Cultural challenges acting as barriers for more foreign investment

While 2011 is the first year of China's 12th Five-Year Plan (2011-2015) and the first year of promotional support for a host of emerging industries, it is also the 11th year of China's go-west policy. The plan was started in 2000 by the State Council under then premier Zhu Rongji with the goal of helping western China catch up with the developed eastern regions. The main purpose of the plan was to increase infrastructure investment, especially in areas such as transport, energy and telecommunications, and attract more foreign investment.

So far, the results have been mixed. Growth rates suggest that though progress is being made, it is slow. Gross domestic product (GDP) growth averaged 13 percent during the first six months of 2011 in the western regions of China compared with single digit growth rates in the east.

Figures from the Chinese Academy of Social Sciences show that between 2006 and 2010, GDP growth in western China was 13.9 percent, 0.9 percentage points higher than the national average. As the growth is coming off a much lower base, the absolute level of GDP isn't catching up as quickly.

To achieve this success, even if only minor, the government has allocated both time and money for the region. In 2008, the State Council released a plan with 10 major projects, involving investment of 436 billion yuan (47 billion euros). These included railways, highways, hydropower stations, coalmines and gas and oil pipelines. In 2010, a plan was announced to invest 683 billion yuan in 23 major projects, equivalent to over a third of the total investment for the development of the western region in the last 10 years.

After all the time and money, progress is now being made. By the end of last year, the power grid in Xinjiang was finally connected to China's northwest power grid. Till then, the Xinjiang grid had remained isolated, and the region's significant energy resources remained vastly under-utilized.

According to estimates from the State Grid Corporation of China, over 40 percent of the 60 gW of power generated from the region will be transmitted to other provinces and regions by 2015 after two new ultra-high voltage lines are built.

But in some respects the progress has also been slow. While the Xin-jiang grid was finally connected to the national grid last year, Tibet's power grid still remains isolated. This is a problem, as many areas in Tibet are still facing power shortages every year, as it is still isolated from China's main grid.

While certain areas of infrastructure, like the power grids are improving, there are others that remain underdeveloped. Though the government has identified great prospects for the coal-bed methane industry, it still lacks the ability to transport the energy generated to the regions or areas where it needs to be used.

Developing the west is also not that easy considering that the region's geography and topography are not conducive to development. Xinjiang has large swathes of mountains and deserts and has snow on the ground for more than seven months of the year. Other areas in the region also present similar problems.

One of the biggest accomplishments of the go-west policy has been the Qinghai-Tibet railway line. That line may need to be dismantled at some point in time, as more than half of the entire track length is on constantly shifting permafrost.

While the government continues to boost funds for western development, one key factor that was highlighted in 2000 and would accelerate progress is still missing - foreign investment. Not only would foreign investors provide additional funding, but they could also bring in the much-needed technical expertise to help accelerate development of certain industries.

There are a variety of reasons that have contributed to the low level of foreign investment so far. In 2005-2006, the Chinese government invited foreign oil majors to Xinjiang to bid for exploration and production rights. But most of the foreign companies did not show interest in the projects due to the tough terrain and high costs.

There is also a cultural issue, as well. Foreign companies had already faced problems while navigating cultural differences in friendlier places such as Shanghai and Shenzhen. It's not easy to explain to an executive from a Western company that they must treat their Chinese counterpart to lunch, sit in a particular seat, clink glasses in a certain way, make a particular toast and then wait until the last 15 minutes of the meal to bring up the main point they want to discuss, just so as to not offend the Chinese party.

If this is so difficult, doing business in the west is near impossible. As a Chinese friend told me, "in the east, business is business. In the west of China, you must first develop trust and friendship". For foreigners who have enough trouble holding off discussing business until after the bread comes to the table, overcoming these cultural differences may prove too difficult, meaning the low level of foreign investment and slow progress on western development may continue.

The author is a financial analyst at North Square Blue Oak, a brokerage house in London.

(China Daily 09/02/2011 page7)