% growth from 2012.

Despite this, Urumqi still suffers from its isolated location, meaning that transport costs are higher than in coastal areas of China – a potential problem for companies looking to invest in resources or manufacturing projects.

Resource rich

Transport costs remain high, but investors are increasingly aware of the treasure trove of resources in the area. Urumqi has huge coal and oil reserves in the surrounding area – the city is sometimes referred to in China as the ‘coal boat in an oil sea’. Much of the resources are still untapped though; they are potentially difficult to access and, given the current infrastructure levels, start-up costs would be steep.

It is also uncertain how much foreign investment is needed in this area – China’s natural resources companies are particularly cash-rich and are looking abroad for acquisitions and co-operation on projects to meet China’s growing resource demands. China’s hunger for resources, however, makes it likely that these vast resources will soon be tapped, and those with advanced technologies or innovative business models attractive to Chinese partners could reap the rewards.

Tapping Urumqi’s resources will be a tempting prospect for many investors, but this is balanced by the continued threat of social tensions in the region. Since violence flared in the city in 2008 and 2009, when Han Chinese and local Uyghurs clashed over cultural and economic disparities, there is a sense that trouble is never far away. And even though violence of that scale has not engulfed the region since, the potential business implications of another incident are myriad.

“One of the reasons people remain cautious about investing is that when conflict occurs, the government has in the past gone into lockdown mode – internet, phone lines and channels of supply are severed, leaving businesses potentially crippled,” says Raffaello Pantucci, senior research fellow for the Royal United Services Institute and an expert on Chinese–central Asian relations

Early adopters

This political sensitivity means that despite the Chinese government’s best efforts, investment from foreign companies remains fairly low at about $125m in 2011. One of the more secure ways for companies to invest in Urumqi is through an existing joint venture with a Chinese partner.

Shanghai-Volkswagen is one such partnership between the Chinese state-owned automotive manufacturer SAIC Motor and German-based automotive company Volkswagen Group. It is currently building a factory just outside Urumqi, which will make 50,000 cars per year when it opens in 2014. While it has been suggested that the decision to build the factory in Urumqi was politically rather than economically motivated, the skilled local workforce and the growing consumer market – the number of cars in Urumqi doubled from 200,000 to 400,000 in just two years from 2009 to 2011 – make it an attractive proposition.

It is these early adopters that are willing to take some risk that are likely to see the biggest gains in years to come as the region’s infrastructure and investment environment improves. The government chairman of Xinjiang, Nur Bekri, says that the new Urumqi factory will help Volkswagen “gain a strategic advantage” in the northwest Chinese and central Asian markets.

Central Asia collaboration

“One of the key ambitions of China’s government is to develop and promote Urumqi and Xinjiang province as a land bridge to central Asia and Eurasia,” says Mr Pantucci. Bordering with countries such as Kazakhstan and Tajikistan, Xinjiang is already seeing collaboration on resources projects between Chinese and central Asian companies. Chinese energy giant China National Petroleum Corporation has already built an oil pipeline from Kazakhstan and a gas pipeline stretching from Turkmenistan through Uzbekistan and Kazakhstan to China, with further projects in the works.

But moving from domestic collaboration to greatly increased foreign investment is going to take time and probably much convincing for some. Both the central and local governments seem aware of this, however, and know that preferential policies and improved infrastructure will not be enough to attract greater investment. So, to showcase the potential of the market, Urumqi has played host to the China-Eurasia Expo for the past two years – the third is due to take place in September 2013 with a theme of ‘mutual trust, mutual benefit’. 

Trade fairs such as this will help to gradually boost foreign investment, but it seems that domestic investment will continue to be the main driver of growth in Urumqi. The Urumqi Economic and Technological Development Zone saw Rmb40bn invested in 2012, with the aim to increase this to Rmb50bn in 2013. And if domestic investment continues at this pace, it will not be long before Urumqi’s overall infrastructure and investment environment will be seen as attractive – and stable – enough for more foreign companies.