World Winning Cities

Global Foresight Series

China40The Rising Urban Stars

● By 2020 China’s Tier II and Tier III cities will play a significant role in the nation’s real estate market. Whilst the 2009 economic slowdown is clearly negatively affecting the short term prospects of China’s Tier II and III cities, their long term fundamentals remain strong. Compared to Tier I cities, they are somewhat sheltered from the global economic storm, reflecting their greater focus on domestic markets. Assuming China’s growing participation in the global economy, an improving regulatory framework and a return to robust economic growth by 2010–11, the country’s property market could quadruple in size by 2020. By then, Tier I cities may well account for less than 10% of commercial real estate activity in China, emphasising the massive opportunities in Tier II and III cities over the coming decade.

● Jones Lang LaSalle highlights 40 Tier II and III cities – the China40 – that we believe will be on the radar of property occupiers,

investors and developers over the next decade.The30citiesweidentifiedtwoyearsago1 continue to thrive and a number of cities have clearly moved ahead. Tianjin has further cemented its position as the leading Tier II city and possesses the greatest potentialtobecomeChina’sfifthTierIcity.Both Ningbo and Wuxi have been promoted from Tier III to Tier II status as a result of rapidly growing economic and real estate activity. Further down the city hierarchy, 10 new cities have been added to our watch list, including cities such as Foshan, Guiyang, Yantai and Shijazhuang.

● Our research has identified a number of cities that offer the best prospects for robust real estate demand over the medium to long term. We believe that Chengdu, Shenyang and Wuhan provide the best all-round potential across the office, retail and logistics property markets reflecting the strong fundamentals of these high-order Tier II cities.

China40: Executive Summary

1 China30, China’s Rising Urban Stars, World Winning Cities Series, Jones Lang LaSalle, 2007.

Fig 1: Future City Winners

Cities in red are those with the best long-term outlook in each sectorSource: Jones Lang LaSalle

Office Winners Logistics Winners Retail Winners

Changsha

Chengdu Chengdu Chengdu

Chongqing

Dalian

Hangzhou Hangzhou

Nanjing

Ningbo

Qingdao

Shenyang Shenyang Shenyang

Suzhou Suzhou

Tianjin Tianjin

Wenzhou

Wuhan Wuhan Wuhan

Wuxi

Zhengzhou

2 China40, 2009

China’s Tier II and Tier III CitiesJones Lang LaSalle highlights 40 Tier II and Tier III Chinese cities that will be on the radar of real estate occupiers, investors and developers over the next decade.

The China40 have been short-listed through a sieving process of 275 cities, based on a range of economic and real estate indicators.

XINJIANG

TIBET

QINGHAI

SICHUAN

SHANDONG

ZHEJIANG

GANSU

INNER MONGOLIA

GUIZHOU

YUNNAN

HAINAN

GUANGDONG

HEBEI

HENAN

SHANXI

ANHUI

HUNAN FUJIAN

TAIWAN

JIANGXI

J IL IN

HEILONGJIANG

GUANGXI

SHAANXI

LIAONING

HEBEI

J IANGSU

NINGXIA

CHONGQINGHUBEI

Indicates levels of economic and property activity

Tier II

Tier III

NantongSuzhou

Ningbo

WenzhouJinhuaShaoxing

Jiaxing

ChangzhouWuxi

Wuhan

Tianjin Dalian

Yantai

Nanjing

Jinan

Urumqi

Foshan

Fuzhou

Xiamen

Dongguan

Zhuhai

Harbin

Changchun

Shenyang

ShijiazhuangTaiyuan

XuzhouZhengzhouXian

HefeiHangzhou

Nanchang

Nanning

Guiyang

Kunming

Lanzhou

ChengduChongqing

Changsha

Qingdao

● For each of the main sectors we have short-listed 3 cities with the best long-term outlook:

Offices: Tianjin and Chongqing, with their visions to become the economic centres of northern and western China respectively, and Nanjing with its status as a rising regional headquarter location will undergo renewed growth in their office markets over the next decade.

Logistics: Chengdu, Qingdao and Zhengzhouallpossesssignificantlogisticspotential due to their strategic locations, access to a large population base and their growing roles as port or railway hubs.

Retail: Changsha, Wuhan and Wenzhou possess relatively undeveloped retail markets, but are well positioned to undergo a period of substantial growth.

● The combination of government policies and massive infrastructure investment will act together to open and funnel activity towards inner and north east Chinese cities. While the

majorityofTierIIandTierIIIcitieswillbenefitfrom this development, those cities with a combination of proactive governments, skilled labour force and good transportation links are best positioned to lead and succeed.

● Central and western cities, such as Chongqing, Chengdu, Wuhan, Xian, Lanzhou, Urumqi and Zhengzhou, will gain much from the many new roads and railways under construction. Coastal cities such as Qingdao, Ningbo, Tianjin, Xiamen and Dalian will continue to see significant growth in their logistics sectors as a result of the continued consolidation of port networks in the Yangtze River Delta, Pearl River Delta and Bohai Bay.

● The availability of skilled labour in a particular city is a key requirement and vital to a city’s attractiveness to service companies. Tier II cities such as Chengdu and Wuhan that offer a deep pool of skilled labour are best positionedtoattracthigh-tech,financial and other service industries.

China40, 2009 3

Business activity in China’s Tier II and Tier III cities has been on a rapid growth trajectory and they continue to offer significant new opportunities for those domestic and international real estate players prepared to look beyond China’s familiar Tier I cities of Shanghai, Beijing, Guangzhou and Shenzhen.

In 2006 Jones Lang LaSalle launched an in-depth research programme to assess the nature of real estate opportunities outside of China’s Tier I cities, to map out China’s new business locations and to identify the drivers that will create China’s future city hierarchy. The results of our first analysis were published in the 2007 China30 – a report that highlighted 30 Tier II and Tier III cities with sufficient indicators of growth potential to place them on the radar of occupiers, investors and developers.

All 30 cities have since shown impressive economic growth, but such has been the pace of city growth and real estate development over

the past two years, a significant review to this original study is now merited. Moreover, as we move into the more uncertain economic and business environment of 2009, there is clearly a great imperative for an up-to-date perspective on the relative long-term opportunities and risks across China’s secondary and tertiary cities.

This latest publication – China40 – provides an expanded list of 40 secondary and tertiary cities that are likely to outperform. Ten new cities – Foshan, Guiyang, Jiaxing, Jinhua, Nantong, Shaoxing, Shijiazhuang, Taiyuan, Xuzhou and Yantai – all show future promise and join the list of those cities which we expect to outperform over the next decade.

This report sets out to review how the original 30 Chinese cities have evolved over the past two years, to assess the main drivers of future city growth among the China40, and to identify the future city winners for each of the main property sectors.

Introducing China’s 40 Rising Urban Stars

‘China’s Tier II and Tier III cities are dynamic centres of economic development and continued growth. Massive infrastructure investment makes these markets increasingly accessible at a time when interest in China has shifted from being export oriented towards a focus on the domestic market.’Michael Klibaner, Head of Research Shanghai, Jones Lang LaSalle

Fig 2: City Evolution Curve

Source: Jones Lang LaSalle

Low

Low

High

Economic Index

Tier II

Tier III

Prop

erty

Index

High

Growth Stage Tier I BenchmarkEarly Adopters Dormant

Shenzhen

Chengdu

Chongqing

Dalian

Dongguan

Hangzhou

Nanjing

Qingdao

Shenyang

Suzhou

Tianjin

Wuhan

Xiamen

Xian

Ningbo

Wuxi

ChangchunChangshaFuzhou

HarbinHefei Jinan

Kunming

NanchangZhuhai

Zhengzhou

Foshan

GuiyangJiaxing

JinhuaLanzhou

Nantong

Shaoxing ShijiazhuangTaiyuan

Urumqi WenzhouXuzhou Yantai

Nanning

Changzhou

4 China40, 2009

Defining City Tiers Jones Lang LaSalle’s city tiering system is based on the combined current levels of economic and real estate activity (supply and demand) in the main property sectors.

Tier I cities comprise of the cities of Beijing, Shanghai, Guangzhou and Shenzhen. Tier II cities correspond to cities in the ‘Growth’ stage and Tier III correspond to cities in the ‘Early Adopter’ and ‘Dormant’ stages (see Figure 2).

Cities can move between tiers as market circumstances change. For example, Ningbo and Wuxi moved from a Tier III to a Tier II in 2009 to reflect increasing levels of real estate activity.

Mapping the OpportunitiesJones Lang LaSalle has developed a framework to assess how and when each of the China40 cities will emerge as interesting locations for the real estate market. We have consolidated our intelligence, information and views in order to create a city evolution curve and clustered the China40 cities into three stages – growth, early adopters and dormant.

Stages of City EvolutionGrowth Cities: These cities, led by Tianjin and Chengdu, typically have influential mayors or effective municipal governments and clear strategies for the future. The entrance of international and domestic banks, manufacturing firms, retailers and hotel operators has created strong demand in real estate markets. Many international real estate advisors and consultancy firms are planning to or have already opened offices in these cities.

Early Adopters Cities: This is the stage when cities are developing a clear vision of their future and setting in place the conditions to create a solid economic profile. Some are beginning to have success at creating real estate demand from domestic and foreign companies. Market transparency and the availability of property data are significantly lower than those in the Growth stage.

Dormant Cities are those where the economy is still almost entirely locally based and growth lags more successful neighbours. These cities show potential to grow based on a mix of strengths across an improving economic base, effective governance, skilled or appropriate labour bases and the development of specialist activities.

Jostling For PositionThe 30 Chinese cities we identified just two years ago continue to thrive and a number of cities have clearly moved ahead. Tianjin has further cemented its position as the leading Tier II city and possesses the greatest potential to become China’s fifth Tier I city. In recent years the city has received enormous attention as a result of the development of its Binhai New Area. FDI in Tianjin has continued to climb and reached USD 5.3bn in 2007, the third highest amount in China behind Shanghai and Suzhou.

In terms of city growth, Tier II and III cities continue to outpace the more mature cities of Beijing, Shanghai, Guangzhou and Shenzhen, albeit they still have a long way to close the gap. From 2005–07 average annual GDP growth in the China30 was 20% pa, 5% higher than the average growth of the four Tier I cities.

Figure 3 ranks city growth based upon the average growth rate across indicators relevant to the economy, education, infrastructure, wealth and investment. The strongest growth over the past two years has occurred in the cities of Zhengzhou, Chongqing, Hefei and Kunming, as economic activity continues to ripple from the coastal regions. Hefei, one of the smaller economies among the China30 has seen its economy growing at 17–18% pa over the past two years. Hefei, as well as Zhengzhou and Chongqing are particularly attractive for manufacturing due to their central locations, good and improving transportation links and low labour costs. Kunming’s growth lies in its attraction as a tourist destination and proximity to neighbouring trading partners such as India and South East Asia.

These high growth cities have also been characterised by rapidly rising FDI levels. Kunming’s attractive business environment has resulted in the largest percentage increase in FDI among the China30 (up by 263% from 2005–2007), albeit from comparatively low levels. Likewise, FDI levels in Zhengzhou, Chongqing and Hefei doubled and have broken through the USD 1bn mark.

China40, 2009 5

Fig 3: City Economic Growth (2006–08)

Source: Jones Lang LaSalle

Proven Winners

Shenzhen

Zhengzhou

Chongqing

Hefei

Kunming

Nanning

Xian

Changsha

Chengdu

Xiamen

Shenyang

Fuzhou

Harbin

Changzhou

Dongguan

Wuxi

Tianjin

Suzhou

Wuhan

Nanchang

Jinan

Changchun

Hangzhou

Nanjing

Ningbo

Dalian

Qingdao

HighLow

Tier I Benchmark Tier II Tier III

Fig 4: Property Activity Growth (2006–08)

Source: Jones Lang LaSalle

HighLow

Shenzhen

Xian

Shenyang

Tianjin

Hangzhou

Chongqing

Wuhan

Ningbo

Changsha

Hefei

Nanchang

Chengdu

Wuxi

Zhengzhou

Changchun

Changzhou

Suzhou

Kunming

Dalian

Qingdao

Dongguan

Nanjing

Xiamen

Harbin

Nanning

Fuzhou

Jinan

Tier I Benchmark Tier II Tier III

6 China40, 2009

The China30 are all witness to growing property market activity as a result of increasing demand from expanding companies. Improving transparency is further enticing domestic and opportunistic cross border investors. The fastest growing property markets are found in the larger Tier II cities, notably Xian, Shenyang, Tianjin and Hangzhou(Figure4).Thecities’efficienttransportation links and good access to skilled labour make them attractive locations for the manufacturing and logistics sectors. Tianjin for example has attracted Airbus, while Shenyang is home to a new General Motors joint venture facility.

Within the office sector, Tianjin is proving to be a favoured location for financial services; this is evidenced by the strong presence of foreign banks such as HSBC and Standard Chartered. Access to large consumer markets and increasing wealth creation are also attracting a wide variety of retailers. Shenyang and Hangzhou for example are popular for luxury

retailers such as Gucci due to their wealthy catchments, while Tianjin and Chongqing which have less developed retail markets have attracted a number of big box retailers such as Wal-Mart. Amongst the Tier III cities Hefei is one of the more popular destinations for foreign companies. Hefei’s status as one of the four main ‘Science and Education Bases’, its good transport connections and low labour costs are among the factors attracting big name manufacturers such as Unilever and Coca-Cola.

Some cities have grown sufficiently over the past two years to firmly place them in the next tier or stage of city development. Ningbo, which is now connected to Shanghai by the Hangzhou Bay Bridge, and Wuxi, which is home to Caterpillar’s new R&D centre, have both been promoted to Tier II status, while Kunming, Hefei and Nanchang have all moved up from the Dormant stage and are now in the Early Adopters stage.

China30 Progress The China30’s success in competing for foreign investment is clearly visible from a number of exceptional business wins.

Dalian Intel recently announced the construction of a new USD 2.5bn chip plant that is expected to employ 1,500 people when completed in 2010. This is the company’s largest investment outside the US and represents one of the largest foreign investments in China to date. Once the plant is completed Dalian will become the largest chip production base in Asia. Intel’s main reasons for choosing the city include its good infrastructure, geographical advantages and business friendly government.

Tianjin Airbus announced the construction of a new plant in Tianjin Binhai NewAreaandthefirstA320planeisexpectedtobecompletedin2009. Total investment is estimated at around RMB 8–10bn. Other major aviation investments include Boeing and China Aviation Industry Corporation’s new USD 21m assembly plant for their joint venture company, scheduled for completion in 2010, and China Aviation Corporation’s USD 1.2bn.

Suzhou Wyeth, a large pharmaceutical company, recently announced plans to open a USD 300m plant in Suzhou by 2010. In September 2008, Samsung announced plans to build a USD 150m liquid crystal display (LCD) plant in Suzhou. This will be the firm’s second plant in the city.

WuxiIn August 2008, Caterpillar announced its investment of USD 100m in a new R&D centre in Wuxi, due for completion in 2009 (its third R&D centre in China).

ChengduIn early 2007, IBM established an R&D centre in Tianfu Software Park, to the southwest of the city and set up 500 technicians in a 5,000 sqm unit.

ShenyangIn December 2008, General Motors and SAIC Motor opened a USD 390m car manufacturing plant in Shenyang. The joint venture is the second plant established in the city and will produce 150,000 cars per year.

China40, 2009 7

New City Entrants – Changing the Map of ChinaWe have identified 10 new cities which are seeing success and growing advantages. Not only are cities moving up the hierarchy but new cities are continually emerging on our watch list.

Of the 10 new cities we have identified, Foshan displays the strongest economic and property fundamentals and is currently in the Early Adopter’s stage. Situated next to Guangzhou, the city ranks ninth in the country for disposable income per head, third in the Pearl River Delta for total GDP, consumer sales and manufacturing and has attracted investment from international companies such as 3M, Siemens, Bosch and Toshiba. Work has begun on a new intercity subway that will connect the city with neighbouring Guangzhou. A port is also planned and is expected to have a projected cargo turnover of 150m tonnes by 2020. Large foreign developers such as CapitaLand and Shui On are present in the city.

Guiyang, the capital of Guizhou province, is benefiting from China’s ‘Go-West’ policy and with its ongoing large infrastructure projects is set up for rapid growth. For example, the new railway connection to Guangzhou currently under construction will cut the travel time to just 3 hours from 18 hours when completed in 2010. Moreover, the city’s low costs and good access

to China’s highway network is likely to encourage increasing levels of foreign investment. The city is already generating interest from foreign developers such as New World China who have a large mixed use project currently under construction in the city.

Yantai, a Tier III city in Shandong province, is also moving rapidly up the city evolution curve. The city is situated opposite Dalian in the Bohai Bay, with an economy that ranks 19th in China in terms of total GDP. With over 2,000 industrial companies and strong presence of automobile manufacturers, Yantai is an interesting mix of industrial activity and tourism. It is a top 15 port and has a domestic airport linked to over 20 Chinese cities.

Shijiazhuang, the capital of Hebei province, is one of China’s larger cities with a population of nearly 10 million. The city’s low costs, central location and position as a major transportation hub with expressways and railway connections to the rest of China ensure the city will prove increasingly attractive to manufacturers and logistics companies. In particular the city’s relatively large pharmaceutical industry and presence of Shijiazhuang Pharmaceutical Group (China’s largest pharmaceutical company) may attract other foreign and domestic companies to the city.

10 New Cities:● Foshan, Guangdong● Guiyang, Guizhou● Jiaxing, Zhejiang● Jinhua, Zhejiang● Nantong, Jiangsu● Shaoxing, Zhejiang● Shijiazhuang, Hebei● Taiyuan, Shanxi● Xuzhou, Jiangsu● Yantai, Shandong

Apartment buildings, Foshan

8 China40, 2009

World Winning CitiesChina40 forms part of Jones Lang LaSalle’s World Winning Cities research, a multi-year global programme that aims to identify the rising urban stars in emerging markets around the world.

Several major research outputs covering different aspects of the China real estate market have been produced by World Winning Cities over the past two years:

China30, China’s Rising Urban Stars (2007) – Profiling 30 Tier II and III cities, assessing the drivers of growth and mapping out the changing geography of commerce in China.

China Logistics, The Geography of Opportunity (2007) – Assessing the current and likely future landscape for logistics property in China.

China Business Parks, The Next Real Estate Opportunity (2008) – Identifying the likely business park hotspots and assessing how the development and investment landscape is likely to evolve over the next few years

Other outputs include a China Map and detailed City Profiles covering 11 Tier II cities.

For more information on the World Winning Cities programme visit: www.joneslanglasalle.com/pages/worldwinningcities

Structural Policy Guiding China’s CitiesThe future evolution of China’s cities and their real estate markets will be driven by a rich combination of factors that are strongly influenced by government policy. The majority of these policies are aimed at directing urbanisation – a process that will see China’s urban population swell to approximately 850 million by 2020. The government’s ideal end vision of the urbanisation process is a country wide network of environmentally sensitive cities each with their own unique competitive advantages and strong trading connections.

The main government policies impacting future city development and urbanisation include the Five Year Plans, the Catalogue Guiding Foreign Investment, the Enterprise Income Tax Law, the Labour Contract Law, the Rural Land Reform and the recent economic stimulus package.

The most significant government policy is the series of Five Year Plans, which since 1990 has helped China transform from an opaque and closed country to an active member of the world economy. Regional economic planning has focused on spreading development gains from south to north and from coastal to inland regions. The focus of the latest 11th FYP (2006–2010) is the Bohai Sea Ring led by Tianjin’s Binhai New District and the revitalisation of the old industrial base of north east China. In addition, the incorporation

of Chengdu-Chongqing in the 11th FYP is an important measure in promoting the continued development of China’s western region, which started with the ‘Go West’ policy in the early 2000s.

Recent government policies mark a significant change in the direction of China’s growth and development. Since 2007 the government has been implementing several transformational policy initiatives aimed at improving the quality of its economic structure, essentially to move up the value chain towards a ‘made AND invented in China’ focus. The most significant policies are the new catalogue guiding foreign investment, and the new labour and contract laws2.

These policies indicate that regulators are no longer promoting export-orientated manufacturers and industries that negatively impact the environment. Instead the government is promoting foreign investment in R&D, regional headquarters, service industries and high technology. As a result, the landscape for city economies and their property markets will be altered over the coming years. The movement of labour intensive factories away from coastal cities towards inland Tier II and Tier III cities, such as Hefei and Zhengzhou, is expected to generate new demand for manufacturing and logistics space. High quality manufacturing,officeandbusinessparkspace3 will also rise with growing demand from service industries and R&D activities.

Urbanising a Nation

11th Five Year Plan (2006–2010) ● GDP target: GDP to

triple from 2000 level; GDP/capita to reach USD 2,400 by 2010

● Population controlled to within 1.36 billion

● Urbanisation to reach 47%

● Average education level of the whole population to be 9 years by 2010

● Emphasis on restructuring traditional industrial cities in north east China

● Reposition Tianjin as the ‘economic centre of north China’, and accelerate development and openness of new business areas such as Tianjin Binhai New Area

● Policy emphasis still on developing west Chinese cities, especially Chengdu and Chongqing

2 Further information on these regulatory changes and how they will impact businesses can be found in ‘Can China Transform its Economic Structure and Remain the Location of Choice?’ Jones Lang LaSalle Research, 2008.

3 Further information on China’s business park property market can be found in ‘China Business Parks: The next real estate opportunity’, Jones Lang LaSalle, 2008.

Chongqing

10 China40, 2009

Economic Stimulus and Rural Land ReformChina’s recent policies to support the economy and rural reforms are expected to provide a significant boost to the economy. As a result of the slowing economic environment, the government has introduced a number of policies, including tax rebates, interest rate cuts, stamp duty tax waivers on stock purchases and reduced down payments on homes, as well as the recent economic stimulus package.

The recent economic stimulus package is the mostsignificantinitiativeandtotalsRMB4trillion(USD 586bn). The majority of these funds are focused on infrastructure projects, particularly railway construction and post-earthquake building. Massive infrastructure investment and the resulting improved connectivity will no doubt be of great benefit to central and western cities such as Chongqing and Chengdu.

Rural land reforms recently announced by the government are likely to have a massive beneficial impact for rural and city economic development, although the benefits are likely to be over the longer term as the rural economy gradually transitions to a consumer society. Over the long term Nanning, Changsha and other provincial cities with large surrounding agricultural populations are likely to grow more quickly as farmers’ trade or lease their land to finance businesses and purchase homes. Cities with large ports such as Qingdao may also benefit as agricultural exports increase on the back of rising agricultural investment and efficiencies.

Fig 5: Recent Policy Initiatives

Source: Jones Lang LaSalle

2007

Catalogue Guiding Foreign Investment in Industry● Encourages green industries, R&D, regional headquarters, business process outsourcing and service industries

such as modern logistics and retail ● Emphasis on sustainability, new technology and expertise● Discourages labour and energy intensive industries in coastal regions

2007

New Enterprise Income Tax Law● Equalisestheincometaxrateforforeignanddomesticcompaniesat25%(previouslydomesticfirmswere

paying33%andforeignfirms15%)● Fewertaxholidays–toqualifybusinessmustbeinafewspecificindustriessuchasR&D

2008

New Labour Contract Law● Companies must permit employees to form unions and consult unions on employee related matters and

contribute the equivalent of 2% of payroll tax to fund these unions● Companies must give written contracts● Employees given rights to take legal action against their employers

2008

New Rural Land Reform● Farmers are able to transfer land use rights and borrow against the value of their land● This should increase agricultural productivity, economically mobilise rural China, spur infrastructure investment in

rural areas, and help close the urban/rural income gap

2008–10

Economic Stimulus Policies● RMB 4 trillion to be spent 2009–10● Infrastructure: welfare housing, post- earthquake-rebuilding, railways● Three rises in export tax rebates covering half of China’s exports● Interest rates and reserve-requirement ratio cut● Possible future stimulus for shipbuilding industry

China40, 2009 11

China’s policies are directing the economy and its cities towards service industries and high-tech sectors that require a higher skill base. Those Tier II and Tier III cities that offer a deep pool of skilled labour are better positioned toattracthigh-tech,financialandotherserviceindustries.Indeedaccesstoqualifiedlabourandlabour costs are the two most important criteria for multinational companies (Figure 6). Tier II cities such as Chengdu and Wuhan have been successfulinattractinglargeforeignfinancialand hi-tech industries due to their large talent pools. However, not all Tier II and Tier III cities benefitfromaccesstoaskilledlabourforce,andthevolume,qualityandcostvariessignificantlybetween the China40.

Quantity, but Quality?China has achieved one of the most remarkable expansions of education in modern times. In 2007, China generated an astonishing 4.5 million graduates, a four fold increase from ten years ago. Surprisingly and despite the economic slowdown, skilled labour is actually still in short supply and barely satisfies the needs of its own growing domestic market. This problem afflicts both industry and office based activities. In a recent AmCham4 Shanghai survey of US-owned enterprises, 37 per cent of respondents cited talent recruitment as their biggest challenge – greater than transparency, bureaucracy or the infringement of intellectual property rights.

China has clearly made great strides in improving the quantity of graduates, but some commentators are arguing that China has overlooked the quality of graduates. In their rush to meet rapidly growing demand, universities sharply increased student intake, but have found it difficult to adapt their curricula to the complex requirements of a fast-changing jobs market. As a result, many graduates are ill equipped with skills useful for today’s businesses. The government is aware of the skills deficit and has mobilised resources to improve education. As a result, the government is allowing more foreign employment and encouraging foreign investment in education in order to import international best-practice teaching methods.

A number of Tier II and Tier III cities have been successful in attracting foreign universities. For example, Ningbo became the earliest city to host a foreign university when the UK’s University of Nottingham established a campus in 2004. The presence of a foreign university or highly reputable domestic university is highly desirable for international firms whose key requirement is access to quality labour.

Fig 6: R&D – What MNCs Want

Source: EIU

Educating a Nation

1 Accesstoqualifiedstaff

2 Local labour costs

3 Accesstofirstrateuniversities

4 Government incentives and tax breaks for foreign investment

5 Proximity to production

6 Size and potential of local market

7 Local regulatory and tax regime

8 Infrastructure and transport links

4 AmCham – The American Chambers of Commerce is a voluntary association of American companies and individuals.

12 China40, 2009

Struggling to Retain Skilled LabourThe China40 cities face an additional problem of retaining skilled labour. Growing the education base is essential for a city to attract new companies, but they must also be able to retain their skilled labour. Many Tier II and Tier III cities watch in vain as their skilled workers and graduates gravitate to Beijing and Shanghai in search of employment. This is a big problem for those cities that are seeking to move up the value chain towards a more service based economy and high tech industries.

Central and local government policies are beginning to address this problem for certain Tier II and Tier III cities. Dalian’s local government is a leader in this respect in trying to tackle this issue. For the last few years, high-tech workers in Dalian have been eligible for a 40% refund on their income tax – saving them thousands of RMB a year. China’s policy to subsidize graduates who ‘Go West’ will also benefit cities with large education systems such as Chengdu, Wuhan and Xian. In January 2009 the State Council announced

that all graduates who take jobs in western or central China will receive a full refund of their tuition fees, representing the first time that the government has offered to refund tuition fees.

DIY GraduatesRather than delay plans to enter or expand in China because of talent shortages, some firms are tackling the problem head on. They have gone about this in two ways:

1 Build ‘guanxi’ relationships with educational institutions. For example, IBM has formed partnerships with several universities, donated millions of dollars to educational institutions across the country, and is collaborating with the Ministry of Education to improve the teaching and curricula at Chinese universities.

2 Build to suit development. Since the talent market routinely fails to provide candidates who have the right skills and leadership qualities, leading companies are creating their own training and development programmes.

Fig 7: Skilled Labour – Quantity v Quality

Source: Jones Lang LaSalle

Low

High

Low High

Quality

Quan

tity

WuhanGuangzhou

NanjingXian

Tianjin

ChengduChongqing

HarbinChangsha

Hangzhou

Zhengzhou

JinanNanchang

HefeiShenyang

FuzhouShijiazhuang

ChangchunTaiyuanQingdaoKunming

ShenzhenSuzhou

DalianNanning

NingboGuiyang

WuxiXiamen

Foshan

UrumqiZhuhai

Yantai

NantongDongguan

ChangzhouJinhua

Xuzhou

ShaoxingLanzhou

WenzhouJiaxing

Beijing

Shanghai

Proportion of skilled labour to total population

Government policies are beginning to address skill shortages in Tier II and III cities

China40, 2009 13

Labour Costs Are Also ImportantThe cost of skilled labour is a critical factor behind a multinational company’s choice of location. Figure 7 illustrates that among the Tier II and Tier III cities Wuhan, Nanjing, Xian and Chengdu offer the best access to skilled labour. The talent pool in these cities is often just as skilled as those in Shanghai and Beijing, but at a lower cost – the cost of an R&D practitioner in Wuhan is approximately half that of Shanghai. Combined with lower land costs, this makes the cities particularly attractive for research activities.

Chengdu is one such example. The city’s attractiveness can be exemplified by IBM and AMD’s establishment of R&D centres in 2007 and 2008 respectively. IBM justified its decision to install its 5,000 sqm research facility in the city by pointing to Chengdu’s low costs and high quality human resources. The city’s 2,700 research institutions and 40 universities produce 105,000 technical graduates each year, slightly less than Shanghai’s 110,000 students. Moreover, rents and labour costs may be as low as 50–70% of coastal cities.

Fig 9: Labour Costs and Real Estate Rents for R&D Functions

Source: Jones Lang LaSalle, Government Statistical Yearbooks

City Average Annual Wage (RMB ) Rental Rates (RMB /sqm/year)

Shanghai 75,119 730–1642

Wuhan 35,213 360–420

Chengdu 51,240 420–540

Nanjing 59,040 360–550

Dalian 55,899 550–700

Tianjin 49,220 400–700

Hangzhou 68,584 360–550

Fig 8: Coping with China’s Talent Shortage

Source: Jones Lang LaSalle

Motorola – BeijingCreated the China Accelerated Management Programme for assisting promising local managers and the Motorola Management Foundation Programme to train new managers in such areas as problem solving and communications.

Intel – Dalian Intel is cooperating with the Dalian city government and the Dalian University of Technology to establish a semiconductor technology college at a cost of RMB 348m.

Nokia – HangzhouNokiacooperateswithandrecruitsfromseveraluniversitiesinChina.Thefirm’sdecisiontobuilditsR&Dcentre in Hangzhou in 2002 was partly due to the presence of Zhejiang University – one of the top 10 universities in China.

Nanjing

14 China40, 2009

Future Expressway NetworkChina 40 Cities

Existing international airportsExisting domestic airports

Existing ports

Wuhan

NantongSuzhouShanghai

Ningbo

WenzhouJinhua Shaoxing

Jiaxing

ChangzhouWuxi

Beijing

Tianjin

Dalian

Yantai

Nanjing

Jinan

Urumqi

Foshan

Fuzhou

Xiamen

Hong Kong

GuangzhouDongguan

ZhuhaiMacau

Taipei

Shenzhen

Harbin

Changchun

Shenyang

Shijiazhuang

Taiyuan

XuzhouZhengzhouXi’an

Hefei Hangzhou

Nanchang

Nanning

Guiyang

Kunming

Lanzhou

ChengduChongqing

Changsha

Qingdao

China’s cross-country infrastructure investment is driving growth in Tier II and Tier III cities while encouraging investors and businesses to ‘Go West’. Connectivity and the efficiency of the transport infrastructure can make or break a city’s success. Since the 1990s, the government’s investment in China’s transport infrastructure has risen sharply. Moreover, it was recently announced that RMB 180bn (USD 26bn) of the RMB 4trn (USD 588bn) economic stimulus will be targeted at the road, railway, ports and airport infrastructure.

Roads to SuccessThe connectivity of many Tier II and Tier III cities has greatly improved as a result of the government’s highway building spree. At the centre of China’s road transport initiatives is the National Expressway Network Plan, or ‘7918’ – a reference to 7 capital city radials, 9 north-south major highways and 18 east–west corridors. By 2020, the network is expected to have reached 85,000 km (compared to just 147 km in 1987) and to have connected all large urban centres and provincial capitals to cities with populations over 200,000. Many of the new roads will be built in central (12,000 km) and western (24,000 km) parts of the country and are expected to benefit greatly secondary and tertiary cities such as Chongqing, Chengdu, Xian, Lanzhou, Urumqi and Guiyang.

Connecting a NationInfrastructure can make or break a city’s success

Fig 10: China’s Existing and Future InfrastructureSource: Jones Lang LaSalle

China40, 2009 15

Railway Growth at Full SteamChina’s railway network, already the world’s busiest, is undergoing a period of expansion unmatched anywhere else in the world. The network is expected to grow by a minimum of 3,000 km a year to reach a total of 100,000 km by 2020. Unlike China’s highways, the country’s railways are still relatively undeveloped. The amount of railway per person is only 6cm – less than half the length of a chopstick – and train operators can only meet 80% of passenger rail demand and 35% of freight demand. As a result, railways should be able to absorb high levels of investment and display quick improvementsandbenefitsfortheChina40.

There is a vast programme of rail construction into Central and Western China that will be of major benefit to Tier II and Tier III cities keen to become established railway hubs, such as Chengdu, Wuhan and Zhengzhou. One of the most ambitious projects is the re-opening of the new ‘Silk Route’ that connects the port city of Lianyungang on the eastern coast of China to Rotterdam in the Netherlands. Cities such as Lanzhou, Urumqi, Zhengzhou, and Xian plan to upgrade their position as trading posts and logistics hubs.

Light Rail Opens Value in 40 CitiesThere are more than 40 cities in China that are planning or have already started construction on subway or light rail projects. By the end of 2008, there were 703 km of subway lines in operation in nine cities around China, five of which are Tier II and Tier III cities. In all, some 1,700 km of new lines are under construction, at a cost of RMB 620bn (USD 92bn). Long term plans envisage Beijing and Shanghai’s subway and light rail system each exceeding 1,000 km, more than double that of London and New York. By 2020, Suzhou is expected to have built a subway line connecting the city with Shanghai.

Fig 12: City Light Rail and Subway

Source: Jones Lang LaSalle, local government websites

Fig 11: Time Saving Highway Routes

Source: United Parcel Force

0

Current Previous

10 20 30 40 50 60

Dalian-Shanghai

Chongqing-Zhangjiang

Chongqing-Shanghai

Shenyang-Beijing

Chengdu-Chongqing hours

Now 20200 100 200 300 400 500 600 700

km

BeijingGuangzhou

ShanghaiShenzhenChengdu

ChongqingHangzhou

XianTianjinWuhanDalian

ShenyangWuxi

SuzhouNingbo

DongguanNanjing

ZhengzhouChangsha

GuiyangFuzhou

ChangchunNanning

HarbinLondon

New York

‘The last time the [Chinese government] tried to boost domestic demand it built the highway system. This time it will probably build up the railway network’Zheng Xinli, Vice Minister of the Communist Party’s Central Policy Research Office

16 China40, 2009

Airports – Flying HighTierIIandTierIIIcitieswillalsobenefitfromthecountry’s recently announced plans to boost airport investment to a massive RMB 450bn (USD 66bn) in 2009 and 2010. This represents a significantincreasecomparedtotheRMB120bn(USD 18bn) spent between 1990 and 2005. The spending will be centred on the construction of 42 new airports and upgrading existing infrastructure. In particular, the government aims for the Tier II cities of Chengdu, Kunming, Xian, Wuhan and Shenyang to become regional hubs. Moreover, western and central China will receive a large portion of this investment, especially benefitingTierIIcitiessuchasChongqing,Kunming and Zhengzhou.

The China40’s new and expanded airports provide a number of opportunities to property occupiers and investors, especially in a less noticed property sector – airport retail, which is expected to witness significant growth in the coming years. According to Verdict Research (Global Airport Retailing 2008) total passenger numbers will rise by almost 250m and spending by approximately USD 300m. The potential of Mainland China’s airports is not going unnoticed by retailers – Burger King has recently announced the airport catering sector will form a key part of their China expansion plans. Up until now the world’s second biggest burger chain has had a relatively limited presence in China, but is planning 250–300 outlets per year for the next five years.

‘China’s airport retail business is a gold mine waiting to be explored,’ Liu Shaocheng, policy department director of the General Administration of Civil Aviation, told the 2007 China Airport Retail Summit.

Ports – A Sea ChangeAs a result of a rapidly expanding port network, the logistics sector has been afforded with a number of opportunities in river and coastal China40 cities. China is developing five large coastal port networks comprising the consolidation of the port networks in the Yangtze River Delta, Pearl River Delta and Bohai Bay, together with the development of new port networks along the Fujian and the southwest coast. Container port development will be primarily focused on the Tier II cities of Qingdao, Ningbo, Tianjin, Xiamen and Dalian.

All of China’s main coastal ports will continue to witness significant growth, but some of the fastest growth is expected in China’s second largest port – Ningbo. The port has been rapidly expanding and maximising its strategic position near to Shanghai, which has been further boosted by the completion of the Hangzhou Bay Bridge. By 2012, the number of TEUs (standard containers) handled is expected to reach 20 million, which would make the port one of the largest in the world. With development costs approximately 30% lower than Shanghai, Ningbo will remain an attractive location for logistics operators for some time.

Thelogisticssectorisalsosettobenefitasriverinland ports are upgraded and made accessible to large ships. Although the navigable Yangtze River stretches from Chongqing to Shanghai, the majority of China’s inland shipping activity takes and is restricted to the ports between Nanjing and Shanghai. However, over the next 20 years the government plans to link all major rivers in China’s western region to major coastal ports. It is also developing more Tier II city ports to take pressure off the major coastal facilities. The Yangtze River will continue to be the main navigation channel and when the Three Gorge Dam is fully operational in 2009 it will open Chongqing to larger10K(dwt)ships.Citiesthatwillbenefitinclude Chongqing, Wuhan and Nanjing.

‘China’s airport retail business is a gold mine waiting to be explored’Liu Shaocheng, policy department director of the General Administration of Civil Aviation

China40, 2009 17

Government policies, combined with the up-skilling of China’s labour force and massive infrastructure investment are driving and shaping China’s cities and real estate markets. In this section we assess how China’s structural changes impact each of the main commercial real estate sectors and identify the likely real estate winners in the office, business park, logistics, retail and hotel sectors.

Building a Nation

Jones Lang LaSalle’s Real Estate Intelligence Service (REIS)Real estate data contained within China40 has been sourced from Jones Lang LaSalle’s Real Estate Intelligence Service (REIS). REIS is a subscription-based research service designed to provide real estate investors and developers with timely, accurate and insightful real estate intelligence and analysis. The China REIS currently covers 4 Tier I cities, 14 Tier II cties and 3 Tier III cities.

REIS helps clients to:● proactively identify emerging risks and

opportunities● formulate and refine investment and

development strategies● benchmark asset performance● project future asset performance● compare and contrast markets across China

For more information, contact Michael Klibaner, Head of Research, Shanghai

Email: michael.klibaner@ap.jll.comHangzhou

18 China40, 2009

Over the long term, Tier II and Tier III cities are destined to play an increasing role as China’s movement towards a service based economy drives the growth of office markets in secondary and tertiary cities.

China’s total grade A office stock is still small, but growing rapidly. By the end of 2008, there was approximately 12 million sqm, less than the grade A office stock in Washington DC. While the majority of existing stock has been built in coastal cities to accommodate MNCs entering China for the first time or firms relocating (for example, both UPS and AT&T have relocated their regional headquarters from Hong Kong to Shanghai), there has clearly been a substantial movement to Tier II and III cities. Currently, the grade A stock in Tier II and III totals approximately 2.1 million sqm (17.5% of the national total), with the largest stocks in the Tier II cities of Chengdu, Hangzhou, Wuhan, Xiamen and Shenyang (Figure 13).

The total grade A stock in China is expected to nearly double to 21 million sqm by 2011. Significantly, nearly half of this increase will take place in Tier II and III cities, bringing the total stock in these cities to about 6 million sqm. Considering there was only a handful of small grade A buildings outside of Tier I cities a decade ago, this represents a significant leap in stock.

DemandforofficespaceinTierIIandIIIcitiesisbeing driven by a mixture of multinational and domesticfirms.Keyoccupiersincluderealestate advisors, insurance services and the banking sector (see page 21). Although domestic firmsaccountforasmallershareofdemand,there is evidence that an increasing number of firms,particularlyfromthefinancialsector,areupgradingorsettingupingradeAofficebuildings. For example, Yicheng Investment and General China Life Insurance both leased 570 sqm and 1,700 sqm respectively of grade A officespaceinChengduin2008.

The global recession is causing demand to soften in Tier II and Tier III office markets over the short term, but the effects are not as pronounced as in Tier I cities, as they are less developed and their economies are more focused on the domestic market. Multinational companies will continue to expand in China, albeit at a slower rate. Domestic companies are expected to become a greater driving force behind the demand for grade A office space. For example, Alibaba, the B2B trader headquartered in Hangzhou, has recently announced plans to increase its workforce by 30% in 2009 alone.

Fig 13: Grade A Office Stock – Now and Future

Source: Jones Lang LaSalle’s China Real Estate Intelligence Service

2008 2011

0.0 0.5 1.0

Million sqm

Chengdu

Wuhan

Dalian

Chongqing

Shenyang

Tianjin

Hangzhou

Nanjing

Xiamen

Changsha

Suzhou

Fuzhou

Zhengzhou

Qingdao

Wuxi

Xian

Offices – Servicing China’s EconomyNearly half of China’s office supply pipeline is in Tier II and III cities

China40, 2009 19

To identify which of the China40 are likely to provide the most robust office markets, we have scored each city based on future stock, absorption patterns, banking sector activity, and the quality of the business environment and education. We believe that the eight cities of Dalian, Chengdu, Hangzhou, Shenyang, Wuhan, Tianjin, Nanjing and Chongqing offer the best prospects to develop as large and robust office hubs.

Dalian, Chengdu and Hangzhou are increasingly favoured locations for business process outsourcing and R&D activities and will continue to attract big names such as Intel and IBM as well as emerging domestic players such as Alibaba.

Although Shenyang and Wuhan are still largely dominated by heavy manufacturing, service firms are beginning to locate in these cities. International foreign banking interest is highlighted by the recent establishment of HSBC branches in the cities. Both cities are also likely to emerge as regional headquarter locations for service companies due to government policies and their strategic location.

Of the eight short-listed cities, three cities stand out:

Tianjin,whichwasoneofthefirstcitiestoopentoforeign banks, is home to more foreign banks than any other Tier II or III city, and has witnessed the largest increase in foreign banks in recent years. Large western banks such as Citigroup, HSBC and Standard Chartered are all present, as are numerous Japanese and Korean banks, due to close economic and geographical connections. The city is also becoming an attractive location for financialfirms’backofficeoperations.Forexample,the Agricultural Bank of China, one of the China big four banks, recently signed an agreement with Tianjin Hi-tech Industrial Park to develop a GFA 120,000 sqm call centre in the National Software and Service Outsourcing Industrial Base.

‘We are endeavouring to turn Tianjin into a financial innovation base that is fitting with its status as an economic centre in North China, a shipping hub and new economic reform region,’ Cui Jindu, Vice-Mayor of Tianjin.

Nanjing, the provincial capital city of China’s richest province Jiangsu, has potential to generate strongdemandintheofficesector.Financialservices are increasing their presence in the city and will be a key driver of demand going forward. For example, HSBC, Mitsubishi UFJ and Deutsche Bank have all recently announced plans to open a branch in the city. Nanjing also appears to be gaining in attraction as a regional headquarter location. For example, the Philippine Metrobank andtheKoreanfirmLIGInsurancebothplantoestablish their regional headquarters in the city.

Chongqing’sofficemarketisexpectedtoundergorenewed growth on the back of a strengthening local economy, a business friendly government and lower operating costs that will continue to attract foreign investors. With only one international standard grade A building – the Metropolitan Tower – the construction of a new CBD will ensure the officemarkethassubstantialroomtogrow.

‘We are endeavouring to turn Tianjin into a financial innovation base that is fitting with its status as an economic centre in North China, a shipping hub and new economic reform region’Cui Jindu, Vice-Mayor of Tianjin

Offices – Future Winners

20 China40, 2009

Finance Pushing into Tier II CitiesThe banking sector is a leading barometer of both a city’s stage of development and the future potential of a city’s office market. Banks and other financial services have typically been the largest users of grade A office space and they also act as a magnet, drawing in clients, related services and competitors. Although the current global financial crisis has dampened foreign bank expansion in China, we believe that this is a temporary reversal and going forward the sector’s rapid growth is likely to continue. Moreover, domestic banks will increasingly drive demand as they upgrade from grade B to grade A space.

Banking is still a local practice in China with domestic banks comprising 98% of the country’s financial system. However, this is changing fast. The reforms and the opening up of financial markets are well under way. Since the country’s entry into the World Trade Organisation, the government has even exceeded its mandatory commitments for opening the banking system to foreign companies. This subsequently unleashed a wave of foreign banks eager to tap China’s domestic market.

Shanghai and Beijing are no longer the only focus for foreign banks. The past few years have witnessed a flurry of branch openings by foreign banks as they sweep across China. Tier II and Tier III cities are a key component of foreign banks expansion plans as they seek to establish a critical mass before other competitors arrive. Tier II cities such as Tianjin, Chengdu, Xiamen and Chongqing have mainly been the focus of foreign banks, but a number of Tier III cities, such as Jinan and Zhengzhou are also now seeing increasing foreign banking activity.

The China Banking Regulatory Commission is also encouraging foreign banks to expand into Tier II and III cities as a means to help spur development in these cities. For each branch opened in Shanghai or Beijing, one rural branch must be opened. HSBC was the first foreign bank to get approval to open a rural bank and in October 2008, opened its third rural bank in Yongan, Fujian province.

Fig 15: Leading Foreign Banks in China

Source: Company Websites, February 2009

Fig 14: Foreign Bank Concentration Score

Source: Jones Lang LaSalle

0 5 10 15 20 25 30 35 40 45

TianjinChengdu

XiamenChongqing

DalianNanjing

HangzhouSuzhou

QingdaoWuhan

DongguanNingbo

ShenyangWuxiXian

JinanNanchang

ZhengzhouChangsha

KunmingFuzhou 03

2005 2009 Score change00

0303030303

0503

08

0706

0604

0811

1509

1612

1324

Bank Origin Branches and sub-branches

HSBC UK 76

Bank of East Asia Hong Kong 66

Standard Chartered Bank UK 46

Citibank US 33

Hang Seng Bank Hong Kong 32

ABN AMRO Bank Netherlands 13

United Overseas Bank Singapore 10

Bank of Tokyo-Mitsubishi UFJ Japan 10

China40, 2009 21

The growth of China’s business park sector is underpinned by the expansion of IT, R&D and business process outsourcing activities. Demand is being further boosted by the government’s strategy of moving the Chinese economy up the value chain and its policy of mapping out IT, R&D and BPO clusters across the country. In our recent paper ‘China Business Parks’, we identified 15 business park winners5 that we believe will be the focus of future business park activity.

Within the China40, the highest business park activity is currently seen in Chengdu, Dalian, Tianjin, Hangzhou, Nanjing and Suzhou. Cities such as Jinan, Chongqing and Qingdao currently have lower levels of activity, but their local governments have aggressive expansion plans and incentives. As highlighted in Figure 16, these cities are popular location choices for high-tech firms.

The Tier II cities of Chengdu, Hangzhou, Tianjin and Wuhan are particularly attractive business park locations and score especially strongly in IT activities. For example, the Tianfu Software Park in Chengdu has successfully attracted hi-tech firms such as IBM, Nokia, Synnex and NEC.

The cities of Dalian, Xian, Hangzhou and Chengdu are favoured locations for BPO activities. Dalian is a particular target of Japanese and Korean firms or multinationals looking to use the city’s language skills to service the Japanese or Korean markets. For example, HP has established a call centre in Dalian to tap into the city’s language skills and service the Japanese market.

5 Shanghai, Beijing, Shenzhen, Guangzhou, Dalian, Chengdu, Hangzhou, Suzhou, Nanjing, Xian, Tianjin, Wuhan, Jinan, Qingdao and Chongqing.

Business Parks – Moving Up the Value Chain

China Business Park’

‘Weareconfidentthatmore business park hotspots will emerge as experienced developers and investors penetrate further into China’s Tier II and Tier III cities. Although investors are currently adopting a cautious approach due to the limited amount of international standard space on the market and the opaque business environment, they are universally confidentaboutgrowthprospects over the next decade’Tammy Tang, Head of Business Parks, China, Jones Lang LaSalle

22 China40, 2009

Fig 16: China40 High Tech and Business Park Activity

High Tech Score based on a basket of hi tech MNCs – Nokia, Intel, Motorola, Microsoft, Panasonic and IBM.Source: Jones Lang LaSalle

High Tech Concentration Score

Business Parks Activity

Chengdu 28 HIGH

Chongqing 8 LOW

Dalian 31 HIGH

Dongguan 10 LOW

Hangzhou 37 HIGH

Nanjing 13 HIGH

Ningbo 4 LOW

Qingdao 9 LOW

Shenyang 12 LOW

Suzhou 16 HIGH

Tianjin 33 HIGH

Wuhan 13 MEDIUM

Wuxi 8 LOW

Xiamen 6 LOW

Xian 10 MEDIUM

Changchun 2 LOW

Changsha 6 LOW

Changzhou 2 LOW

Foshan 4 LOW

Fuzhou 10 LOW

Guiyang 2 LOW

Harbin 6 LOW

Hefei 4 LOW

Jiaxing 2 LOW

Jinan 10 MEDIUM

Jinhua 2 LOW

Kunming 8 LOW

Lanzhou 2 LOW

Nanchang 6 LOW

Nanning 4 LOW

Nantong 2 LOW

Shaoxing 2 LOW

Shijiazhuang 2 LOW

Taiyuan 2 LOW

Urumqi 6 LOW

Wenzhou 2 LOW

Xuzhou 2 LOW

Yantai 2 LOW

Zhengzhou 8 LOW

Zhuhai 11 LOW

Fig 17: China40 Logistics Activity

Logistics Potential Score based on indicators covering transport infrastructure, market size and access to population, presence of bonded logistics parks, developer and occupier current and future presence.Source: Jones Lang LaSalle

Tier

IITi

er III

Logistics Potential Score

Estimated Foreign Developer Logistics Portfolio by 2010 (sqm)

Chengdu 45 235,237

Chongqing 41 18,210

Dalian 32 162,645

Dongguan 17 0

Hangzhou 35 93,142

Nanjing 38 175,878

Ningbo 41 405,556

Qingdao 39 219,557

Shenyang 41 218,432

Suzhou 39 558,737

Tianjin 70 710,282

Wuhan 45 190,600

Wuxi 14 40,100

Xiamen 31 0

Xian 34 23,176

Changchun 30 0

Changsha 18 24,000

Changzhou 16 0

Foshan 12 0

Fuzhou 19 0

Guiyang 15 0

Harbin 29 0

Hefei 22 0

Jiaxing 8 132,895

Jinan 25 0

Jinhua 7 0

Kunming 24 0

Lanzhou 12 0

Nanchang 22 0

Nanning 10 0

Nantong 7 0

Shaoxing 7 0

Shijiazhuang 25 0

Taiyuan 12 0

Urumqi 18 0

Wenzhou 5 0

Xuzhou 8 0

Yantai 12 0

Zhengzhou 31 0

Zhuhai 8 18,090

Tier

IITi

er III

China40, 2009 23

China’s rapid economic progress is reflected in the recent strong growth in the logistics sector. Turnover in the domestic logistics sector reached RMB 88.8trn (c. USD 13trn) in 2008, up from just RMB 3trn in 1991. While 2009 will no doubt be a challenging year, the logistics sector is still expected to maintain its double digit growth rate.

The modern logistics real estate sector in China is still young and has emerged only in the past four years. Currently, there is around 6–7 million sqm of modern logistics space in China, less than that of Belgium – a country half the size of Zhejiang province. More than half of this space is clustered in just three regions: Yangtze River Delta (Shanghai); Pearl River Delta (Shenzhen/Guangzhou) and the Bohai Bay region (Beijing/Tianjin).

Large foreign developers such as Prologis, AMB Property, Mapletree and Goodman have built the majority of this modern stock. Initially these firms concentrated on servicing the import-export business in the Tier I cities of Shanghai, Beijing, Guangzhou and Shenzhen. However, they are now turning their attention to the growing domestic market and secondary and tertiary cities such as Dalian, Hangzhou,

Nanjing, Ningbo, Qingdao, Suzhou, Tianjin, Wuxi and Jiaxing. Cities in central and western China that are successfully attracting foreign developers include Chengdu, Chongqing, Changsha, Xian and Wuhan.

Whilst the China industrial market is still on a growth trajectory and the domestic retail sales are still growing by a very impressive 20% per year (as at the end 2008), the logistics sector is not immune from the ongoing global economic slowdown. Rising land, labour and raw material costs, renminbi appreciation, coupled with falling demand from abroad have led to a number of factory closures in the coastal industrial cities. Consequently, manufacturers and logistics operators are being forced to reconsider their location strategies; they will seek more cost efficientlocationstomaintainexportpricecompetition while refocusing on the domestic market. It is likely that manufacturers and logistics firmswillrealigntheirdistributionsystemstowardscentral and western cities, rather than towards export manufacturing facilities. With regards to supply, there will be fewer new developments over the short-term as some large foreign developersfacefinancialdifficulties.Indeedsomehave already halted several projects that are at the early stages of development.

Fig 19: Logistics FDI

Source: China Statistics Bureau

0

500

1,000

1,500

2,000

2,500

2000 2001 2002 2003 2004 2005 2006 2007

USD

millio

n

Fig 18: Modern Logistics Stock – Now and Future

Source: Jones Lang LaSalle’s China Logistics Intelligence Service

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

Shanghai

Beijing

Shenzhen

Tianjin

Chengdu

Guangzhou

Qingdao Millions sqm

20082002 2012

Logistics – A Good Move

‘Logistics companies are seeking to mitigate risk by consolidating core business operations and limiting new investment. While operations in Tier II and Tier III cities are usuallythefirstareasto be cut from growth plans,firmscannotafford to stand back for long. Demand for distribution services in secondary and tertiary cities will continue to grow strongly on the back of rapid urbanization and the government’s priority to raise rural incomes and spending’Stuart Ross, Head of Industrial China, Jones Lang LaSalle

24 China40, 2009

By 2011, the total stock of prime logistics space is expected to have more than doubled to around 15 million sqm. The market will likely witness continuing consolidation, particularly in the 20 primary, secondary and emerging logistics hubs we identified in our white paper China Logistics: The Geography of Opportunity6.

We expect that the most dynamic logistics markets over the next decade will be found in the following China40 cities: Tianjin, Wuhan, Shenyang, Suzhou, Ningbo, Chengdu, Qingdao and Zhengzhou.

Tianjin currently stands head and shoulders above the other cities in terms of current levels of logistics activity and is displaying robust growth on the back of superior and expanding port facilities, high speed railways, highways and airport capacity. The recent establishment of Airbus, Boeing and China Aviation manufacturing plants are testament to the city’s growing attractiveness.

Ningbo, which possess one of the largest and fastest growing ports in China, will continue to consolidate its position as a key secondary logistics hub, boosted by rapid expansion in port activities and transport infrastructure (such as the new Hangzhou Bay Bridge).

Suzhou’s superior transport infrastructure and status as a key high-tech manufacturing area – the city generates at least 6 million TEUs of exports and imports annually – ensures a good future for the logistics sector. Large international developers such as AMB Property have already invested in the city.

Wuhan and Shenyang represent major industrial hubs that are both administrative targets of the government’s ‘Revitalise the North’ and ‘Go-West’ campaigns. There is a strong requirement in these citiesforefficientlogisticsfacilitiesandnetworks,but the markets are currently underdeveloped with very little modern space available. Boosted by the cities’ emergence as regional shopping centres, retail activities will drive demand for logistics.

Over the long term three cities stand out:

Chengdu is aiming to become the largest logistics hub in western China and has backed this pledge by investing USD 286m to construct a railway container station that will be the largest in Asia when completed. Moreover, transport construction has sped up and additional funds have been allocated as a result of the earthquake rebuilding programme.

Qingdao‘s port is one of the largest and fastest growing ports in China. The city is also a base for a number of shipping and logistics companies – Maersk’s northern China headquarters is located here – operating their dock and logistics businesses along the coast. The logistics sector will also undoubtedly benefit from the latest rural reforms as increased agricultural productivity results in higher volumes of food processing and refrigerated container shipments.

Zhengzhou has until now been largely unnoticed by the logistics sector, but its aim to be the centre of a new city cluster in Henan province and its strategic position as a railway hub is expected to attract significant activity. The city is also an important manufacturing location, known as the ‘aluminium capital of China’, and its lower costs – labour and land costs are approximately half that of Shanghai – are an added attraction.

6 Shanghai, Beijing, Shenzhen, Guangzhou, Tianjin, Qingdao, Dalian, Xiamen, Ningbo, Suzhou, Chongqing, Wuhan, Nanjing, Chengdu, Shenyang, Hangzhou, Changchun, Harbin, Xian and Zhengzhou.

Logistics – Future Winners

‘Tier I cities are bearing the brunt of a logistics shift from focusing less on exports and more on domestic distribution. Lower cost locations close to both industry and dense population centres will be the focus of logistics companies seeking their share of the increasingly important domestic market’Stuart Ross, Head of Industrial China, Jones Lang LaSalle

China40, 2009 25

The retail market in China’s secondary and tertiary cities may face some turbulence in the short term, but the long term fundamentals and prospects are good.

Robust Growth but Short Term UncertaintyChina’s retail property market in Tier II and Tier III cities has so far maintained robust growth, but the short term outlook is looking increasingly uncertain. In 2008, total retail sales reached a record RMB 10.8trn (USD 1.7trn), representing a 21.6% increase over the previous year. The government’s recent rural subsidy scheme – provides a 13% subsidy to rural buyers of home appliances such as TVs and washing machines – and the economic stimulus package is expected to positively impact the economy in the second half of 2009. However, there is a noticeable slowdown in both demand and supply with some developers in Tier II and Tier III cities delaying project completion dates. Although retailers still see China as a potential source of growth, many are now exhibiting more caution in opening new stores. Wal-Mart, Carrefour, Zara and Mango are examples of brands that are still searching for expansion opportunities.

Current forecasts point to the economy entering a recovery stage in the second half of 2009 with retail sales resuming their strong upwards trajectory. However, consumer sentiment points to a disappointing short-term outlook. A survey by Macquarie Research in January 2009 found 25% of respondents expect to cut expenditure on travel, clothes and eating out. If consumer spending falls then tenants are less willing to pay high rents. Low-end brands with limited financing are likely to be the first to be affected.

Fig 20: Prime Retail Stock – Now and Future

Source: Jones Lang LaSalle’s China Real Estate Intelligence Service

Retail – The Great Moderniser of China’s Future

0 1 2 3 4 5 6

BeijingShanghai

GuangzhouShenzhenShenyang

DalianTianjin

ChangshaZhengzhou

ChengduChongqingHangzhou

WuhanNanjingSuzhou

XianQingdao

FuzhouXiamen

Wuxi Million sqm

Tier I

2008 2011

Hangzhou retail and residential project

26 China40, 2009

Large Future Supply PipelineA decade ago there were around 100 shopping malls in China, but today there are an estimated 450 – including four of the largest in the world. Interestingly, the majority of this development has been focused on Tier II and Tier III cities, which currently account for around 70% of the total prime retail stock in China. For shopping centre developments located in these cities, large international retailers or big box units are typically sought after as anchor tenants. Wal-Mart, for example, is a typical anchor tenant in many of CapitaLand’s Tier II developments.

Going forward, the total retail stock is expected to almost double to 46 million sqm by 2011 and much of the development is located in Tier II and Tier III cities. The largest increase is expected to occur in the cities of Changsha, Chongqing, Hangzhou, Shenyang and Zhengzhou, each of which is expected to add over one million sqm of new prime retail space to their markets. However, not all these new developments will be a success; many shopping malls will struggle or fail as a resultofpoormanagement,overspecificationanda limited understanding of shopping behaviour.

Retailers Focusing on Tier II and Tier III CitiesHighest demand in Tier II and III cities has come from large multinational and domestic retail chains. Since deregulation and removal of geographical restrictions in 2004, foreign retailers have seized the opportunity to invest in prime locations across China. Today there are over 1,000 foreign retailers, compared to just 314 in 2004. In particular, big box retailers and supermarkets such as Wal-Mart, Carrefour, B&Q, IKEA and Metro, have established significantfootprintsacrossChinaandarethemost bullish among the retailers. Carrefour currently has 134 stores and has stated it plans to open 28 stores in 2009, compared with 22 in 2008. The majority of these stores will be in Tier II and Tier III cities. IKEA, a late entrant, recently opened stores in the Tier II cities of Dalian and Nanjing. The group also has stores in Beijing, Shanghai, Shenzhen, Guangzhou and Chengdu.

Secondary and tertiary cities are attractive to retailers for a number of reasons. On the one hand, retailers are being pushed to look for opportunities outside of the competitive and saturated Tier I cities. On the other hand, rising disposable incomes and lower labour and property costs in large secondary and tertiary cities are attractive targets. Our foreign retailer concentration score (Figure 21) highlights the more popular locations for big box retailers, such as Chongqing, Chengdu, Shenyang, Kunming, Wuhan, Harbin and Nanjing.

Fig 21: Foreign Retailer Concentration

Based on a basket of international retailers including Carrefour, IKEA, B&Q, Tesco, Wal-Mart, and Metro.Source: Jones Lang LaSalle, Company Websites

2006 2009

ChongqingChengdu

ShenyangKunming

WuhanHarbin

NanjingDalianTianjin

FuzhouDongguan

WuxiHangzhou

QingdaoChangchunChangsha

XianXiamenNingboSuzhou

HefeiNanchang

FoshanZhengzhou

ZhuhaiJinan

UrumqiChangzhou

NanningGuiyangJiaxing

NantongTaiyuanJinhua

ShaoxingWenzhou

XuzhouYantai

Low High

Tier II and III cities account for 70% of China’s prime retail stock

China40, 2009 27

Amongst the China40, we have identified eight retail winners that we expect to appear increasingly on the radar of retailers over the coming decade – Shenyang, Chengdu, Hangzhou, Suzhou, Wuxi, Changsha, Wenzhou and Wuhan.

Shenyang has one of the greatest concentrations of retail space and luxury retailers in China. The city’s position as a premier shopping destination for north east China and rising incomes in its satellite cities ensure robust future retail demand.

Chengdu is already emerging as a popular retail location and offers good potential due to its strategic location as the retail hub of south western China. CapitaLand is currently building one of its Raffles City shopping centre concepts in the city, which is due for completion in 2010.

Hangzhou and Suzhou, wealthy and popular tourist destinations, have long been of interest to various retailers. Hangzhou’s luxury segment is one of the most advanced among Tier II cities with retailers including Giorgio Armani, Burberry, Chloe, Celine, Dior, Ferragamo, Gucci, Louis Vuitton and Versace.

Wuxi’s retail market is currently one of the least significant among the Tier II cities, but has significant potential for growth. The city is attracting increasing interest due to strong retail sales growth and a large market of wealthy residents. Gucci and Emporio Armani have recently opened stores in the city and more luxury retailers are set to follow.

Three cities stand out as offering among the best long term potential as retail hubs:

Changsha’s development into a transport hub of Hunan province will boost retail activity in the city as a result of increased traffic flows. Other cities in Hunan province, such as Zhuzhou and Xiangtan, will also contribute to retail spending in the city.

Wuhan, already one of China’s most populous cities, plans to consolidate its status by embracing eight surrounding cities, which should ensure the city’s position as a major regional shopping destination. Compared to other Tier II cities, the modern retail stock in Wuhan is still low and has significant room for growth. Also, considering the current scarcity of luxury brands in the city relative to Tier I and other Tier II cities, future demand for prime retail space is expected to be robust.

Wenzhou, with its surprisingly unsophisticated retail market given its market size of 7.6 million people with above above average incomes, is well placed to achieve significant results.

Retail – Future Winners

28 China40, 2009

Evolving Luxury in China Luxury retailers have been a key driver of demand for prime retail space in Tier II and Tier III cities. These retailers have been attracted by the combination of strong economic growth, an increasingly wealthy middle class, and the one child policy which has produced an army of young, aspiring spenders keen to show off their new wealth and status. Moreover, shopping centres are keen to attract luxury retailers as they tend to draw other well known brands, increase footfall and improve the centre’s image. To entice luxury retailers, shopping centres sometimes offer incentives such as rental discounts or longer rent free periods.

Giorgio Armani, Gucci, and Louis Vuitton are some of the well known names that have shown significant expansion into Tier II and III cities. Louis Vuitton, which entered China in 1992, has 23 stores in 18 cities and achieved an annual profit growth of almost 50% a year. Where local knowledge is lacking, particularly in Tier III cities, luxury retailers such as Dunhill have often opted for the franchise model. Most expansion has occurred in Tier II cities such as Shenyang, Dalian, Qingdao, Hangzhou and Wuxi (Figure 22). However, wealthy Tier III cities such as Wenzhou (a coastal city located south of Shanghai, where disposable incomes are amongst the highest in the country) are also popular targets.

Fig 22: Luxury Retailer Concentration

Based on a basket of luxury international retailers including Gucci, LV and Armani.Source: Jones Lang LaSalle, Company Websites

Low High

ShenyangDalian

QingdaoHangzhou

NanjingKunming

WuxiTianjin

WenzhouChengdu

XianWuhan

ChangshaChangchun

SuzhouXiamenHarbinJinan

ZhengzhouNingbo

TaiyuanChongqing

FuzhouNanchang

ShijiazhuangHefei

NanningGuiyangFoshanZhuhai

China40, 2009 29

Growth in hotel demand, driven by both business and leisure travellers, as well as the development of new city centres and industrial zones, are offering unprecedented opportunities for domestic and international hotel brands to expand across China. By the end of 2008, it is estimated that there were over 15,000 star-rated hotels in China; approximately 10% are located in Tier I cities, leaving nearly 90% of all star-rated hotels distributed across the country. While hotel development in China’s Tier I cities have dominated the headlines with record numbers of new rooms and landmark projects, Tier II and III cities are experiencing a rapid evolution of their hotel markets, which is presenting both challenges and opportunities for hotel operators and investors.

Domestic vs International OperatorsIn most cases, China’s Tier II and III cities do not offer the scale of international travellers that Tier I cities enjoy, at least for the time being. Although many Tier II and III cities are home to MNCs, the majority of hotel users are domestic customers, which in part explains the historically low representation of international brands. However, this is changing, as an increasing number of international operators are expanding beyond Tier I cities, both driven by operators’ growth strategy and owners’ desire.

At the other end of the spectrum, many domestic hotel brands are also capturing the growth momentum and rapidly expanding into Tier II and III cities. Many of these operators are able to capitalize on local relationships and knowledge, in addition to competitive terms to gain new management contracts. Today, many domestic hotels in Tier II and III cities are challenging the premium sector that is traditionally dominated by international hotels. As supply increases, the race between domestic and international brands in Tier II and III cities will also intensify, testing the mantra of “think global, act local”, Global Distribution Systems and traditional operating models of international hotels.

Investment vs Investment ReturnsOne of the challenges for hotels in Tier II and III cities is room rates. Most Tier II and III cities are commanding rates that are a fraction of those achieved in Tier I cities. Although land prices are typically lower in Tier II and III cities, the variance in hotel construction and fit-out costs (for four-and five-star hotels) across the country is low, which challenges the traditional investment assumptions and returns for hotel owners. In many cases,

hotel investments are included as part of mixed use projects, or offered with incentives to enhance the overall return. Further, some international brands have introduced mid-tier products, such as Holiday Inn Express and Hilton Garden Inn, targeting the Tier II and III markets.

At the same time, economy hotels (including budget hotels) are making a strong entry into Tier II and III cities with their attractive investment model. On the one hand, investment costs of economy hotels are only a fraction of those in four andfivestarhotels(largelybecausemanyeconomy hotels are leased not owned). On the other hand, economy hotels provide a no-thrill product at a price point that captures the growing demand of price-conscious travellers that are the core of China’s growing economy.

China40 vs China40AsTierIIandIIIcitiescontinuetodefinetheir positioning and market share in the nationalplatform,manyhaveidentifiedleisure and MICE (Meetings, Incentives, Conventions and Exhibitions) industries as key sectors to develop. This trend is largely driven by the need to attract outside investments and income sources in order to expedite local growth. As such, many cities are investing in elaborate convention facilities, infrastructure and tourist attractions, through both public and private funding. Xiamen, Dalian, Qingdao, Xian and Kunming, for example, all have identifiedMICEmarketasakeydriverforeconomic growth and are competing for namedeventstoelevatetheirprofiles.Although the race for MICE demand will intensify and there will be winners and losers, we believe that growth of the overall MICE demand in China will offer many opportunities for well planned cities to capture their fair share.

Hotels – A Niche Opportunity

Fig 23: International Hotels in Tier II cities

Source: Jones Lang LaSalle Hotels

Tier II Cities

No. of International Hotels, 2008

Est. % Increase in New Supply

by 2010

Chengdu 8 109%

Chongging 12 72%

Dalian 8 68%

Dongguan 5 68%

Hangzhou 15 143%

Nanjing 6 87%

Ningbo 4 112%

Qingdao 6 53%

Shenyang 9 28%

Suzhou 10 78%

Tianjin 11 135%

Wuhan 14 8%

Wuxi 4 308%

Xiamen 8 47%

Xian 13 35%

30 China40, 2009

Investor interest in Tier II and Tier III cities remains high, but the global financial crisis has temporarily subdued activity.

Less Investment ActivityWhilst property investment has seen double digit growth, recent months have witnessed a slight slowdown. According to the National Bureau of Statistics national property investment totalled RMB 3.0 trn (USD 450bn) in 2008, up 20.9% year-on-year. Although many investors and developers are struggling to raise finance as a result of the credit crunch and global slowdown, there is evidence that domestic buyers that are less reliant on financing continue to be active acquirers.

Temporary Retreat to Tier I CitiesOver the short term, investor and developer activity will continue to fall and their attention will temporarily shift away from Tier II and III cities to Shanghai and Beijing. A slowing global economy, difficulties in obtaining credit, government policies restricting foreign investment, and a re-pricing of risk all act together to put the brakes on property investment and development in China. Developer activity has already scaled back significantly. For example, China Vanke constructed 5.86 million sqm of space in 2008, 15% less than what was originally planned at the beginning of the year.

Consequently, the attention has shifted back to the more mature cities of Shanghai and Beijing that are perceived to offer lower risk. Moreover, these Tier I cities are passing through a construction boom that will continue to deliver a large quantity of good quality investable space that may be available on more favourable terms.

‘The focus of investment has temporarily shifted from Tier II and Tier III cities to primary cities such as Shanghai and Beijing where increasing volumes of good quality stock is leading to better opportunities with lower risk,’ – Greg Hyland, Head of Jones Lang LaSalle’s Shanghai Investment Department.

The improving profiles and development potential of Tier II and III cities have attracted the attention of developers and investors. A sizeable chunk of real estate investment has been targeted on Tier II and Tier III cities, with the proportion of total transactions increasing from 45% in 2000 to 73% in 2007. Moreover, fastest growth in real estate investment is occurring in west and middle China, rising at 51% and 41% respectively in 2007. Chengdu and Chongqing recorded the highest levels of real estate invstment in 2007.

Hong Kong firms, such as Kerry Properties, Shui On and China Resources have been particularly active players. However, European and North American investors are increasing their presence in China. For example, Blackstone Group recently made their first major acquisition in China with the RMB 928.2m purchase of Shanghai’s Changshou Commercial Plaza in the second half of 2008.

Property Investment

‘Property investment is slowing because of fallingconfidence,difficultiesinobtainingfinancingandgovernment hurdles to foreign investment. However, we expect investor activity to start to recover in the second half of 2009 as government measures to boost liquidity through relaxed lending and falling property prices leads to attractive investment opportunities’Greg Hyland, Head of Jones Lang LaSalle’s Shanghai Investment Team

China40, 2009 31

Local developers account for the majority of construction in Chinese cities. The top 100 domestic developers sold property worth an average of USD 705m in 2007 (a 65% increase on 2006), according to the China Real Estate Top 10 Research Team. Although foreign developers only account for less than 5% of the market, they have increased their participation in the market. In 2007, total foreign developer investment reached RMB 65.1bn (USD 9.6bn), a 65% increase over the previous year. The most active developer markets among the China40 are Chengdu, Tianjin, Hangzhou and Wuhan.

CapitaLand was one of the earliest entrants and has been in China for 14 years. The group has expanded its presence into Shanghai and the Yangtze River Delta, Beijing and the Bohai Economic Rim, Guangzhou and the Pearl River Delta, and the Central and Western regions of China. To date, the firm has 76 malls in 44 cities across China, including four Raffles City shopping centres (the firm’s most high profile brand) in Shanghai, Beijing, Chengdu and Hangzhou.

Fig 24: Property Investment and Developer Activity

Developer Activity Score based on basket of developers including Capitaland, Kerry, Hang Lung Properties, Shui On Group, Hutchison Whampoa, Sun Hong Kai, New World China Land, Vanke, China Overseas, Forte and Henderson.Source: China Statistics Bureau

Fig 25: Destination of Real Estate Investment

Source: Jones Lang LaSalle and National Statistics Bureaus

Tier II and Tier III, 55% Tier I, 45%

2000

Tier II and Tier III, 70%

Tier I, 30%

2006

Tier II and Tier III, 73%

Tier I, 27%

2007

Total Real Estate Investment

(RMB billions)Developer Activity

Score

Chengdu 91 8

Chongqing 85 5

Dalian 41 4

Dongguan 21 4

Hangzhou 52 6

Nanjing 45 5

Ningbo 3 3

Qingdao 32 4

Shenyang 73 4

Suzhou 57 4

Tianjin 51 8

Wuhan 46 6

Wuxi 38 3

Xiamen 38 0

Xian 39 4

Changchun 13 4

Changsha 41 4

Changzhou 23 2

Foshan 31 4

Fuzhou 38 1

Guiyang 14 1

Harbin 16 0

Hefei 39 1

Jiaxing 15 0

Jinan 19 1

Jinhua 12 0

Kunming 22 0

Lanzhou 5 0

Nanchang 13 1

Nanning 19 0

Nantong 14 0

Shaoxing 18 0

Shijiazhuang 20 0

Taiyuan 9 0

Urumqi 8 0

Wenzhou 19 0

Xuzhou 10 0

Yantai 21 0

Zhengzhou 30 1

Zhuhai 13 5

Tier

IITi

er III

32 China40, 2009

While the ongoing global recession is subduing activity in China’s secondary and tertiary cities, the long term growth fundamentals remain strong. Going forward, business activity in Tier II and Tier III cities will resume its rapid growth trajectory and the cities are expected to play a significant role in China’s property market. The combination of government policies and massive infrastructure investment will act together to open and funnel activity towards inner and north east Chinese cities. While the majority of Tier II and Tier III cities will benefit from this development, those cities with a combination of proactive governments, deep pools of skilled labour and good transportation links are best positioned to lead and succeed.

Final Observations

Watch China REITs The anticipated introduction in China of Real Estate Investment Trusts (REITs) is expected to have a major impact on property market dynamics. Whilst there are a growing number of China REITs based in locations such as Hong Kong and Singapore, none are currently listed on the mainland stock exchanges due to a lack of legislation. However, this may soon change with the recent approval of these financial instruments by central government and plans to run a pilot REIT programme in 2009. A thriving REIT industry is certainly in the interest of the central government as it could help to reduce bank exposure to the

real-estate market, create a more professional environment for property investment, discourage speculation, improve real estate transparency and offer foreign funds additional access to the Chinese market. Moreover, REITs would help to provide a much needed capital infusion to the property market which the government is keen to promote as a method of driving economic growth. More recently in December 2008, China’s State Council identified nine financial measures, which officially mentioned REIT for the first time, as one of the significant financing channels for companies.

China40, 2009 33

Population Nominal GDPDisposable

Income FDI Airports Ports Higher Education Quality of Busines

EnvironmentCity City Registered Millions 2007

Average Growth % 2003–07

2007 Billion US$

Average Growth % 2003–07

GDP/Capita 2007 US$

2007 US$ 2007 Billion US$

FDI as % GDP 2007

Status International or Domestic

Total Passengers 000s 2007

Coastal or River

Total TEU 000s 2007

Institutions 2007

Graduates 000s 2007

Shanghai SHANGHAI

Lying at the mouth of the Yangtze River, Shanghai is China’s most important commercial hub, financial centre and its largest container port. Shanghai is the location of choice for MNCs. The World Expo will be held in Shanghai in 2010.

Shanghai SHANGHAI 18.6* 1.7% 172.9 12.4% 11,679 3,404 7.9 4.6% International 51,553 Coastal 26,150 60 485 A

Beijing BEIJING

Capital of China and its main political and cultural centre. Beijing has the country’s largest number of higher education and scientific research centres. Most State Owned Enterprises are also headquartered in the city. Massive infrastructure development associated with the 2008 Summer Olympics.

Beijing BEIJING 16.3* 2.4% 129.8 12.1% 8,076 3,168 5.1 3.9% International 54,365 None 0 83 568 A

Guangzhou GUANGDONG

Capital of Guangdong Province and a key regional city in southern China. Located in the Pearl River Delta, in close proximity to Hong Kong and Macau, the city is the 3rd largest container port in mainland China. The city holds the Chinese Export Commodities Fair annually. The 2010 Asian Games will be held in Guangzhou.

Guangzhou GUANGDONG 10.0* 1.4% 101.6 14.5% 10,326 3,238 3.3 3.2% International 30,958 Coastal 9,200 63 679 A

Shenzhen GUANGDONG

Bordering Hong Kong SAR, Shenzhen was China’s first Special Economic Zone, and is home to one of its 2 stock exchanges. Shenzhen is a production and research base, as well as a commodities trade centre of high-tech products. It is also one of the world’s largest container ports.

Shenzhen GUANGDONG 8.6* 10.9% 88.8 16.6% 11,415 3,584 3.7 4.1% International 20,619 Coastal 21,099 9 59 A

Hong Kong HONG KONG SAR

China’s Special Administrative Region and one of the world’s most open economies. Hong Kong has become Asia’s major financial, trading and commercial centre. It also has one of the world’s busiest container ports.

Hong Kong HONG KONG SAR 7.0 1.3% 207.2 6.4% 41,978 21,779 28.9 13.9% International 47,042 Coastal 23,881 12 na A+

Chengdu SICHUAN Capital of Sichuan Province, Chengdu is seeking to position itself as the main commercial and manufacturing hub of south west China. The city has been a major target for international property developers. Chengdu

SICHUAN 12.6 1.6% 47.9 13.8% 3,822 2,140 1.1 2.4% International 18,574 None 0 40 541 A

Chongqing CHONGQING

A key city of China’s ‘Go West’ policy. Chongqing is a major hub of water, land and air communications in western China. It has a strong industrial base, and leading industries include automotives, chemicals, pharmaceuticals, construction and tourism.

Chongqing CHONGQING 28.2 0.1% 59.2 12.6% 2,107 1,976 1.1 1.8% International 10,356 River 432 56 414 B

Dalian LIAONING

Located in the most southerly part of Liaodong Peninsula, Dalian is an important port, trade, industry and tourist city. In recent years, Dalian has been developing its IT industries, and has emerged as an important BPO location. The city is a favoured location for Japanese and Korean investors.

Dalian LIAONING 6.1 0.7% 45.1 15.9% 7,439 2,177 3.2 7.0% International 7,281 Coastal 3,438 21 220 B

Dongguan GUANGDONG

Located on the Hong Kong-Guangzhou Golden Economic Corridor, Dongguan is a major transportation hub and manufacturing base, particularly in electronics. However, high labour costs have forced a large number of textile and shoe factories out of the city in recent years.

Dongguan GUANGDONG 6.9 3.2% 45.4 19.1% 6,630 3,894 2.1 4.7% None 0 None 0 4 25 B

Hangzhou ZHEJIANG

One of the most popular tourist destinations in China. Hangzhou is the cultural, economic and political centre of Zhejiang Province, one of the richest provinces in China. Hangzhou is also emerging as an IT hub and holds the annual Hangzhou West Lake International Expo.

Hangzhou ZHEJIANG 7.9 1.1% 59.1 14.4% 7,585 3,125 2.8 4.7% International 11,730 None 0 36 393 A

Nanjing JIANGSU

Capital of Jiangsu Province, and one of the seven ancient capitals of China. Nanjing is emerging as a major growth location, and is already home to many MNCs. The city is also an increasingly attractive target for regional headquarter functions.

Nanjing JIANGSU 7.4 1.8% 47.2 15.6% 6,463 2,928 2.1 4.4% International 8,037 River 1,050 41 678 A

Ningbo ZHEJIANG

A major port city, ranked 2nd after Shanghai in terms of cargo throughput. The city is benefiting from strong private sector growth in Zhejiang Province. The completion of Hangzhou Bay Bridge has significantly reduced the driving time between Shanghai and Ningbo, acting as a catalyst for further growth.

Ningbo ZHEJIANG 5.6 0.7% 49.5 14.4% 8,794 3,214 2.5 5.1% International 3,301 Coastal 9,349 13 126 B

Qingdao SHANDONG

Situated on the south coast of Shandong, Qingdao possesses one of the largest container ports in the world. Key industries are home appliances, chemical engineering, food and beverages. The city is a key target for Japanese and Korean investors. It is also famous for Tsingtao beer.

Qingdao SHANDONG 8.4 1.2% 54.6 16.2% 6,597 2,573 3.8 7.0% International 7,868 Coastal 9,462 25 254 B

Shenyang LIAONING

Capital of Liaoning Province, Shenyang is a key component of the revitalization plan and the largest city and railway hub in northern China. It has a heavy industrial base, and is known as ‘the home of machinery’. The city is known for car manufacturing, but is also increasingly attractive to aviation industries as evidenced by Airbus’s recent announcement to establish a factory in the city.

Shenyang LIAONING 7.5 0.6% 44.3 16.0% 6,268 2,105 5.0 11.4% International 6,190 None 0 30 317 B

Suzhou JIANGSU

Suzhou is a city with 2,500 years of history and culture heritage, and is known as the ‘Venice of the Orient’. It is also a major high-tech and manufacturing base. Suzhou is a favoured location for FDI, due to its strategic location close to Shanghai, a business friendly environment and competitive costs.

Suzhou JIANGSU 8.1 1.3% 82.1 16.4% 10,053 3,063 7.4 9.0% None 0 River 1,900 17 152 B

Tianjin TIANJIN

A major manufacturing and port city, Tianjin has the largest commercial container port in northern China, and its airport has Huabei’s largest cargo freight centre (in terms of handling capacity). Recent improvements to rail and road links have further integrated its economy with nearby Beijing.

Tianjin TIANJIN 11.2 0.9% 72.3 14.9% 6,604 2,357 5.3 7.3% International 3,861 Coastal 7,103 45 357 A

Wuhan HUBEI

Capital of Hubei Province, Wuhan is the ‘Detroit of China’ and has one of the country’s biggest steel and car industries. The city is also referred to as the ‘crossroads of China’ because it has China’s second largest inland port and several national highways and railways pass through the city. The city’s education system ranks 3rd in China.

Wuhan HUBEI 8.9 1.5% 45.3 14.3% 5,071 2,069 2.3 5.0% International 8,356 River 388 55 778 C

Wuxi JIANGSU

An increasingly important manufacturing hub with key industries including electronics & IT, fine chemicals, bioengineering and pharmaceuticals. Caterpillar has recently opened its engine R&D centre in the city.

Wuxi JIANGSU 5.9 1.0% 55.6 15.7% 9,395 3,011 2.8 0.0% Domestic 1,360 River 13 11 103 B

Xiamen FUJIAN

Located in Fujian Province on the Taiwan Straits, Xiamen is a port city and major transport hub in southern China. The city is focusing on environmentally friendly industries, and is a favoured location for Taiwanese investors. Dell has its main China operations in the city.

Xiamen FUJIAN 2.4 4.0% 19.8 16.3% 8,155 3,098 1.3 6.4% International 8,685 Coastal 463 15 94 B

Xian SHAANXI

Capital of Shaanxi Province, Xian is the home of China’s terracotta warriors. As well as a major tourist destination and historical city, Xian is an important aerospace and high-tech manufacturing centre in north west China.

Xian SHAANXI 8.3 1.7% 25.0 13.5% 3,028 1,824 1.1 4.5% International 11,373 None 0 48 560 C

Changchun JILIN

Capital of Jilin Province, Changchun is known for its car manufacturing, engineering and film production. The automobile giant - China First Automobile Works is located in Changchun. It is also a key city in the plan to revitalise north east China.

Changchun JILIN 7.5 0.9% 30.1 13.8% 4,053 1,846 1.7 5.6% International 2,623 None 0 28 331 C

Changsha HUNAN Capital of Hunan Province, Changsha is a key transport link between east and west China due to its central location. Its pillar industries are tobacco, machinery, food and textiles. Changsha

HUNAN 6.5 1.4% 31.6 14.9% 4,857 2,328 1.5 4.8% International 8,070 River 93 48 454 C

Changzhou JIANGSU

A port city located at the centre of the Yangtze River Delta and just 2 hours by train from Shanghai, Changzhou is an increasingly important industrial centre for textiles, food processing, engineering and high technology. It is benefiting from the economic spill over from Suzhou and Wuxi, further east.

Changzhou JIANGSU 4.4 0.8% 27.1 15.2% 6,293 2,751 1.8 0.0% Domestic 510 River 22 9 94 C

Foshan GUANGDONG

Situated next to Guangzhou, Foshan ranks third in the Pearl River Delta for GDP, consumer sales, and manufacturing. Apart from being the largest producer of microwaves in China, the city’s industry is known for furniture, pharamaceutical products and textiles. A popular destination for foreign investment, the city has attracted well known brands such as Siemens, Bosch and Toshiba.

Foshan GUANGDONG 5.9 1.3% 51.7 11.8% 8,778 3,135 1.6 0.0% None 0 Coastal 259 3 37 C

Fuzhou FUJIAN

Capital of Fujian Province, a traditional port, which was one of the earliest ports opened to foreign trade. Fuzhou is the mainland’s nearest large city to Taiwan Province, and is increasingly benefiting from ties with Taiwan. It is home to China’s largest manufacturer of sports shoes.

Fuzhou FUJIAN 6.7 1.1% 28.5 12.8% 4,224 2,398 1.7 6.0% International 4,247 Coastal 1,200 35 245 C

Guiyang GUIZHOU

Capital of Guizhou Province, one of China’s poorest provinces, Guiyang is known as the ‘forest city’ with over 35% of the city covered by trees. The city offers low costs for foreign and domestic investors. Several ongoing transport infrastructure projects will help open the city for investment.

Guiyang GUIZHOU 3.6 0.9% 10.0 14.3% 2,819 1,842 0.1 0.8% International 4,248 None 0 15 158 C

Harbin HEILONGJIANG Capital of Heilongjiang Province, Harbin is a major trading hub, particularly international trade with Russia. It is also an important education centre of north east China, with good technical schools. Harbin

HEILONGJIANG 9.9 0.8% 35.1 13.7% 3,569 1,840 0.4 1.3% International 4,433 River 0 48 416 C

Hefei ANHUI

Capital of Anhui Province, Hefei is a major centre for higher education, and is well known for the quality of its science graduates. Hefei is likely to benefit from the westwards economic expansion of the Yangtze River Delta region.

Hefei ANHUI 4.8 1.4% 19.2 16.8% 4,053 1,935 1.0 5.3% Domestic 2,230 None 0 41 296 C

Jiaxing ZHEJIANG

Situated in north east Zhejiang Province, Jiaxing, also known as the ‘home of silk’, is becoming a communications hub connecting Zhejiang with Shanghai, Jiangsu and Anhui. Key industries include textiles, mechanical and chemicals.

Jiaxing ZHEJIANG 3.4 0.3% 22.8 14.9% 6,794 2,900 1.7 7.3% None 0 Coastal 37 8 58 C

Jinan SHANDONG

Capital of Shandong Province, one of China’s fastest growing provinces. Jinan, also known as ‘spring city’ for its 72 springs, has a largely domestically-driven industrial economy. A good supply of highly skilled labour is helping the economy to diversify into bio-technology and IT.

Jinan SHANDONG 6.0 1.0% 36.8 15.4% 6,077 2,594 0.6 1.5% International 4,363 None 0 39 463 C

Jinhua ZHEJIANG Located in the centre of Zhejiang, 3 hours from Shanghai by car, Jinhua is known for its dry cured ham. The city is an important manufacturing base for textiles, hardware, medicines and chemical products. Jinhua

ZHEJIANG 4.6 0.4% 21.1 14.6% 4,601 2,861 0.5 2.4% None 0 None 0 8 61 C

Kunming YUNNAN

Capital of Yunnan Province, Kunming is a major tourist city, and is known as the ‘Spring City’. Kunming is strategically located close to South East Asia and India, and the city will benefit from planned new road links. The city already possesses one of the busiest airports in China and is now planning to construct a new international airport that will be the 3rd largest in the country.

Kunming YUNNAN 6.2 4.9% 20.1 11.6% 3,253 1,741 0.3 1.5% International 15,726 None 0 31 222 C

Lanzhou GANSU

Capital of Gansu Province, Lanzhou is located on the ancient Silk Road and is a regional transportation hub connecting Lhasa and Urumqi with the rest of China. The city possess one of the largest oil refineries in the country and is the centre of China’s atomic energy industry

Lanzhou GANSU 3.2 1.2% 10.6 11.7% 2,942 1,480 0.1 0.9% International 2,511 None 0 18 161 C

Nanchang JIANGXI

Capital of Jiangxi Province, Nanchang is considered the birthplace of the People’s Liberation Army and is an important transport and agricultural hub in Eastern China. Nanchang is benefiting from the migration of cost sensitive industrial activity from coastal regions.

Nanchang JIANGXI 4.9 1.8% 20.0 15.8% 4,390 1,884 1.2 6.1% International 3,068 River 38 46 431 C

Nanning GUANGXI

Captial of Guangxi, Nanning is rich in mineral resources. The city is seeking to maximise its proximity to South East Asian countries and plays an important role in Sino-ASEAN communications. Pillar industries include food, paper making, and electronics.

Nanning GUANGXI 6.8 2.7% 15.3 14.2% 2,260 1,711 0.2 1.2% International 2,917 River 0 28 212 C

Nantong JIANGSU

A port city on the Yangtze River in Jiangsu Province, Nantong possess a diverse industrial economy that has been a star performer in the region in recent years. More than 500 MNCs are present, including Fujitsu and the shipping giant Cosco.

Nantong JIANGSU 7.7 -0.4% 30.4 15.2% 3,289 2,370 3.1 10.2% Domestic 168 Coastal 428 6 81 C

Shaoxing ZHEJIANG

Located in the Yangtze River Delta, Shaoxing is the birthplace of silk making and is famous for its textile industry which dates back to the Tang dynasty. Apart from textiles, the government places a strong emphasis on high-tech industries such as electronics, chemicals and IT.

Shaoxing ZHEJIANG 4.4 0.1% 28.4 14.3% 6,516 3,166 1.1 3.9% None 0 River na 5 44 C

Shijiazhuang HEBEI

Capital of Hebei Province, Shijiazhuang is a major industrial city and is home to China’s largest pharmaceutical plant and the army’s military academy. Other main sectors include machinery, chemicals, textiles and electronics. The city’s large population, position as a major railway hub and improving infrastructure are attracting the attention of logistics operators.

Shijiazhuang HEBEI 9.6 1.1% 34.5 13.3% 3,026 1,903 0.5 1.5% International 802 None 0 44 317 C

Taiyuan SHANXI

Located in the centre of Shaanxi Province, the coal rich city is home to many industries including the Taiyuan Iron and Steel company – the largest stainless steel producer in the world. Also called the ‘dragon city’ because it is the hometown of many emperors.

Taiyuan SHANXI 3.5 1.4% 18.0 14.3% 5,242 1,981 0.2 1.3% International 3,613 None 0 34 298 C

Urumqi XINJIANG

Capital of Xinjiang Province, Urumqi is in the Guinness Book of World Records as the most remote city in the world from any sea. The coal and oil rich city is making a return as a link between Europe and China on the ancient Silk Road. Pillar industries include petrochemical, textiles, machinery and foods.

Urumqi XINJIANG 2.1 3.8% 11.3 13.6% 5,302 1,889 0.1 0.6% International 6,107 None 0 13 111 C

Wenzhou ZHEJIANG

Located on the south coast of Zhejiang, Wenzhou is the birthplace of China’s private economy and has a deep history of entrepreneurialism. It is also one of the wealthiest cities in China in terms of disposable incomes. Key industries are food processing, papermaking, and building materials.

Wenzhou ZHEJIANG 7.6 0.7% 31.1 13.9% 4,087 3,459 0.6 2.0% Domestic 3,588 Coastal 351 6 64 C

Xuzhou JIANGSU

An important transportation and manufacturing hub located in north Jiangsu Province, Xuzhou is a city with 2,500 years of history. Over 100 construction machinery manufacturers are located here, including Caterpillar and Xuzhou Construction Machinery Group (China’s largest construction machinery company).

Xuzhou JIANGSU 9.4 0.8% 24.2 14.2% 2,770 2,143 0.1 0.4% Domestic 414 River 0 7 106 C

Yantai SHANDONG

Situated on the north east shore of Shandong Peninsula, opposite Dalian, Yantai is the second most important industrial region in the province. Key industries are machinery, electronics, food processing and gold. Major automobile enterprises include Hyundai Furnace and Dongyue Automobile.

Yantai SHANDONG 6.5 0.1% 41.5 17.2% 6,375 2,417 2.4 5.8% Domestic 1,640 Coastal 1,250 9 117 B

Zhengzhou HENAN

Capital of Henan Province, Zhengzhou is known as the ‘Aluminium Capital’ for which it is an important manufacturing base in China. Due to its strategic location it is challenging Wuhan to be a key regional city of Central China. Zhengzhou Yutong, the largest bus manufacturer in Asia is based here.

Zhengzhou HENAN 7.4 2.6% 34.9 15.2% 4,779 1,973 1.0 2.9% International 5,002 None 0 39 551 B

Zhuhai GUANGDONG Located on the coast of Guangdong bordering Macau and Hong Kong. The Hong Kong-Zhuhai-Macau Bridge currently under construction will provide a boost to the city’s economy. Zhuhai

GUANGDONG 1.0 4.0% 12.8 15.5% 8,800 2,780 1.0 8.1% International 1,041 Coastal 0 8 79 B

Tier

ITi

er II

Tier

III

Fig 26: China, City ComparisonsSource: Jones Lang LaSalle, Miscellaneous Government Sources

Population Nominal GDPDisposable

Income FDI Airports Ports Higher Education Quality of Busines

EnvironmentCity City Registered Millions 2007

Average Growth % 2003–07

2007 Billion US$

Average Growth % 2003–07

GDP/Capita 2007 US$

2007 US$ 2007 Billion US$

FDI as % GDP 2007

Status International or Domestic

Total Passengers 000s 2007

Coastal or River

Total TEU 000s 2007

Institutions 2007

Graduates 000s 2007

Shanghai SHANGHAI

Lying at the mouth of the Yangtze River, Shanghai is China’s most important commercial hub, financial centre and its largest container port. Shanghai is the location of choice for MNCs. The World Expo will be held in Shanghai in 2010.

Shanghai SHANGHAI 18.6* 1.7% 172.9 12.4% 11,679 3,404 7.9 4.6% International 51,553 Coastal 26,150 60 485 A

Beijing BEIJING

Capital of China and its main political and cultural centre. Beijing has the country’s largest number of higher education and scientific research centres. Most State Owned Enterprises are also headquartered in the city. Massive infrastructure development associated with the 2008 Summer Olympics.

Beijing BEIJING 16.3* 2.4% 129.8 12.1% 8,076 3,168 5.1 3.9% International 54,365 None 0 83 568 A

Guangzhou GUANGDONG

Capital of Guangdong Province and a key regional city in southern China. Located in the Pearl River Delta, in close proximity to Hong Kong and Macau, the city is the 3rd largest container port in mainland China. The city holds the Chinese Export Commodities Fair annually. The 2010 Asian Games will be held in Guangzhou.

Guangzhou GUANGDONG 10.0* 1.4% 101.6 14.5% 10,326 3,238 3.3 3.2% International 30,958 Coastal 9,200 63 679 A

Shenzhen GUANGDONG

Bordering Hong Kong SAR, Shenzhen was China’s first Special Economic Zone, and is home to one of its 2 stock exchanges. Shenzhen is a production and research base, as well as a commodities trade centre of high-tech products. It is also one of the world’s largest container ports.

Shenzhen GUANGDONG 8.6* 10.9% 88.8 16.6% 11,415 3,584 3.7 4.1% International 20,619 Coastal 21,099 9 59 A

Hong Kong HONG KONG SAR

China’s Special Administrative Region and one of the world’s most open economies. Hong Kong has become Asia’s major financial, trading and commercial centre. It also has one of the world’s busiest container ports.

Hong Kong HONG KONG SAR 7.0 1.3% 207.2 6.4% 41,978 21,779 28.9 13.9% International 47,042 Coastal 23,881 12 na A+

Chengdu SICHUAN Capital of Sichuan Province, Chengdu is seeking to position itself as the main commercial and manufacturing hub of south west China. The city has been a major target for international property developers. Chengdu

SICHUAN 12.6 1.6% 47.9 13.8% 3,822 2,140 1.1 2.4% International 18,574 None 0 40 541 A

Chongqing CHONGQING

A key city of China’s ‘Go West’ policy. Chongqing is a major hub of water, land and air communications in western China. It has a strong industrial base, and leading industries include automotives, chemicals, pharmaceuticals, construction and tourism.

Chongqing CHONGQING 28.2 0.1% 59.2 12.6% 2,107 1,976 1.1 1.8% International 10,356 River 432 56 414 B

Dalian LIAONING

Located in the most southerly part of Liaodong Peninsula, Dalian is an important port, trade, industry and tourist city. In recent years, Dalian has been developing its IT industries, and has emerged as an important BPO location. The city is a favoured location for Japanese and Korean investors.

Dalian LIAONING 6.1 0.7% 45.1 15.9% 7,439 2,177 3.2 7.0% International 7,281 Coastal 3,438 21 220 B

Dongguan GUANGDONG

Located on the Hong Kong-Guangzhou Golden Economic Corridor, Dongguan is a major transportation hub and manufacturing base, particularly in electronics. However, high labour costs have forced a large number of textile and shoe factories out of the city in recent years.

Dongguan GUANGDONG 6.9 3.2% 45.4 19.1% 6,630 3,894 2.1 4.7% None 0 None 0 4 25 B

Hangzhou ZHEJIANG

One of the most popular tourist destinations in China. Hangzhou is the cultural, economic and political centre of Zhejiang Province, one of the richest provinces in China. Hangzhou is also emerging as an IT hub and holds the annual Hangzhou West Lake International Expo.

Hangzhou ZHEJIANG 7.9 1.1% 59.1 14.4% 7,585 3,125 2.8 4.7% International 11,730 None 0 36 393 A

Nanjing JIANGSU

Capital of Jiangsu Province, and one of the seven ancient capitals of China. Nanjing is emerging as a major growth location, and is already home to many MNCs. The city is also an increasingly attractive target for regional headquarter functions.

Nanjing JIANGSU 7.4 1.8% 47.2 15.6% 6,463 2,928 2.1 4.4% International 8,037 River 1,050 41 678 A

Ningbo ZHEJIANG

A major port city, ranked 2nd after Shanghai in terms of cargo throughput. The city is benefiting from strong private sector growth in Zhejiang Province. The completion of Hangzhou Bay Bridge has significantly reduced the driving time between Shanghai and Ningbo, acting as a catalyst for further growth.

Ningbo ZHEJIANG 5.6 0.7% 49.5 14.4% 8,794 3,214 2.5 5.1% International 3,301 Coastal 9,349 13 126 B

Qingdao SHANDONG

Situated on the south coast of Shandong, Qingdao possesses one of the largest container ports in the world. Key industries are home appliances, chemical engineering, food and beverages. The city is a key target for Japanese and Korean investors. It is also famous for Tsingtao beer.

Qingdao SHANDONG 8.4 1.2% 54.6 16.2% 6,597 2,573 3.8 7.0% International 7,868 Coastal 9,462 25 254 B

Shenyang LIAONING

Capital of Liaoning Province, Shenyang is a key component of the revitalization plan and the largest city and railway hub in northern China. It has a heavy industrial base, and is known as ‘the home of machinery’. The city is known for car manufacturing, but is also increasingly attractive to aviation industries as evidenced by Airbus’s recent announcement to establish a factory in the city.

Shenyang LIAONING 7.5 0.6% 44.3 16.0% 6,268 2,105 5.0 11.4% International 6,190 None 0 30 317 B

Suzhou JIANGSU

Suzhou is a city with 2,500 years of history and culture heritage, and is known as the ‘Venice of the Orient’. It is also a major high-tech and manufacturing base. Suzhou is a favoured location for FDI, due to its strategic location close to Shanghai, a business friendly environment and competitive costs.

Suzhou JIANGSU 8.1 1.3% 82.1 16.4% 10,053 3,063 7.4 9.0% None 0 River 1,900 17 152 B

Tianjin TIANJIN

A major manufacturing and port city, Tianjin has the largest commercial container port in northern China, and its airport has Huabei’s largest cargo freight centre (in terms of handling capacity). Recent improvements to rail and road links have further integrated its economy with nearby Beijing.

Tianjin TIANJIN 11.2 0.9% 72.3 14.9% 6,604 2,357 5.3 7.3% International 3,861 Coastal 7,103 45 357 A

Wuhan HUBEI

Capital of Hubei Province, Wuhan is the ‘Detroit of China’ and has one of the country’s biggest steel and car industries. The city is also referred to as the ‘crossroads of China’ because it has China’s second largest inland port and several national highways and railways pass through the city. The city’s education system ranks 3rd in China.

Wuhan HUBEI 8.9 1.5% 45.3 14.3% 5,071 2,069 2.3 5.0% International 8,356 River 388 55 778 C

Wuxi JIANGSU

An increasingly important manufacturing hub with key industries including electronics & IT, fine chemicals, bioengineering and pharmaceuticals. Caterpillar has recently opened its engine R&D centre in the city.

Wuxi JIANGSU 5.9 1.0% 55.6 15.7% 9,395 3,011 2.8 0.0% Domestic 1,360 River 13 11 103 B

Xiamen FUJIAN

Located in Fujian Province on the Taiwan Straits, Xiamen is a port city and major transport hub in southern China. The city is focusing on environmentally friendly industries, and is a favoured location for Taiwanese investors. Dell has its main China operations in the city.

Xiamen FUJIAN 2.4 4.0% 19.8 16.3% 8,155 3,098 1.3 6.4% International 8,685 Coastal 463 15 94 B

Xian SHAANXI

Capital of Shaanxi Province, Xian is the home of China’s terracotta warriors. As well as a major tourist destination and historical city, Xian is an important aerospace and high-tech manufacturing centre in north west China.

Xian SHAANXI 8.3 1.7% 25.0 13.5% 3,028 1,824 1.1 4.5% International 11,373 None 0 48 560 C

Changchun JILIN

Capital of Jilin Province, Changchun is known for its car manufacturing, engineering and film production. The automobile giant - China First Automobile Works is located in Changchun. It is also a key city in the plan to revitalise north east China.

Changchun JILIN 7.5 0.9% 30.1 13.8% 4,053 1,846 1.7 5.6% International 2,623 None 0 28 331 C

Changsha HUNAN Capital of Hunan Province, Changsha is a key transport link between east and west China due to its central location. Its pillar industries are tobacco, machinery, food and textiles. Changsha

HUNAN 6.5 1.4% 31.6 14.9% 4,857 2,328 1.5 4.8% International 8,070 River 93 48 454 C

Changzhou JIANGSU

A port city located at the centre of the Yangtze River Delta and just 2 hours by train from Shanghai, Changzhou is an increasingly important industrial centre for textiles, food processing, engineering and high technology. It is benefiting from the economic spill over from Suzhou and Wuxi, further east.

Changzhou JIANGSU 4.4 0.8% 27.1 15.2% 6,293 2,751 1.8 0.0% Domestic 510 River 22 9 94 C

Foshan GUANGDONG

Situated next to Guangzhou, Foshan ranks third in the Pearl River Delta for GDP, consumer sales, and manufacturing. Apart from being the largest producer of microwaves in China, the city’s industry is known for furniture, pharamaceutical products and textiles. A popular destination for foreign investment, the city has attracted well known brands such as Siemens, Bosch and Toshiba.

Foshan GUANGDONG 5.9 1.3% 51.7 11.8% 8,778 3,135 1.6 0.0% None 0 Coastal 259 3 37 C

Fuzhou FUJIAN

Capital of Fujian Province, a traditional port, which was one of the earliest ports opened to foreign trade. Fuzhou is the mainland’s nearest large city to Taiwan Province, and is increasingly benefiting from ties with Taiwan. It is home to China’s largest manufacturer of sports shoes.

Fuzhou FUJIAN 6.7 1.1% 28.5 12.8% 4,224 2,398 1.7 6.0% International 4,247 Coastal 1,200 35 245 C

Guiyang GUIZHOU

Capital of Guizhou Province, one of China’s poorest provinces, Guiyang is known as the ‘forest city’ with over 35% of the city covered by trees. The city offers low costs for foreign and domestic investors. Several ongoing transport infrastructure projects will help open the city for investment.

Guiyang GUIZHOU 3.6 0.9% 10.0 14.3% 2,819 1,842 0.1 0.8% International 4,248 None 0 15 158 C

Harbin HEILONGJIANG Capital of Heilongjiang Province, Harbin is a major trading hub, particularly international trade with Russia. It is also an important education centre of north east China, with good technical schools. Harbin

HEILONGJIANG 9.9 0.8% 35.1 13.7% 3,569 1,840 0.4 1.3% International 4,433 River 0 48 416 C

Hefei ANHUI

Capital of Anhui Province, Hefei is a major centre for higher education, and is well known for the quality of its science graduates. Hefei is likely to benefit from the westwards economic expansion of the Yangtze River Delta region.

Hefei ANHUI 4.8 1.4% 19.2 16.8% 4,053 1,935 1.0 5.3% Domestic 2,230 None 0 41 296 C

Jiaxing ZHEJIANG

Situated in north east Zhejiang Province, Jiaxing, also known as the ‘home of silk’, is becoming a communications hub connecting Zhejiang with Shanghai, Jiangsu and Anhui. Key industries include textiles, mechanical and chemicals.

Jiaxing ZHEJIANG 3.4 0.3% 22.8 14.9% 6,794 2,900 1.7 7.3% None 0 Coastal 37 8 58 C

Jinan SHANDONG

Capital of Shandong Province, one of China’s fastest growing provinces. Jinan, also known as ‘spring city’ for its 72 springs, has a largely domestically-driven industrial economy. A good supply of highly skilled labour is helping the economy to diversify into bio-technology and IT.

Jinan SHANDONG 6.0 1.0% 36.8 15.4% 6,077 2,594 0.6 1.5% International 4,363 None 0 39 463 C

Jinhua ZHEJIANG Located in the centre of Zhejiang, 3 hours from Shanghai by car, Jinhua is known for its dry cured ham. The city is an important manufacturing base for textiles, hardware, medicines and chemical products. Jinhua

ZHEJIANG 4.6 0.4% 21.1 14.6% 4,601 2,861 0.5 2.4% None 0 None 0 8 61 C

Kunming YUNNAN

Capital of Yunnan Province, Kunming is a major tourist city, and is known as the ‘Spring City’. Kunming is strategically located close to South East Asia and India, and the city will benefit from planned new road links. The city already possesses one of the busiest airports in China and is now planning to construct a new international airport that will be the 3rd largest in the country.

Kunming YUNNAN 6.2 4.9% 20.1 11.6% 3,253 1,741 0.3 1.5% International 15,726 None 0 31 222 C

Lanzhou GANSU

Capital of Gansu Province, Lanzhou is located on the ancient Silk Road and is a regional transportation hub connecting Lhasa and Urumqi with the rest of China. The city possess one of the largest oil refineries in the country and is the centre of China’s atomic energy industry

Lanzhou GANSU 3.2 1.2% 10.6 11.7% 2,942 1,480 0.1 0.9% International 2,511 None 0 18 161 C

Nanchang JIANGXI

Capital of Jiangxi Province, Nanchang is considered the birthplace of the People’s Liberation Army and is an important transport and agricultural hub in Eastern China. Nanchang is benefiting from the migration of cost sensitive industrial activity from coastal regions.

Nanchang JIANGXI 4.9 1.8% 20.0 15.8% 4,390 1,884 1.2 6.1% International 3,068 River 38 46 431 C

Nanning GUANGXI

Captial of Guangxi, Nanning is rich in mineral resources. The city is seeking to maximise its proximity to South East Asian countries and plays an important role in Sino-ASEAN communications. Pillar industries include food, paper making, and electronics.

Nanning GUANGXI 6.8 2.7% 15.3 14.2% 2,260 1,711 0.2 1.2% International 2,917 River 0 28 212 C

Nantong JIANGSU

A port city on the Yangtze River in Jiangsu Province, Nantong possess a diverse industrial economy that has been a star performer in the region in recent years. More than 500 MNCs are present, including Fujitsu and the shipping giant Cosco.

Nantong JIANGSU 7.7 -0.4% 30.4 15.2% 3,289 2,370 3.1 10.2% Domestic 168 Coastal 428 6 81 C

Shaoxing ZHEJIANG

Located in the Yangtze River Delta, Shaoxing is the birthplace of silk making and is famous for its textile industry which dates back to the Tang dynasty. Apart from textiles, the government places a strong emphasis on high-tech industries such as electronics, chemicals and IT.

Shaoxing ZHEJIANG 4.4 0.1% 28.4 14.3% 6,516 3,166 1.1 3.9% None 0 River na 5 44 C

Shijiazhuang HEBEI

Capital of Hebei Province, Shijiazhuang is a major industrial city and is home to China’s largest pharmaceutical plant and the army’s military academy. Other main sectors include machinery, chemicals, textiles and electronics. The city’s large population, position as a major railway hub and improving infrastructure are attracting the attention of logistics operators.

Shijiazhuang HEBEI 9.6 1.1% 34.5 13.3% 3,026 1,903 0.5 1.5% International 802 None 0 44 317 C

Taiyuan SHANXI

Located in the centre of Shaanxi Province, the coal rich city is home to many industries including the Taiyuan Iron and Steel company – the largest stainless steel producer in the world. Also called the ‘dragon city’ because it is the hometown of many emperors.

Taiyuan SHANXI 3.5 1.4% 18.0 14.3% 5,242 1,981 0.2 1.3% International 3,613 None 0 34 298 C

Urumqi XINJIANG

Capital of Xinjiang Province, Urumqi is in the Guinness Book of World Records as the most remote city in the world from any sea. The coal and oil rich city is making a return as a link between Europe and China on the ancient Silk Road. Pillar industries include petrochemical, textiles, machinery and foods.

Urumqi XINJIANG 2.1 3.8% 11.3 13.6% 5,302 1,889 0.1 0.6% International 6,107 None 0 13 111 C

Wenzhou ZHEJIANG

Located on the south coast of Zhejiang, Wenzhou is the birthplace of China’s private economy and has a deep history of entrepreneurialism. It is also one of the wealthiest cities in China in terms of disposable incomes. Key industries are food processing, papermaking, and building materials.

Wenzhou ZHEJIANG 7.6 0.7% 31.1 13.9% 4,087 3,459 0.6 2.0% Domestic 3,588 Coastal 351 6 64 C

Xuzhou JIANGSU

An important transportation and manufacturing hub located in north Jiangsu Province, Xuzhou is a city with 2,500 years of history. Over 100 construction machinery manufacturers are located here, including Caterpillar and Xuzhou Construction Machinery Group (China’s largest construction machinery company).

Xuzhou JIANGSU 9.4 0.8% 24.2 14.2% 2,770 2,143 0.1 0.4% Domestic 414 River 0 7 106 C

Yantai SHANDONG

Situated on the north east shore of Shandong Peninsula, opposite Dalian, Yantai is the second most important industrial region in the province. Key industries are machinery, electronics, food processing and gold. Major automobile enterprises include Hyundai Furnace and Dongyue Automobile.

Yantai SHANDONG 6.5 0.1% 41.5 17.2% 6,375 2,417 2.4 5.8% Domestic 1,640 Coastal 1,250 9 117 B

Zhengzhou HENAN

Capital of Henan Province, Zhengzhou is known as the ‘Aluminium Capital’ for which it is an important manufacturing base in China. Due to its strategic location it is challenging Wuhan to be a key regional city of Central China. Zhengzhou Yutong, the largest bus manufacturer in Asia is based here.

Zhengzhou HENAN 7.4 2.6% 34.9 15.2% 4,779 1,973 1.0 2.9% International 5,002 None 0 39 551 B

Zhuhai GUANGDONG Located on the coast of Guangdong bordering Macau and Hong Kong. The Hong Kong-Zhuhai-Macau Bridge currently under construction will provide a boost to the city’s economy. Zhuhai

GUANGDONG 1.0 4.0% 12.8 15.5% 8,800 2,780 1.0 8.1% International 1,041 Coastal 0 8 79 B

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March 2009

Michael KlibanerHead of ResearchShanghai+86 21 6133 5707Michael.Klibaner@ap.jll.com

Kin Keung FungManaging DirectorGreater China+852 2846 5123Kinkeung.Fung@ap.jll.com

Jeremy KellyProgramme DirectorWorld Winning Cities+44 (0)20 3147 1199Jeremy.Kelly@eu.jll.com

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Jones Lang LaSalle would like to acknowledge Daniel Gardner for his major contribution to the China40 report.