This article is a guest contribution by Yu Zhang, Matthews Asia.
I recently spent a week in China, conducting research meetings. The general sentiment on the ground is quite positive, underpinned by a sustained pick-up of economic activity carried over from last year, and people are also becoming more confident about their own well-being.
After visiting companies in five different cities across the country, I was reminded once again of the intriguing opportunities available to long-term investors in such a large economy. By viewing the Chinese economy as a homogenous one, one may miss out on some of its more exciting investment opportunities. One highlight of the trip was my visit to Chengdu, the capital city of China’s western Sichuan Province. Traditionally hindered by its inland location, Chengdu—or the entire western part of China for that matter—had lagged behind China’s eastern coastline regions in economic development. However, since the Chinese central government initiated a full-scale campaign to develop its western regions a few years ago, the situation has undergone a sea change. Visiting the city for the first time I was positively surprised when I saw the level of urban development in the city. Not only is Chengdu upgrading its old city center with new commercial and residential development projects, the city is literally building a brand new Central Business District (CBD) catering to an entirely new set of industries, with information technology (IT) software and outsourcing as its main backbones.
Modeling itself as the “Bangalore of China,” (India's information technology hub) Chengdu has successfully attracted many domestic and global heavyweight technology companies to invest and set up operational bases. The city’s abundant IT engineering resources—supported by a half million university students each year—and cheaper land and labor costs, compared with cities on the east coast, have made Chengdu an ideal place for companies to establish large-scale IT outsourcing operations.
The trickle-down effect of this new IT industry boom on the city is immense. Talking to one local real estate developer, I was pointed to the contemporary office buildings sprouting up in the new CBD as evidence of strong demand from new corporate customers. Additionally, the new jobs created by the software and outsourcing industries are offering better wages, and the average residential property prices are still one-third of that in Beijing, Shanghai and Shenzhen, making Chengdu attractive with a firm long-term outlook.
Another obvious beneficiary of Chengdu’s development is the local infrastructure. With a population of 11 million and car ownership already over 2 million, Chengdu is building new roads and expanding its subway systems to support this rapid urbanization. A local toll road company I visited also confirmed that they are not only experiencing a rapid increase in traffic, they are also busy constructing new toll roads, expanding the current network to accommodate the growing traffic volume.
As China rebalances its growth model and allows its western regions to catch up to the east coast, cities like Chengdu (which have enjoyed a relatively low-cost advantage) are developing a lead in new, fast-growing industries and have the potential to be the next growth engine of China’s economic development.
Yu Zhang, CFA
Research Analyst
Matthews International Capital Management, LLC
(c) Matthews Asia
