Pacific Money

China’s Air Hub Plan

Using airports to create inland SEZs: a savvy growth strategy or misdirected investment?

Less than a year ago, I was in a meeting in which a Chinese official mentioned how a variation on the concept of the old “Special Economic Zone” (SEZ)* was being considered as a model in which an inland city could boost its growth and reform its economy. As Chinese SEZs had traditionally been set up in coastal cities (with easy access to outside markets) or occasionally in border cities or other areas with good outside links (rivers for example) I asked for a more detailed explanation.

What it boiled down to, to simplify, was that “air-hubs” could be established to enable “inland SEZs.” All the usual SEZ characteristics such as special tax benefits; imported component assembly processes; and attractive foreign investment conditions would allow the area to develop rapidly, if an air transport hub could connect such an area to global markets. Areas nearby the “air-hub serviced SEZ” could benefit from supplying labor, components and materials into the special zone.

China has been through a bit of an airport building boom in recent years, as local governments saw such massive land-investment-infrastructure projects as an ideal way to counteract the economic slowdown which emerged as the global financial crisis struck the country. And why not? Once built, airports provide jobs, boost tourism and tax revenues and increase the profile of a city.

There have been varying figures for just how many new airports China is building;  The Telegraph reported the figure at 70 new airports by 2015 (in this article from last summer); Bloomberg Business Week put it at 55 new airports by the end of the current five year plan (also by 2015); whilst Forbes went as high as 82 new airports by the end of the same year.

Whichever turns out to be the case, airports in China have been under pressure. In 2011, the CAA (China’s Civil Aviation Administration) announced the disturbing news that 75% of China’s airports were operating at a loss, and this is remembering the subsidized below-market or even negative interest rates that such projects have to pay. Right now, China has 183 operating airports, and a staggering 143 of those are in the red.

With the fabled elixir of airport-hub driven growth and transformation luring in at least 50 cities, there are certainly going to be a lot of losers along with the few winners. In many ways, the plans sound eerily similar to reports that numerous cities were planning to become “international financial centers.” After all, strong financial centers tend to develop naturally for reasons outside of government planning: New York, London, Singapore or Hong Kong, for example. Special Economic Zones performed so well because they were located naturally near to export routes. An “air-hub SEZ” may be the natural next step for cities or provinces which have built loss-making airports, but with high prices for air freight, and so many competing plans, this may turn out to be another case of government misdirected investment.

*- Special Economic Zones were the cornerstone of China’s “opening up” in the early 1980s, initially in Shenzhen, Zhuhai and Guangdong, but later in many other coastal cities such as Dalian, Tianjin and Shanghai.