February 18, FT.com - China's economic "miracle" has so far been largely confined to the country's east coast. This is mainly due to the ease of shipping export goods manufactured in the Pearl River and Yangtze River deltas out of ports in Shanghai, Ningbo, Guangzhou, and Hong Kong.

Facing wide regional income disparities, the central government is looking for ways to spread economic development into places like Anhui and Jiangxi – two inland provinces that sit nestled like twin ice-cream scoops in the bowl of rich coastal provinces such as Jiangsu, Zhejiang, Fujian, and Guangdong.

In the next five years, central China will grow rapidly, in part by imitating east China’s development model - Jiangxi and Anhui are already capturing the low end of export-processing industries crimped by rising input costs on the coast.

But mimicking east China’s export-led approach will not be central China’s main growth engine. Instead, Anhui and Jiangxi aim to become “China’s China” – suppliers of low-cost goods to the rest of China (especially its wealthy east coast) just as China as a whole supplies low-cost goods to the world.

In recent years, rising costs for inputs like labour, water and electricity in China’s highly developed east coast have created an opening for central China in the export sector. Its clearest competitive advantage is wages: compared with export juggernaut Guangdong, average monthly wages are 32 per cent lower in Anhui and 40 per cent lower in Jiangxi. Transport is also convenient. Jiujiang, in Jiangxi, and Wuhu, in Anhui, are Yangtze River port cities that offer easy, low cost transport to the container ports of Shanghai.

Thus, despite fears of a flight from high wages in Guangdong to greener pastures in Vietnam and Bangladesh, export processers have already discovered central China as an attractive alternative to moving offshore. Exports in both provinces have increased faster than the national average, and Anhui’s share of total production of refrigerators and washing machines already exceeds that of the rich provinces.

This is thanks largely to Royalstar and Midea, whose factories in Hefei and Wuhu produce both Chinese- and foreign-branded machines through joint ventures and original equipment manufacturer (OEM) agreements.

But despite rapid growth, traditional export processing industries like textiles, electronic appliances, toys, and furniture make up a small proportion of the total industrial output of these provinces. The biggest industries are heavy ones (steel and non-ferrous metal production) that cater to domestic investment demand.

Maanshan Iron and Steel Company in Anhui offers a good example of how Anhui firms are growing largely on the strength of supplying eastern China with intermediate goods. Maanshan is the largest industrial enterprise in either province and the sevent-largest steel producer in China. About 42 per cent of Maanshan’s sales are to Jiangsu, Shanghai, Zhejiang and Guangdong; another 36 percent are within Anhui.

Another success story is Anhui Conch, China’s largest cement producer. Like Maanshan, Conch’s largest markets are in the highly-developed Yangtze River and Pearl River deltas, where the lack of limestone obviates local cement production. The Yangtze also offers a cost-effective shipping channel for a low weight-to-value commodity like cement.

According to executive director Guo Jingbing, Conch has pursued a “T-shaped strategy”: Anhui is the base of the “T”, and the Yangtze is its stem, flowing east towards the crux of “T” at Shanghai. From there, the crossbar extends north to Jiangsu and south to Zhejiang.

Such eastern-facing distribution patterns are what Anhui and Jiangxi provincial governments have in mind as they promote a development strategy summarised as “3 +2,” meaning the three Yangtze delta jurisdictions (Jiangsu, Shanghai and Zhejiang) plus the two provinces of Anhui and Jiangxi. These plans are themselves the province-level offshoots of the central government’s “Rise of the central region” strategy, announced in late 2004.

The most enduring legacy of “Rise of the central region” has been improved transportation infrastructure. Anhui and Jiangxi rank fifth and 10th in new highway construction since 2003; many of the other top-ranking provinces (Henan, Hubei, and Hebei) are also in central China.

Differences between central China’s development model and that of its eastern neighbours highlight a broader point about China’s economy: contrary to popular myths, as a whole, Chinese growth is not export-dependent. Though development of the export sector has facilitated the import of much-needed technology and managerial expertise, the direct contribution of net exports to total GDP growth has been limited to a couple of percentage points per year.

The structure of central China’s economy shows that China has plenty of room to grow by satisfying domestic demand for steel, cement, chemicals, electric power, and other investment goods.