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Due to its remoteness, Kunming has been an economic backwater in China for most of the last 20 years, though this has changed as China’s trade with Southeast Asia has growth and the “Go West” policy was implemented.

For Kunming, the success of the “Go West” policy was a boom as companies have looked to Chengdu and Chongqing as primary manufacturing, research, and consumer markets in the West.  As the focus has shifted towards Chengdu and Chongqing, Kunming was put on the radar screen of many companies, and the result has been increased investment and economic growth.

Kunming is surrounded by natural resources located in the center of China’s agricultural and mineral production areas. It is being groomed by provincial and national leaders to serve as a main commercial and financial hub for the upcoming China-ASEAN (Association of Southeast Asian Nations) Free Trade Area (FTA). China and the ASEAN member countries signed the world’s largest FTA agreement this year for 1.8 billion people.  It will go into effect in 2010.

Infrastructure improvements already underway indicate Beijing’s expectations for Kunming's near future: Kunming will have a new airport in 2008 that will be China's third largest; a highway is being built to connect Kunming with Singapore; rail links connecting Kunming to Southeast Asia are being built or expanded; and most recently it was announced that India and China are going to rebuild the Stilwell Road, which will connect Kunming with Ledo in northeast India's Assam state.

Economic Overview:

Located at 2000 meters, Kunming’s economy has historically been dependent upon its natural resources (wood, minerals, coal, and metals).  Through its trade contacts with more than 70 countries and regions in the world, Kunming has mostly exported tobacco, machinery and electrical equipment, chemical and agricultural products and non-ferrous metals in the past to South East Asia and to other parts of China for processing and manufacturing.  With what is considered to be the best weather in China, Kunming is also experiencing a rise in tourism.

For the past 4 years, Kunming has shown strong macroeconomic growth in GDP and FDI, as shown in figures 1 and 2.  Kunming, the capital of the Yunnan province, has experiences slower nominal growth in its economy when compared to other second tier cities, however, in real terms Kunming is currently experiencing its own macroeconomic boom. With the population expected to nearly double in the next 4 years, Kunming’s growth is primarily being catalyzed by the growth in neighboring Chengdu and Chongqing.  As a beneficiary and target of the “Go West” policy, Kunming will continue to enjoy the support of the Central Government and will continue to enjoy the interest of many foreign and domestic manufacturers looking to invest in new manufacturing facilities in China.

As can be seen by the increases in disposable income, savings, and annual consumption, the residents of Kunming are now able to afford a higher quality of life and are able to spend more money.  The best example of this ability of Kunming residents, are the reports that there are more than 300 cars being bought each day, and the resulting traffic that has become China’s most famous.

Foreign Presence

Historically Kunming, more than Chongqing and Chengdu, has had difficulty in attracting large foreign investments because it was a difficult place to export manufactured goods from. While having a better living standard than other second tier cities, it remained largely in the shadows of Chongqing and Chengdu due to its longer transportation times and higher transportation costs to reach markets.  However, many companies from the West and Southeast Asia are seeing Kunming as a future market for manufacturing and sales of fast moving consumer goods (FCMG). 

In addition to this growing market incentive, the Government has put several policies into effect to bring in more foreign companies. For example, a foreign company can register a wholly foreign-owned enterprise (WFOE) to foreigners investing as little as $35,000 USD (compared to the $140,000 USD required in Shanghai).

Compared to many other second tier cities, Kunming has lagged behind in attracting FDI into the city.  With only 58 new contracts in 2003, Kunming was nearly 150 contracts behind Chengdu and Chongqing.  However ,the amount of contracted and utilized FDI has show gains for the last 4 years and as Chongqing and Chengdu continue to develop and expand the trend will continue. With commitments from Fraport and Changi for the new Kunming Airport and other multinationals establishing manufacturing facilities, this trend will continue for the near term.  Recently, Kunming has begun to win multinational investments because Kunming offered lower costs of labor, setup, and at the same time, a rising population experiencing growth in per capital income. 

To continue its growth and leverage natural resources, Kunming is trying to attract foreign investment in the following areas:

• Infrastructure
• Development of agricultural and biological products
• Development of mineral resources
• High technology
• Environmental production

Conclusions

Kunming is a city that appears to be at a crossroads where the economy is at the tipping point of expanding very quickly with millions of people moving to the city while real estate industry is still undergoing its own growing pains.

In the near term (1-3 years), Kunming has a higher risk profile than Chongqing or Chengdu because its economy is 3-5 years behind in terms of infrastructure, knowledge base, and exposure in the international community. However, as the only 2nd tier city south of Chongqing and Chengdu, Kunming will see increased interest from foreign companies much like Suzhou with Shanghai and Tianjin with Beijing.   As regional powerhouses Chongqing and Chengdu grow, Kunming will become the less expensive manufacturing market in the southwest. It is already gaining attention from many foreign companies.