More multinational companies are eyeing China's second-tier cities as expansion destinations for the next two years.

A survey released yesterday by Jones Lang LaSalle, a world leading real estate services and money management firm, found companies are most interested in penetrating these cities for their preferential policies and huge market potential.

Chengdu, capital of southwest China's Sichuan Province, northeast China's Dalian and east China's Hangzhou ranked as the top secondary level cities on companies' radars.

The survey showed companies that set up off-shore manufacturing and other outsourcing services in China's big three cities Beijing, Shanghai and Guangzhou have long since expanded their operations in secondary and tertiary locations. Newcomers are often lured by competitive costs and business opportunities in those areas.

Anna Kalifa, head of research at Jones Lang LaSalle's Beijing Branch, said the next two years would be "an exciting time" for foreign firms in China.

"We expect first mover companies, such as those in the IT or telecommunication, manufacturing, as well as transport and logistics sectors to strengthen their investments in the second-tier locations and begin eying expansions to potential tertiary tier cities," said Kalifa.

She added the banking and finance sector would continue aggressive expansion in the first-tier cities, as retail banks are expected to competitively grow in first-tier locations and into cities where they are permitted to conduct renminbi business.

"Companies in the professional services sector will focus on gaining market share in key cities and expanding to select secondary cities, while Chengdu, Hangzhou and Nanjing will be target locations for this group, which includes accountants, consultants, law firms," Kalifa said.

The survey also revealed that the industry mix of the multinationals varied in different secondary cities.

According to Pol-Henry Cox, country head for Jones Lang LaSalle China, the IT and telecommunication sector is more established in Chengdu because of its incentive policies and large supply of qualified labour.

The banking and finance industry, however, is more dominant in Tianjin, as the municipality is one of the first cities to open to foreign banks under WTO regulations.

Professional services firms have a stronger presence in Dalian and Hangzhou as a result of the cities' successes in attracting foreign businesses, the main clients of this group.

Cox indicated that Chinese cities hoping to attract multinationals with manufacturing facilities, research and development plants face tough domestic and international competition.

"It is not enough that China have seemingly low labor costs, as different competing regions offer various incentives geared towards attracting a specific type of industry in order to get the upper-hand," said Cox.

The survey targeted large multinationals, mostly global Fortune 500 companies.

The four largest sectors represented in the survey were IT and telecommunications, with 28 percent of total respondents, followed by banking and finance (16 percent), professional services (16 percent) and real estate development and management services (10 percent).

(China Daily January 19, 2006)