Kunming and Nanning Evolving as Major Trade Links with Vietnam

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Oct. 15 – With much commentary these days on the “ripple effect” of China’s fast growing economy affecting other regional countries, one area in particular has been undergoing a massive, yet almost quiet revolution: Southwest China.

With yesterday’s news on Vietnam Briefing that Vietnam’s exports for 2008 are set to reach US$63 billion, the country cannot just be dismissed as a regional backwater with little infrastructure. Clearly, the infrastructure is there and is working to enable such a small country of 81 million achieve such a large amount of export value.

Much of this is centered in three areas: Hanoi in the north with its increasingly close infrastructural ties with Southwest China, Ho Chi Minh City in the south, and new rail links, partly funded by the Asian Development Bank (US$650 million) and partly by FDI into the country, which will connect the country with serious rail freight capability right down through Thailand to Singapore. Additional infrastructure developments include several bridges across the Mekong, which the World Bank is has promised US$500 million in funding for, in agreement with other Mekong border countries. These are expected to be operational partly by 2010 and fully by 2015. Clearly, Vietnam is moving ahead and solving its problems.

Today, however, when comments appear concerning a lack of infrastructure in Vietnam, they are usually referring to three things:

1) Rail: Yet the trans-Vietnam route is already being built .
2) Ports: Capable today of handling a maximum of 10,000 DWT, but have a look at the infrastructure developments taking place here which will see Cai Lang hit vessel size capability to 90,000 DWT and Danang to about 40,000 DWT by 2010. Clearly, port infrastructure problems are going to be increasingly a thing of the past, while development is taking place now.
3) A lack of domestic purchasing capability: Internally, Vietnam can be difficult still to travel by road, although this will improve. However, the market is not in Vietnam, it’s overseas. Getting product exported that really counts, and in this area Vietnam is increasingly becoming sophisticated.

This is impacting China, a major recipient of Vietnamese exports itself, in several ways, and not least the development of two of its regional cities, Kunming and Nanning.

These cities, in Yunnnan and Guangxi respectively, are a long way from the prosperous eastern coastal regions and until recently their development has been stunted by its isolation. Foreign investors have so far been much slower to embrace these cities, even when factoring in the central government implemented “Go West” policy, levels of FDI have remained low.

However, all this has been changing. Both are in a unique position to benefit from a potentially historic opportunity. Kunming and Nanning have been earmarked as major commercial and financial hubs for the upcoming China-Association of Southeast Asian Nations Free Trade Area. Once put into effect in 2010 the FTA will be the world’s largest, encompassing 1.8 billion people.

Kunming is one of China’s 30 second- or third-tier cities to watch in the coming five years according to the 2007 report, China 30: China’s Rising Urban Stars by real estate, by services firm Jones Lang LaSalle.

The report focused on the 26 mainland cities other than Shanghai, Beijing, Guangzhou and Shenzhen that the study believes will be on the radar screen of real estate occupiers, investors and developers over the next five years.

Kunming’s development with Vietnam
The white paper is positive regarding Kunming’s future prospects as an investment destination, particularly for the hotel and tourism industries. However, it was rated in the lower part of the top 30 mainland cities in terms of GDP growth and concentration of high technology. The city also lagged behind most other cities when its economic development was compared with that of Shanghai, however, that should not be a surprise. It does however group Kunming with Guangxi’s Nanning, Jiangsu’s Changzhou, Anhui’s Hefei and Nanchang in Jiangxi as “longer term winners.”

In 2007, Kunming’s GDP hit RMB139.4 billion, showing an increase of 12.5 percent from the year before. Per capita GDP was RMB22,578. The city lies just 490km from Hanoi with direct extensive rail and freight routes linking the two.

Traditionally Kunming has relied on favorable agricultural conditions to grow grain, oil-bearing plants, and cured tobacco among others. However, the growth of advanced technologies has seen a diversification of the local economy and industries such as biotech, optoelectronics, information technology, and machine tools have contributed significantly to the cities’ economic development.

Exports, mostly in the form of tobacco, machinery, electrical equipment, and chemical and agricultural products, increased 39 percent to US$3.24 billion in 2007. Imports also increased 45.10 percent to US$3.44 billion. Due to previous difficulties in transporting goods out of the region levels of foreign investment are still very low although due to the emergence of improved road and rail links to Vietnam this is expected to improve rapidly. In 2007 however, utilized FDI was just US$300 million. Opportunities are there for early birds.

The Kunming Economic and Technological Development Zone is a state-level zone that was first established in 1992, and now has a developed area of six square kilometers from a planned total of 9.8 square kilometers. It is situated to the east of Kunming, at 1,893 meters above sea-level. It is four kilometers from downtown Kunming, where the highways take you straight to the China-Laos border town of Mohan, the China-Vietnam border town of Hekou, and the China-Myanmar border town of Ruili. All three border towns are rated Grade A border ports of China.

A railroad network has been built around Kunming, consisting of the Guiyang-Kunming, Chengdu-Kunming, Nanning-Kunming, Kunming-Dali and Yunan-Vietnam railways. The zone is two kilometers away from the Kunming East Railway Station and four kilometers from the Kunming South Railway Station. Both are rail centers for cargo and passenger transportation.

The Kunming International Airport is only 1.8 kilometers away from the zone. It operates eight air routes to overseas airports such as Singapore, Rangoon, Kuala Lumpur, Seoul, Osaka, and more than 70 domestic routes to Hong Kong Macau and other cities.

The zone has access to ocean shipping at the Beihai and Fangcheng Ports in Guangxi province via the Nanning-Kunming railway, at Zhanjiang port of Guangdong province via the Guiyang-Kunming railway, and at Haiphong, Vietnam via the Yunnan-Vietnam Railway.

Nanning’s development with Vietnam
Nannings GDP hit US$15 billion last year and is growing at a rate of some 14 percent annually. Again, much of this growth has come from increased ties to Vietnam; it is also a rail terminus for goods coming from Hanoi and has a direct freight and passenger service, covering a distance of just 400km.

The city has a population of close to 7 million, and it must be remembered that the city is very well connected both by rail and sea to the wealthy markets of Guangdong Province to its immediate east – China’s richest province with the nation’s wealthiest per capita income. On top of that, it is also close to the golden eggs of Hong Kong and Macau, with their first world markets and income levels. Nanning is Vietnam’s key to getting products to Hong Kong.

As can be seen in the above mentioned Jones Lang LaSalle report, Nanning is also viewed favorably, and much of this has to do with its strategic position between Vietnam and South China’s wealth. This has not gone unnoticed by the Guangxi Provincial government, who has spent over US$2billion in upgrading Nannings infrastructure over the past six years to accommodate the increased flow through of Vietnamese trade.

New interstate highways have also been built, between Nanning and Guangzhou, and north into Chengdu and Chongqing. The same is true of rail; Nanning is in the central connecting point with direct access to major freight routes to Beijing, Shanghai and Guangzhou. Concerning ports, the city being inland has recently dredged the Xijiang River allowing 1,000 ton vessels to load here, much of these travels onto Hong Kong and Guangzhou. Its rail network also extends with major lines through to Beihai and Zhanjiang, both excellent deepwater facilities which equally service Hong Kong and South China in addition to Southeast Asia and beyond.

Southwest China, and now Kunming and Nanning in particular, must be seen as viable destinations for export processing businesses to ASEAN nations through the Vietnam corridor, and also as transshipment destinations for Vietnamese and ASEAN product entering China.

Meanwhile, with exports of US$63billion and increasing, and border cities such as Kunming and Nanning positioning themselves to accommodate the dynamic growth of Vietnamese manufactured products, now is the time to look ahead at the region, assess its potential for growth, and put aside concerns over a lack of Vietnamese infrastructure. As always, it is the early investor who catches the worm, and the Hanoi focused ASEAN free trade zone is going to be a major hot spot for multinational investors looking at manufacturing within the region.

This article was aggregated from three new China Briefing Regional Business Guides:
China Briefing Regional Business Guide to West China
China Briefing Regional Business Guide to South China and the Greater Pearl River Delta
China’s Neighbors

They can be ordered from the China Briefing Bookstore, priced US$25 each plus p&p.

For advice on investing in Kunming, Nanning or Hanoi, please email to info@dezshira.com for professional regional advice, or visit www.dezshira.com.