Western Hub

The ancient capital is repositioning itself as northwest China’s technology and transportation hubby Virginia A. HulmeCapital of Shaanxi, Xi’an lies in the geographic center of China. More than 3,000 years old, Xi’an was China’s capital for more than 1,000 years and 13 dynasties. But there is more to this ancient city than the famed terracotta warriors, imperial hot springs, and city walls. Sixty percent of the Shenzhou 6, the spaceship that carried China’s second manned space flight, was made in Xi’an, a fact that hints at the city’s technical prowess.

The city’s five official pillar industries largely reflect this history and technical strength: tourism; high technology, including national defense industries, particularly aeronautics such as satellites, missiles, and planes; equipment manufacturing; culture and education; and modern services, such as logistics, finance, and consulting. Chief among Xi’an’s strengths for foreign investors are its transportation links and its technically skilled workforce.

The heart of China

Xi’an’s central location gives ready access to 600 million consumers and 10 provincial capitals within 12 hours’ travel time. Seven highways connect Xi’an to Baotou, Inner Mongolia; Chengdu, Sichuan; Chongqing; Hefei, Anhui; Lanzhou, Gansu; Shijiazhuang, Hebei; Taiyuan, Shanxi; Wuhan, Hubei; Yinchuan, Ningxia; and Zhengzhou, Henan. The ports of Lianyungang, Jiangsu; Qingdao, Shandong; Shanghai; and Tianjin are only one day away by truck, or four days by rail.

Xi’an is also on the Eurasia rail link, which runs from Lianyungang in Jiangsu to Rotterdam in the Netherlands, giving firms in the city the option of shipping to Central Asia and Europe by rail. (Technical, tax, and customs barriers of the countries along the route currently lessen the appeal of this option, however.) In 2004, Xi’an’s rail stations processed 23.8 million passengers and 41.3 million tons of freight, up 26.1 percent and 12.7 percent from 2003, respectively.

Travelers can fly to six international destinations from Xi’an—Seoul and Pusan in South Korea and Tokyo, Nagoya, Niigata, and Fukuoka in Japan—as well as nearly 50 other Chinese cities, including Hong Kong and Macao. In 2004, 6.3 million passengers and 111,000 tons of cargo flowed through the Xi’an Xianyang International Airport, up 45 percent and 28 percent over 2003, respectively.

Foreign investment

By the end of 2005, Xi’an had attracted 2,258 companies from 58 countries, with a total utilized foreign investment of $3.12 billion. More than 30 Fortune 500 enterprises have set up in Xi’an.

Preferential policies

Xi’an offers several tax incentives for foreign investors, in addition to various national-level policies. Most of these incentives focus on export-oriented enterprises and those in high-tech and other encouraged sectors.

For instance, manufacturing foreign-invested enterprises (FIEs) are normally taxed at a rate of 24 percent. Between 2001 and 2010, enterprises in sectors in which the state encourages investment are taxed at 15 percent. High-tech enterprises registered in the Xi’an High-Tech Industries Development Zone and manufacturing enterprises registered in the Xi’an Economic and Technology Development Zone (ETDZ) are also taxed at 15 percent. Advanced technology enterprises may qualify for additional tax breaks.

FIEs that reinvest profits may receive a refund of 40 percent of the tax paid by the enterprises in which the money was reinvested; that amount rises to 100 percent for export-oriented or advanced technical enterprises. Most FIEs that export 70 percent of their total annual output value can recover half of their income tax paid that year.

Income gained from the transfer of technology, technical development, and related technical consultation and services may be exempt from business tax. In some cases, FIEs may deduct half of research and development (R&D) expenses from the income tax payable that year. Export-oriented or advanced technology FIEs, or those in other favored industries, can be exempted from local income tax, city real estate tax, and vehicle- and ship-use license tax.

A new attitude

One of the more interesting aspects of the foreign investment climate in Xi’an is the determination of city and zone officials, particularly in the high-tech zone and the Bureau of Foreign Trade and Economic Cooperation, to serve investors better. This determination stems, at least in part, from the loss of a large investment to a rival city.

Xi’an’s main competitor in the race to attract foreign investment is Chengdu, capital of Sichuan. Xi’an officials were rudely awakened in 2003, when Intel Corp., which had looked at both cities, chose Chengdu for a $375 million investment. Xi’an officials interviewed for this article were refreshingly frank about their need to do better, noting that the Intel incident led the city to overhaul its investment promotion policies. Now, say Xi’an officials, high-level administrators make investment promotion a top priority—an attitude that is relatively rare among officials in western China. At the working level, every agency related to investment has experts on hand to perform feasibility studies quickly, and 23 teams provide assistance to potential investment projects. The effort seems to be bearing fruit. In recent years, Xi’an has attracted large investments from ABB Inc., Applied Materials, Inc., and Micron Technology, Inc.

Despite these successes, city officials note that foreign investors may still face challenges, such as finding all the necessary information to make business decisions. To help foreign investors navigate the regulatory maze, Xi’an, like many other Chinese cities, has created a “Green Channel,” or a one-stop service area that brings 40 different government departments together in one location. Several officials admitted that the city’s soft environment is not as good as that of most east coast cities, but is improving.

In the zone

Xi’an has two main investment zones, the Xi’an ETDZ and the Xi’an High-Tech Industries Development Zone. The Yanliang National Aviation High-Tech Industrial Base, approved by the National Development and Reform Commission in 2004, is a relatively new national-level zone. Local-level zones include the Qujiang Tourism and Holiday Resort Development Zone, located near the Dayan Pagoda and featuring a reconstructed Tang Dynasty garden, and the Chang-Ba Ecological Zone, where a conference center for the Boao Forum for Asia is to be built.

Xi’an ETDZ

The Xi’an ETDZ, located on the north side of the city, was established in 1993 and became a national-level zone in 2000. In 2002, the ETDZ opened the first export-processing zone (EPZ) in northwest China. Goods can clear customs in the EPZ, which provides a 24-hour clearance service. In the first three quarters of 2005, the ETDZ exported goods worth $135.4 million.

Xi’an ETDZ boasts 1,800 companies, 600 of which are FIEs. Of these, 15 are Fortune 500 companies, including ABB Inc., BP, the Coca-Cola Co., Hitachi Ltd., Mitsubishi Corp., and Siemens AG. Companies in the zone focus on petrochemical, electronics, food and beverages, and biopharmaceuticals.

Xi’an ETDZ has spent ¥3 billion ($374.6 million) on infrastructure and plans to spend another ¥3 billion in the next two years. As part of these plans, the zone will develop four sub-zones. The central zone will focus on modern services, such as real estate, finance, and insurance; trade and commerce; catering; and entertainment. The EPZ will focus on machinery and electronics production. The Jing-Wei Industrial Zone will concentrate on making heavy-duty trucks, new materials, and machinery and equipment. Finally, the Caotan Ecological Industrial Zone hopes to take advantage of plans to relocate the city government to grow into the new city center, with a focus on food processing, biopharmaceuticals, culture, education, and entertainment. The city’s new railway station will be located in the ETDZ.

Xi’an High-Tech Industries Development Zone

Located in the southwest corner of the city, the Xi’an High-Tech Industries Development Zone, established in 1988, won national-level approval in 1991. The zone features a business incubator and specialized parks for software, pharmaceuticals, and other industries. Its main industries are electronic information, equipment manufacturing, biomedicine, and autos. Of the zone’s 6,000-plus enterprises, roughly 10 percent are FIEs. The zone also aims to attract innovative companies; according to zone officials, it already has 6,000 innovative projects, some of which have won patents. In addition, some of the processing operations use their own inventions. Foreign companies in the zone include Honeywell, Royal Philips Electronics NV, Robert Bosch GMBH, Brother Industries, Ltd., NEC Corp., Fedders Corp., Fujitsu Ltd., and PepsiCo, Inc.

Like Xi’an’s city foreign investment officials, the high-tech zone officials emphasize that they have changed their mindset “from management to service.” The zone’s investment promotion bureau introduces potential investors to the zone, the investment service bureau signs the investment agreement for land and construction, and the economic development bureau helps investors find their way through the maze of regulatory approvals needed to set up a firm in China. The zone also offers incentives for technology start-ups by Chinese who have studied abroad, R&D centers, and other companies with a technology component.

Strong hard skills, weaker soft skills

One of Xi’an’s advantages is its technically skilled workforce. The city has 37 public and 36 private universities, more than 660 research institutes, 400,000 specialized technicians, 800,000 university students, and 150,000 information technology engineers. These institutions provide a deep pool of technical talent for companies based in the city.

Compared with eastern locations, however, Xi’an’s workforce is relatively weak in management skills, and most people, whether in business or government, have had much less exposure to foreign companies than their eastern counterparts. For example, one company interviewed for this article noted that communication is not as open and clear as it is on the east coast and that companies have to follow up more to make sure things get done.

As in other interior cities, costs are significantly lower than on the east coast. City investment literature from 2005 estimated labor costs ranging from ¥400-¥600 ($50-$75) per month for an unskilled worker up to ¥2,500-¥7,000 ($312-$874) for experienced technical staff. Real estate is also cheaper, with monthly office and residential rents ranging from ¥30-¥70 ($3.75-$8.74) and ¥9-¥25 ($1.12-$3.12) per square meter, respectively.

Environment

Although Shaanxi is often thought of as a dry and dusty place, local officials say that Xi’an has access to plenty of water. The city gets its drinking water from the Qinling Mountains, which lie to the south of the city. Eight rivers also flow through the municipal area. Water may not be in short supply, but its quality is dubious. The Shaanxi Provincial Environmental Protection Bureau reports that in 2004, 77 percent of samples taken from the Wei River, the largest river flowing through southern Shaanxi, were Grade IV or below—not fit for direct human use.

Like all major Chinese cities, Xi’an is struggling to reduce air pollution, and air quality has improved since coal burning was banned in the city center in 2002. Plans to replace coal with natural gas as the city’s main source of fuel may raise air quality further. Many of the city’s taxis already run on natural gas. Whether such gains can outpace the inevitable rise in the number of cars on the road is open to question.

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11th Five-Year Plan Highlights

Xi’an’s 11th Five-Year Plan (2006-10) focuses on building and improving infrastructure, both inside of the city and between Xi’an and other cities.

Main Goals

• Attain average annual GDP growth of 12 percent
• Construct new city center north of Wei River
• Use natural gas for 97 percent of energy by 2010
• Upgrade water, power, and heating systems
• Improve water quality in eight rivers
• Develop six key industries: high technology, equipment manufacturing, tourism, cultural industry (exchanges, film, performances), modern services, and software
• Move city government north to south bank of Wei River and build new city center there

Transportation Projects

• Build two subway lines
• Develop rail hub ranked fifth nationwide
• Build new Xi’an-Zhengzhou railway
• Build Beihuan cargo line from Xi’an to nearby cities
• Build Xinzhu container transportation center
• Build Xinfeng cargo marshalling yard, to be the largest in northwest China
• Build Xi’an North Railway Station
• Expand Xi’an Xianyang International Airport
• Finish third ring road
• Build freeways to Hangzhou, Zhejiang; Hefei, Anhui; and Nanjing, Jiangsu

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Xi’an at a Glance

Contacts

Government and Chinese Communist Party
Party Secretary: Yuan Chunqing
Mayor: Sun Qingyun
Vice Mayors: Chen Baogen, Dong Jun, Jiang Shuying, Han Song, Zhang Daohong, Qiao Zheng, Yang Guangxin, Zhu Zhisheng, Huang Xingshen
www.xa.gov.cn

Xi’an Municipal Development and Reform Commission
Director: Wang Xuedong
Address: 159 Beiyuanmen
Tel: 86-29-8729-5821
Fax: 86-29-8721-0878
www.xainvest.gov.cn

Xi’an Municipal Bureau of Foreign Trade and Economic Cooperation
Director: Wang Yi
Address: 68 Middle Section, Huangchengnanlu
Tel: 86-29-8786-2620
Fax: 86-29-8785-3288
www.xianonlineinvest.org

Xi’an Municipal Administration of Industry and Commerce
Director: Du Mengxi
Address: 298 Youyidonglu
Tel: 86-29-8782-3126
Fax: 86-29-8782-3013
www.xags.gov.cn

China Council for the Promotion of International Trade Xi’an Sub-Council
Director: Zhao Hongzhuan
Address: B25/F., Pioneer Square,
48 Kejilu
Tel: 86-29-8835-0391
Fax: 86-29-8835-0389
www.ccpitxian.org

Zones

Xi’an Economic and Technological Development Zone
Director: Yue Huafeng
Address: Fengchengjiulu
Tel: 86-29-8651-0118
Fax: 86-29-8652-1102
www.xetdz.com.cn

Xi’an High-Tech Industries Zone
Director: Jing Junhai
Address: Pioneer Square, 48 Kejilu
Tel: 86-29-8833-3726
Fax: 86-29-8833-3606
www.xdz.com.cn

Xi’an National Yanliang Aviation High-Tech Base
Director: Yang Guangxin
Address: 54 Renminxilu,
Yanliang District
Tel: 86-29-8685-5308
Fax: 86-29-8685-5309
www.caib.gov.cn

Xi’an Qujiang New District

Director: Duan Xiannian
Address: 3 Yan’anyilu
Tel: 86-29-8559-9011
Fax: 86-29-8559-9015
www.qujiang.com.cn

Xi’an Chanhe and Bahe Comprehensive Treatment and Development Construction
Director: Wang Jun
Address: 48 Jinhuabeilu
Tel: 86-29-8259-2200
Fax: 86-29-8259-2200
www.xachanba.com.cn

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Virginia A. Hulme is editor of CBR.

The author would like to thank Lin Jun of the US-China Business Council’s Beijing office for his research assistance on this article.