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China’s best-performing city isn’t where you’d expect it

The cities powering China’s economic growth have been largely clustered on its coasts, but a little known inland town has become the mainland’s top performer, the Milken Institute found.

The inland city of Guiyang grabbed the crown of the best-performing Chinese city this year, moving up from 11th place last year, the report released Monday found.

“With the construction of hotels, amusement parks, skyscrapers, massive numbers of residential apartments, and a monorail, it is easy to see why this city climbed our ranking so quickly,” it said. “Squelching talk of Guiyang becoming another ghost town resulting from building too much too quickly, the city attracted several big-name businesses to open operations there, including Foxconn.”

Landing a big manufacturer wasn’t the only driver of growth, the report noted.

“Despite its location in the less-developed southwest, the city has benefited from the central government’s effort to bridge the gap between the coastal and inland regions. In particular, the One Belt One Road initiative helps Guiyang receive more investment, stimulating growth,” the report said.

It noted that Guiyang offered a key railway hub linking southern Chinese cities such as Guangzhou and Shenzhen to south-western markets in Yunnan Province, where the One Belt One Road initiative will extend toward Southeast Asia.

The One Belt One Road project has aimed to connect China to Europe via inland routes and use maritime routes to connect the mainland to Europe via sea, in a modern replica of the ancient “silk road” trade routes. The initiative was expected to drive large investments in infrastructure around the region.

Other inland cities could also see stronger performance ahead, the report noted.

“Many Chinese coastal and developed cities are relinquishing their emphasis on low-end and labour-intensive manufacturing and pursuing more high-end, high value-added innovation-driven industries,” the report said. “As this process unfolds, many smaller and inland cities are taking over the low-end manufacturing functions by leveraging their lower labour and land costs.”

The ranking, which considers third-tier cities in a separate category from first and second tier ones, incorporated nine indicators, including one-year and five-year job and wage growth and gross regional product per capita growth.

The report noted that Shanghai and Tianjin remained second and third in the ranking, while Shenzhen moved up six places to land in fourth place.

Cities in China’s northeast region, excluding Dalian, had a lacklustre performance, the report said.

“This reflects upon the region’s difficulty in restructuring an older industrial base that relies on energy, steel production and less diversified heavy industries,” it said.

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—By CNBC.Com’s Leslie Shaffer; Follow her on Twitter @LeslieShaffer1