China's Money Flows West.(International Edition; CHINA)(plans for the economic-stimulus package)

Byline: Melinda Liu; With Craig Simons in Dongguan

As exports plummet and coastal factories close, Beijing looks inland for a new economic model.

Even if you follow news about China, it's possible that you've never heard of Chongqing, a sprawling municipality of 32 million people on the Yangtze River. A major industrial center and logistics base, Chongqing bills itself as the "Gateway to Western China." Seventy percent of its citizens are peasants. Per capita income levels, while growing, have never reached those of better-known cities such as Shanghai or Beijing. Yet Chongqing and a host of smaller inland cities like it are central to China's economic-recovery hopes. Chongqing is already outperforming not just the depressed coast but the rest of China, too. The city's GDP is slated to grow at an eye-popping 12 percent in 2009--beyond the wildest dreams of most Western countries, or indeed beyond China's own 2009 national target of 8 percent, which even Premier Wen Jiabao now admits will be "arduous" to achieve.

This unusual record is due largely to billions of dollars in government money. More than 60 percent of China's two-year, $586 billion economic-stimulus package will go to inland regions, and some $34 billion is earmarked for Chongqing--more than double the per capita share for China's 1.3 billion people. Ambitious rail- and road-expansion projects--such as the Chongqing-Lanzhou rail line--will help connect the Yangtze port and other inland cities to markets farther west as well as to big cities back east: $220 billion of stimulus money is for such projects. This accelerated spending will, in turn, drive up demand for coal and iron ore--two major commodities shipped along the Yangtze. In January the river's ports saw their first monthly increase in cargo in half a year. "Chongqing has entered a new growth cycle," predicts Mayor Wang Hongju.

The numbers back him up. Investment in infrastructure and other types of construction in 2009 has jumped 35 percent from the same period last year. And, with labor and property costs still relatively low, companies that once built factories on the coasts are relocating to Chongqing. (HP has begun building a new facility, as has the major Chinese electronics manufacturer Jiangsu Baixue.) It's a shift sanctioned by Beijing, which sees the city as the centerpiece of its newly reinvigorated "Go West" campaign, which aims to shift China's future growth from the coasts to the vast hinterland. Now, with the coastal export model well and truly broken, Beijing has political license to move full steam ahead with the plan, which is focused on bettering the lives of China's 750 million farmers in more than 400,000 villages, mostly in the interior--and, eventually, turning them into consumers.

The goal was front and center at China's parliamentary session in early March, during which Wen revealed plans to increase spending on agriculture and social programs in rural areas by 20 percent, to US$104.6 billion, and to boost a nationwide campaign to "send electronics down to the countryside" by giving a 13 percent rural sales rebate on TVs, cell phones and computers. The government is even offering farmers a one-time grant to upgrade farm vehicles to light trucks and cars. At the same time, new shopping centers, cinemas, sports halls and other entertainment venues are going up in ...