Chinese cities with good investment climates not only attract more foreign investment, they also achieve a more "harmonious society."

Cities with good climates for foreign investment tend to have better environmental outcomes, such as clean air days per year and better social outcomes such as low infant mortality and low unemployment.

This is the main conclusion of a new World Bank study of investment climate in 120 Chinese cities.

The World Bank, working together with the National Bureau of Statistics, surveyed 100 firms in each city (200 firms in four mega-cities). In this sample of 12,400 manufacturing firms, majority State-owned firms only accounted for 8 per cent of firms.

These State-owned firms tend to be large, however, so that they control one-third of the total assets. This ratio varies a lot across China.

In the southeast coastal cities manufacturing is almost completely private sector. In the northeast and centre, on the other hand, manufacturing assets are still majority State owned.

This issue is important because in the same sector and same location, State-owned firms have a much lower return on assets than private firms: 7 per cent compared to 20 per cent.

Interestingly, the pre-tax rate of return for foreign firms and joint ventures is about the same as the return for the domestic private sector. The difference in ownership structure is one reason why the coastal areas have grown faster.

Objective measures of investment climate vary a lot among Chinese cities: this is a second major finding of the study.

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