A changing industrial landscape is unfolding in China's most prosperous coastal region.

After 30 years of rapid development, the Yangtze River Delta, which is China's most vibrant economic zone, is facing increasing pressure from the shortage of energy supplies and natural resources, as well as the environmental deterioration.

As one of the richest areas in China, the Yangtze River Delta accounts for 20 percent of the nation's gross domestic product and is responsible for one-third of its imports and exports. However, little of its 15 percent portion of national energy consumption comes from its own resources. In the last couple of years this economic engine has been hampered by repeated coal shortages and power cuts. It is not unusual for a manufacturing firm there to operate only four days a week.

Meanwhile, land costs are higher. According to Shanghai Industrial Property Market, a report issued by Colliers International in May 2007, the average land-leasing price in Shanghai's major industrial zones has risen to $112 per sq m, up 10.43 percent from the end of 2006.

But the demand for land is not daunted by the surging prices. Shanghai and the neighboring cities in the delta are suffering from over-exploitation of land resources due to industrial construction and expansion, says Hong Yinxing, director at the Research Center for the Social and Economic Development of the Yangtze River Delta, Nanjing University.

The rate of construction-earmarked land in the delta area, according to Hong, reached 17.4 percent as of the end of 2006, much higher than the national average of 3 percent. Shanghai alone accounted for an alarming ratio of 35.8 percent.

Strained by such excessive demand for construction land, environmental degradation has taken a big toll on the 16-city megalopolis surrounding Shanghai.

Statistics from the National Development and Reform Commission (NDRC) show that the Yangtze River Delta is experiencing the worst ever subsidence in China. In Shanghai, mostly due to the over-exploitation of underground water and constant construction of skyscrapers, more than 1,000 sq km of the city has been affected by subsidence by the end of last year.

Topping the environmental hazards within the region was last year's blue-green algae outbreak in the Taihu Lake that disrupted water supplies to two million residents in the city of Wuxi. The lake, which provides drinking water for about 30 million people in the provinces of Jiangsu and Zhejiang as well as Shanghai municipality, has been heavily polluted since the 1980s.

These problems are obviously adding to the woes of many of the labor-intensive manufacturing enterprises there, which are reeling from the worsening export situation. The hunger for more abundant natural resources and land accessibility is pushing an increasing number of companies to more cost-effective and resource-sufficient inland provinces.

"With an over-high concentration of industrial enterprises that are placing mounting pressure upon air and water quality, industrial restructuring and upgrading in the Yangtze River Delta is no longer a choice, but a necessity," says Wang Zhen, professor from Shanghai Academy of Social Sciences.

"The high costs and long development cycles in the Yangtze River Delta, coupled with increasingly stringent environmental standards, will divert more enterprises to the secondary markets inland, as the area accelerates its industrial restructuring from the resource-hungry manufacturing sector to hi-tech and service industries." Wang says.

Given that the overall business costs in the delta are already 30 percent higher than the neighboring provinces such as Anhui, the relocation of businesses to inland areas, or cities in less developed northern Jiangsu Province, is expected to provide new chances for growth while contributing to the sustainable development of the region.

Liu Laibao, owner of a small machinery plant in Wuxi, Jiangsu says he moved his plant to Lianyungang in northern Jiangsu four months ago.

"In Lianyungang I not only have easier access to land, but also lower labor costs." Liu says, adding that he plans to double capacity by the end of this year.

Moving Inland

In the newly issued guideline in mid-September on further promoting the economic and social development of the Yangtze River Delta, the State Council also makes it explicit that the delta should work more closely with the middle and western regions to propel their growth.

Motivated by the opportunities ahead, inland provinces including Anhui, Jiangxi and Hunan, as well as cities in northern Jiangsu which used to be decoupled from the economic prosperity of the central Yangtze River Delta, are all striving to attract businesses during the eastern coastal cities' current industrial transfer.

In adjacent Anhui Province, for example, over 55 percent of its inbound investment has been coming from the Yangtze River Delta, according to a report from the NDRC.

Central China's Hubei and Hunan provinces, too, are looking to the Yangtze River Delta for the transferring of businesses in a bid to build up their processing and manufacturing industries.

At the Hubei and Shanghai (Yangtze River Delta) Economic and Trade Fair late August, Hubei pocketed a series of investment deals worth over 60 billion yuan.

With its advanced infrastructure and strategic position in south-central China, Hunan attracted a total investment volume of over $40 billion at the 2008 Hunan (Shanghai) Investment Conference held in mid-June this year, with more than 800 key investment projects covering infrastructure, energy, logistics, financial service, tourism, cultural and creative industry.

For the city of Xuzhou, located at the northern tip of Jiangsu where the economy is much less developed, cooperation with Suzhou and Shaoxing, both from the central Yangtze River Delta, has brought in 36 investment projects totaling 17 billion yuan last July.

With the opening of the Suzhou-Nantong Yangtze River Bridge and the construction of Chongming-Qidong Bridge, both connecting the economic hubs in the delta with the less developed cities in the region, experts say there would be much speedier integration of the south and north of Jiangsu.

Meanwhile, foreign capital for processing trade will also move westward to less developed regions to continue enjoying the competitiveness brought about by the low labor costs.

An annual survey from the American Chamber of Commerce in Shanghai earlier this year shows about 5.5 percent of the companies are already investing in inland provinces like Hunan, and over 36 percent say they would set up operations in second- and third-tier cities and interior areas in China.

With a fast developing infrastructure network, abundant resources in land and labor, as well as people's rising living standards, cities in inland China are well positioned to become the next destination for investment after the highly saturated eastern regions, experts say.

They agree, however, that the relocation of businesses should not be achieved at the cost of the environment.

"The moving of labor-intensive manufacturing industries into economically underdeveloped but resource-rich areas would be a key point not only for ensuring a balanced and sustainable development of the region's economy, but also for creating new chances of growth in less developed areas, given that they should take environmental protection as a prerequisite for the relocation." Wang says.