April 1, 2013 | 1045 GMT
Editor's Note: This is the first piece in a three-part series on the geopolitical implications of China's move to transform the Yangtze River into a major internal economic corridor. Part one provides a broad overview of the geography and history of the Yangtze River region and its role in shaping Chinese politics and statecraft. Part two examines the strategic river city of Wuhan, and part three considers the political economy of Beijing's push to develop the Yangtze River corridor.
As the competitive advantage of low-cost, export-oriented manufacturing in China's coastal industrial hubs wanes, Beijing will rely more heavily on the cities along the western and central stretches of the Yangtze River to drive the development of a supplemental industrial base throughout the country's interior. Managing the migration of industrial activity from the coast to the interior -- and the social, political and economic strains that migration will create -- is a necessary precondition for the Communist Party's long-term goal of rebalancing toward a more stable and sustainable growth model based on higher domestic consumption. In other words, it is critical to ensuring long-term regime security.
The concept of developing the interior is rooted in the dynastic struggle to establish and maintain China as a unified power against internal forces of regional competition and disintegration. Those forces arise from and reflect a simple fact: China is in many ways as geographically, culturally, ethnically and economically diverse as Europe. That regional diversity, which breeds inequality and in turn competition, makes unified China an inherently fragile entity. It must constantly balance between the interests of the center and those of regions with distinct and often contradictory economic and political interests.
Currently, the Party's stated intent is eventually to achieve greater socio-economic parity between coastal and inland regions, as well as between cities and the rural hinterland. But Beijing also recognizes that underlying broad categories like "inland," "central" and "western" China is a complex patchwork of regional differences and inequality. Mitigating these differences will require more varied and nuanced policies.
Against this backdrop, the central government has targeted the Yangtze River economic corridor -- the urban industrial zones lining the Yangtze River from Chongqing to Shanghai -- as a key area for investment, development and urbanization in the coming years. Ultimately, the Party hopes to transform the Yangtze's main 2,800-kilometer-long (1,700-mile-long) navigable channel into a central superhighway for goods and people, better connecting China's less developed interior provinces to the coast and to each other by way of water -- a significantly cheaper form of transport than road or railway. By positioning this "second coastline" to become one of the nation's new economic cores, Beijing seeks to build what no previous dynasty could: a truly unified Chinese economy.
The Yangtze as a Core
The Yangtze River is the key geographic, ecological, cultural and economic feature of China. Stretching 6,418 kilometers from its source in the Tibetan Plateau to its terminus in the East China Sea, the river both divides and connects the country. To its north lie the wheat fields and coal mines of the North China Plain and Loess Plateau, which unified China's traditional political cores. Along its banks and to the south are the riverine wetlands and terraced mountain faces that historically supplied China with rice, tea, cotton and timber. The river passes through the highlands of the Yunnan-Guizhou Plateau, the fertile Sichuan Basin, the lakes and marshes of the Middle Yangtze and on to the trade hubs of the Yangtze River Delta. Its watershed touches 19 provinces and is central to the economic life of more people than the populations of Russia and the United States combined. The river's dozens of tributaries reach from Xian, in the southern Shaanxi province, to northern Guangdong -- a complex of capillaries without which China likely would never have coalesced into a single political entity.
VIDEO: The Strategic Importance of the Yangtze River
The Yangtze, even more than the Yellow River, dictates the internal constraints on and strategic imperatives of China's rulers. The Yellow River may be the origin of the Han Chinese civilization, but on its own it is far too weak to support the economic life of a great power. The Yellow River is China's Hudson or Delaware. By contrast, the Yangtze is China's Mississippi -- the river that enabled China to become an empire. Just as the Mississippi splits the United States into east and west, the Yangtze divides China into its two most basic geopolitical units: north and south. This division, more than any other, forms the basis of Chinese political history and provides China's rulers with their most fundamental strategic imperative: unity of the lands above and below the river. Without both north and south, there is no China, only regional powers. Only after the Qin captured the Yangtze's three primary regions -- the Upper, Middle and Lower stretches -- in 221 B.C., thereby gaining access to the southeast coast, did "China" as a single unit come into being. In the two millennia since, the Yangtze has continued to mark the boundary between kingdom and empire. The constant cycle between periods of unity (when one power takes the lands north and south of the Yangtze) and disunity (when that power breaks into its constituent regional parts) constitutes Chinese political history. If the Yangtze did not exist, or if its route had veered downward into South and Southeast Asia (like most of the rivers that begin on the Tibetan Plateau), China would be an altogether different and much less significant place. Its population would be much smaller, isolated to the southeast coast, Loess Plateau and North China Plain -- the only parts of Han China where economic life does not depend on the Yangtze. The provinces of central China, which today produce more rice than all of India, would be as barren as Central Asia. Regional commercial and political power bases like the Yangtze River Delta or the Sichuan Basin would never have emerged. The entire flow of Chinese history would be different.
Three regions in particular make up the bulk of the Yangtze River Basin: the Upper (encompassing present-day Sichuan and Chongqing), Middle (Hubei, Hunan and Jiangxi) and Lower Yangtze (Jiangsu and Zhejiang provinces, as well as Shanghai and parts of Anhui). Geography and time have made these regions into distinct and relatively autonomous units, each with its own history, culture and language. Each region has its own hubs -- Chengdu and Chongqing for the Upper Yangtze; Wuhan, Changsha and Nanchang for the Middle Yangtze; and Suzhou, Hangzhou and Shanghai for the Lower Yangtze. Each region has its own internal market networks, and each historically is more interested in protecting its autonomy and prosperity than uniting under the north's control. Conquering and integrating them from the outside therefore required not only overwhelming military power -- historically, northern China's advantage -- but also complex bureaucratic and internal security apparatuses. Finally, it required a transport and communications infrastructure comprehensive enough to make the exercise of central authority over vast distances and diverse populations feasible. Between 1949 and 1978, the Communist Party expanded those networks and laid that infrastructure with brutal efficiency. In many ways, China was more deeply united under Mao Zedong than under any emperor since Kangxi in the 18th century. After 1978, the foundations of internal cohesion began to shift and crack as the reform and opening process directed central government attention and investment away from the interior (Mao's power base) and toward the coast. Today, faced with the political and social consequences of that process, the Party is once again working to reintegrate and recentralize -- both in the sense of slowly reconsolidating central government control over key sectors of the economy and, more fundamentally, forcibly shifting the economy's productive core inland. The first phase of this process will be driven in large part by urbanization along the Yangtze River corridor, especially in the provinces that make up China's traditional Upper and Middle Yangtze regions. Politics and Economy of the Yangtze Today, the Yangtze River is by far the world's busiest inland waterway for freight transport. In 2011, more than 1.6 billion metric tons of goods passed through it, representing 40 percent of the nation's total inland waterborne cargo traffic and about 5 percent of all domestic goods transport that year -- up 250 percent from 2004. Over the last decade, dramatic increases in waterway freight traffic have been seen in some provinces along the Yangtze River corridor, such as Anhui (840 percent, to 364 million tons), Chongqing (640 percent, to 117 million tons) and Hunan (500 percent, to 179 million tons). By 2011, the nine provincial capitals that sit along the Yangtze and its major tributaries had a combined gross domestic product of $1 trillion, up from $155 billion in 2001. That gives these cities a total wealth roughly comparable to the gross domestic products of South Korea and Mexico. This growth, since roughly 2003, has been underpinned by a massive expansion in centrally allocated fixed-asset investment into the interior, and specifically to those parts of the interior Beijing considers most viable as potential alternative or supplemental industrial bases to the southeast coast. Unsurprisingly, areas with ready access to the Yangtze River system have been targeted as cores of future inland urbanization. In part, this is because cities like Chongqing and Wuhan already possess well-developed urban industrial infrastructures, the legacy of Mao's intensive focus on inland industrialization. This legacy in turn gives these cities comparatively more influence and leverage than less developed parts of the interior when it comes to extracting central government financial support. Finally, cities along the Yangtze benefit from geography: Transport by road is roughly 30-35 times more expensive than transport by water, and rail is 3-3.5 times as expensive, meaning that cities without direct access to the Yangtze are inherently less viable as manufacturing and trade hubs. Investment in further industrial development along the Yangtze River reflects not only an organic transformation in the structure of the Chinese economy but also the intersection of complex political forces. First, there is a clear shift in central government policy away from intensive focus on coastal manufacturing at the expense of the interior (the dominant approach throughout the 1990s and early 2000s) and toward better integrating China's diverse regions into a coherent national economy. But how that policy shift plays out on regional, provincial and local levels is shaped less by dictates from Beijing than by the political maneuvering of local and provincial governments for central government favor. Access to navigable waterways enables the cities of the western and central stretches of the Yangtze River to lobby more effectively for credit and tax rebates that might otherwise have gone to less competitive, landlocked provinces. Investment in the interior accelerated rapidly in the wake of the 2008-2009 financial crisis, when the sudden evaporation of external demand revealed just how fragile and imbalanced China's economy had become. Thirty years of export-oriented manufacturing centered in a handful of coastal cities generated huge wealth and created hundreds of millions of jobs. But it also created an economy characterized by deep discrepancies in the geographic allocation of resources and by very little internal cohesion. By 2001, the economies of Shanghai and Shenzhen, for instance, were in many ways more connected to those of Tokyo, Seoul and Los Angeles than of the hinterlands of Sichuan and Shaanxi provinces. For most of the 1990s and 2000s, this lack of cohesion was viewed as an unfortunate but necessary and temporary byproduct of an economic model that was otherwise doing its job. After the 2008-2009 financial crisis, internal economic disunity -- like the growth model it embodied -- became a social and political liability. The foundation of this model was an unending supply of cheap labor. In the 1980s, such workers came primarily from the coast. In the 1990s, when coastal labor pools had been largely exhausted, factories welcomed the influx of migrants from the interior. Soon, labor came to replace coal, iron ore and other raw materials as the interior's most important export to coastal industrial hubs. By the mid-2000s, between 250 million and 300 million migrant workers had fled from provinces like Henan, Anhui and Sichuan (where most people still lived on near-subsistence farming) in search of work in coastal cities. This continual supply of cheap labor from the interior kept Chinese manufacturing cost-competitive throughout the 2000s -- far longer than if Chinese factories had only had the existing coastal labor pool to rely on. But in doing so, it kept wages artificially low and, in turn, systematically undermined the development of a domestic consumer base. This was compounded by the fact that very little of the wealth generated by coastal manufacturing went to the workers. Instead, it went to the state in the form of savings deposits into state-owned banks, revenue from taxes and land sales, or profits for the state-owned and state-affiliated enterprises that controlled not only many of the major coastal factories but also the various inputs that made manufacturing possible: roads, rail and port construction; power generation; mining; and oil and natural gas. (Notably, state-owned enterprises continue to dominate heavy industrial manufacturing). This dual process -- accumulation of wealth by the state and systematic wage repression in low-end coastal manufacturing -- significantly hampered the development of China's domestic consumer base. But even more troubling was the effect of labor migration, coupled with the relative lack of central government attention to enhancing inland industry throughout the 1990s and early 2000s, on the economies of interior provinces. Remittances from the coast kept families in the interior alive and paid for children of migrant workers to attend school, but they did little to improve the overall vitality of inland provincial economies. As a result, when the children of the first generation of migrant laborers reached working age, many of them followed their parents to the coast, where employment opportunities were far more abundant. However, unlike their parents, who had families to care for back in Henan and Sichuan, the new generation of migrants had far less incentive to one day return inland, let alone send money back. With the possible exception of a handful of inland cities (Hefei, Wuhan, Changsha and Chongqing, all of which saw marginal to moderate population growth between 2001 and 2011), the interior came to represent poverty and backwardness, a place to abandon rather than to develop. Beijing has long understood that it will have to change that perception -- and the economic and policy realities underlying it -- before it can hope to address the growing structural imbalances of its current economic model. But in China, this is easier said than done. In trying to urbanize and industrialize the interior, Beijing is going against the grain of Chinese history -- a multimillennia saga of failed attempts to overcome the radical constraints of geography, population, food supply and culture through ambitious central government development programs. Though its efforts thus far have yielded notable successes, such as rapid expansion of the country's railway system and soaring economic growth rates among inland provinces, they have not yet addressed a number of pivotal questions. Before it can move forward, Beijing must address the reform of the hukou (or household registration) system and the continued reliance on centrally allocated investment, as opposed to consumption, as a driver of growth. http://www.stratfor.com/analysis/geopolitics-yangtze-river-developing-interior?utm_source=freelist-f&utm_medium=email&utm_campaign=20130412&utm_term=Yagntze&utm_content=readmore&elq=2809599b2238499894dec579cd757238 The Strategic Importance of the Yangtze River March 29, 2013 | 1811 GMT http://www.stratfor.com/video/strategic-importance-yangtze-river The Geopolitics of the Yangtze River: Wuhan's Rise 
StratforEditor's Note: This is the second piece in a three-part series on the geopolitical implications of China's move to transform the Yangtze River into a major internal economic corridor. Part one provides a broad overview of the geography and history of the Yangtze River region and its role in shaping Chinese politics and statecraft. Part two examines the strategic river city of Wuhan, and part three considers the political economy of Beijing's push to develop the Yangtze River corridor.
In a sense, Wuhan is the heart of modern China. It is not the country's most important economic or cultural hub, and aside from a brief stint in the 1920s as the Nationalist Party government's capital, it has never been China's official political center. But while Wuhan wields less heft than Beijing, Shanghai or Chongqing, its location at the intersection of the country's most important transport routes gives it a different kind of strategic significance for the Communist Party.
Situated at a bend in the Yangtze River near the geographic center of Han China, Wuhan is a natural transportation crossroads. From west to east, it binds the upper and lower stretches of the Yangtze together, serving as the intermediary for goods passing between the Sichuan Basin -- western China's industrial powerhouse -- and the Yangtze River Delta. From north to south, it anchors the Beijing-Guangzhou railway, a 2,324-kilometer-long (1,444-mile-long) trunk line that gives China's traditional political core, the North China Plain, direct access to the prosperous but historically restive Guangdong province.
Just as important as these national-level axes are the numerous interprovincial infrastructure linkages that converge on Wuhan. These roads, waterways and highways bring goods and people from inland provincial capitals such as Xian, Changsha, Kunming and Zhengzhou down to Wuhan's ports and, from there, on to Shanghai. The city serves to integrate China's disparate geographic and economic macro-regions into one coherent economic system and helps enable the central government to enforce political control and social management over these regions.
Wuhan's Growing Significance
Beijing increasingly recognizes Wuhan's importance in the evolving system of infrastructure linkages and as a core from which to gradually expand urbanization and industrial activity out into the rural hinterlands.
As a result, Beijing has launched state-level policy initiatives such as the "Rise of Central China" plan inaugurated in 2004 and the Hubei-Jiangxi-Hunan "Central Triangle" development program, which seeks to transform Wuhan, Changsha and Nanchang into one contiguous urban conglomerate to complement the Yangtze River Delta. Through these programs, Beijing has sought to build on Wuhan's inherent advantages -- its location roughly equidistant from both Chongqing and Shanghai; its physical, historical and economic ties to nearby urban centers such as Changsha and Jiujiang; an extremely high per capita distribution of top-level universities and research institutes; and well-established and influential steel and automaking industries, among others -- to frame the city as both a driver and a model for future inland development. These efforts are most obviously manifested in Wuhan's substantial economic growth over the last decade.
Between 2001 and 2011, fixed asset investment into Wuhan (much of it centrally allocated) rose nearly eightfold. Gross industrial output grew by 760 percent over the same period, while local government revenue grew by 680 percent and the city's gross regional product more than quadrupled. In 2011, 418 million tons of goods passed through Wuhan, an increase of more than 255 million tons from a decade before. More freight passed through Wuhan last year than any other inland city besides Chongqing. (Notably, because Wuhan's population is one-third the size of Chongqing's, its per capita freight traffic is actually almost 70 percent higher.) Its economy is now larger than those of Bangladesh, Angola and Morocco. Alone, it contributes almost 35 percent of Hubei's provincial gross domestic product despite housing only 17 percent of the province's population.
Wuhan's story over the past decade is one of unimpeded growth, rapid infrastructure development (on Dec. 12, 2012, the city opened the nation's first cross-Yangtze River subway, and it plans to have eight metro lines in operation by 2017) and rising living standards (reported per capita income in 2011 was 4.5 times greater than a decade before). But this was not always the case. In fact, over the last half century, the city has seen its fortunes rise and fall in lockstep with changes in the national political and economic climate. For much of the past three decades, as Deng Xiaoping's Reform and Opening process got under way, local Party leaders in Wuhan have struggled against not only the natural disadvantages facing all inland cities relative to coastal metropolises but also against the direct and indirect burdens imposed by central policies and provincial-level politicking.
A closer look at Wuhan's history, ancient and modern, helps explain both the particular dynamics of Wuhan's current "rise" as well as broader elements in Chinese political and economic organization. Wuhan's many iterations over the years reflect the extremely tight relationship between politics and economy in China, and the ways in which policy -- whether at the central or provincial level -- has shaped and guided the development of the Chinese economy throughout the Reform and Opening period.
Wuhan and the Evolution of the Middle Yangtze Region
The three cities that together constitute present-day Wuhan have existed in some form for more than 3,500 years and have served as important trading centers in central China since at least the sixth century B.C., when Hanyang (named, like its sister city, Hankou, after the Han River, a major tributary that flows into the Yangtze at Wuhan) emerged as a commercial hub in the prosperous and culturally sophisticated state of Chu. By the third century, the area around Wuhan had become the region's most important trading center. As the core of the Middle Yangtze region, this area was highly sought after by the competing states of Shu, Wu and Wei, which in 208-209 fought one of the most famous battles in Chinese history, the Battle of Red Cliffs, in the hills outside present-day Wuhan.
Over the next 16 centuries, the Middle Yangtze geographic region -- bound to the west by the outer wall of the Sichuan Basin, and to the south, east and north by a patchwork of mountain ranges -- further coalesced into a distinct and relatively independent political, economic and cultural unit. In times of dynastic unity, the Middle Yangtze was loosely subsumed under the center's control through bureaucratic and trade links. In times of disunity, it broke off into its own would-be state. Throughout, Wuhan remained the core around which the region's economic life revolved. Though the Middle Yangtze at times served as a supplier of raw materials (timber, cotton and grain) to the more advanced Yangtze Delta region, it relied far more heavily on its own internal commercial networks than on inter-regional trade. Like most parts of China before the mid-20th century, the Middle Yangtze had far more to do with itself -- economically and culturally -- than with other parts of the Chinese Empire.
It is critical to remember the degree to which geography imbued the inhabitants and rulers of China's regions with a strong sense of historical, cultural and political autonomy. As with the Middle Yangtze region, that autonomy was often undergirded by economic reality. Until recently, China has never had a truly unified economic system. Even today, these deep-seated regional differences manifest in strong competition between provinces for Beijing's "favor" -- government investment and preferential tax policies -- and low levels of interprovincial trade. In fact, though Beijing ultimately desires to build a genuinely integrated national economy, it often utilizes its ability, as the center, to exacerbate regional rivalries to solidify its own political and economic influence. Wuhan's experience over the last half century illustrates this strategy.
When Mao Zedong came to power, he sought to reassert central control over the economy by closing China to foreign trade. This entailed transferring much of the budding industrial plant around China's major international ports -- Shanghai and Guangzhou -- to inland provinces, Mao's primary power base. Some of that industrial plant went northeast in order to reinforce the region's role as a buffer against invasion via the Korean Peninsula. Much of the rest went to central China, and especially to Wuhan, which Mao quickly transformed into one of the country's most important industrial bases (founding, in the process, some of contemporary China's most powerful state-owned enterprises, such as Wuhan Iron and Steel Co.). When Mao died, Wuhan ranked fourth among Chinese cities in terms of fixed asset investment, industrial profits, tax revenue contributions to the central government and gross industrial output.
With the onset of Deng Xiaoping's Reform and Opening process in the 1980s, Wuhan's fortunes changed rapidly. By 1992, the city's gross regional product had fallen to 11th out of 35 cities surveyed by the State Statistical Bureau. Its gross industrial output fell to 13th over the same period, and its average annual growth rate dropped to 8 percent, below the national average of 8.7 percent and well under the 15-20 percent annual growth enjoyed by new coastal economic zones. In part, Wuhan's relative decline reflects the natural disadvantages of China's interior in a newly market-oriented system based on trade with the outside world. Distance and geography made export-oriented manufacturing in much of inland China economically unfeasible, especially given the region's poor infrastructure links to the coast at the time.
But in fact, Wuhan's shift in fortunes was affected, directly and indirectly, by the central government's decision to open coastal Special Economic Zones such as Shenzhen. These zones received enormous government investment in transport and power infrastructure, retained 100 percent of their foreign exchange revenues (compared to 25 percent for the rest of the country) and received significantly higher tax remittances from Beijing. In turn, the extra tax burden was shifted to cities like Wuhan, depressing local government revenue even as the central government dramatically reduced fixed-asset investment into interior China, thereby giving foreign investors even less incentive to look inland. And while Beijing in 1985 did officially grant Wuhan the economic powers of a province (meaning that Wuhan no longer paid taxes to the Hubei government, but only to Beijing), it did so without also implementing policies designed to attract foreign investment. In the end, this hindered Wuhan more than it helped. Not only was the city still unable to attract outside investment, but even its own provincial government came to view Wuhan as a competitor. Because it no longer drew tax revenue from Wuhan, Hubei worked instead to redirect resources and trade that normally would have ended up in the city elsewhere.
New Imperatives, New Policy Outlook
Beijing's policies in the 1950s grew from a strong need to reassert central control and move industrial activity away from the vulnerable coastline. As a result, cities such as Wuhan were prioritized and grew accordingly. By contrast, the central government's policies in the 1980s and 1990s grew from a need to attract the initial wave of foreign capital that would eventually give the central government the means to develop the rest of the country, even if it required temporarily retarding economic growth in -- and in many ways actively undermining the competitiveness of -- inland provinces. This need went hand in hand with the economic model now widely associated with China: high growth rates built on low-cost, export-oriented manufacturing clustered along the coast. In turn, the interior suffered.
As that model becomes economically, socially and politically untenable at a time of rising wages and input costs and weak external demand, Beijing is again working to reprioritize growth and investment into the interior. As a result, cities such as Wuhan, Chongqing and Hefei (the capital of Anhui province) have become sites for new Special Economic Zones (such as Chongqing's Liangjiang New Area), high-tech and industrial development zones (Wuhan's East Lake Zone and Anhui's "861 Plan" to develop eight new industries, including manufacturing) and large-scale transport and port development. Between 2011 and 2020, the central government plans to invest $28.6 billion to revamp Wuhan's port network, giving it a throughput of 200 million metric tons and 2 million 20-foot equivalent units by 2015 -- up from 100 million metric tons and 650,000 20-foot equivalent units in 2012 -- and adding a further 40 million metric tons and 3 million 20-foot equivalent units of capacity by 2020. In just the last two years, favorable central government policies have helped Wuhan attract investment from firms such as Honeywell ($60 million for a turbocharger factory), Ikea ($794 million for a shopping center), Lenovo ($790 million for research and development) and Shanghai General Motors ($1.1 billion).
The story these new investments help tell is not only or primarily one of natural economic cycles. Rather, Wuhan's ebbs and flows are a reflection of broad shifts in the balance of political power within the Communist Party, shifts in China's wider geopolitical environment and, ultimately, Beijing's evolving efforts to cope with fundamental constraints and achieve its strategic imperatives. Industrialization and urbanization of the Yangtze River corridor, of which Wuhan is just one node, is not simply an economic process, but rather one driven by a network of needs and interests.