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ECONOMY

Questions raised about China's big plan to modernise old industrial bases

Decision to spend huge amounts converting relics of obsolete factories into bases for new manufacturing sparks concern money will be wasted

PUBLISHED : Wednesday, 08 May, 2013, 12:00am
UPDATED : Wednesday, 08 May, 2013, 5:20am

It may come across as a good thing at first glance. Smoky chimneys and blazing boilers moved from city areas to the suburbs; steel mills, chemical plants and other polluters relocated; environmentally friendly and resource-saving technologies introduced to heavy industries; and infrastructure in city areas ramped up.

But the Old Industrial Base Restructuring Plan, approved by the State Council last month, has raised concerns that splashing out on low-efficiency government-owned entities and relics of sunset industries is antithetical to market reforms and a waste of taxpayers' money.

Trillions of yuan are expected to be pumped into the 10-year plan starting this year that will rejuvenate 120 cities saddled with heavily polluting and cash-guzzling state-run heavy industries set up in the early days of the country's industrialisation drive.

"I think the plan would hurt the economy more than the 4 trillion yuan (HK$4.54 trillion) stimulus package did, in terms of the wastage it would generate," said Yuan Gangming, a researcher at the Chinese Academy of Social Sciences.

"I'm afraid the move comes across as a sweetener to regions that lag behind in market reforms, rather than one seriously aimed at improving productivity through market forces."

The government went on a 4 trillion yuan infrastructure-building spree in the wake of the 2008-09 global financial crisis.

Although officials defended the move, saying it helped China avoid a slowdown, many economists blame it for a raft of white elephants, bad loans and severe indebtedness of local governments.

"This plan will involve an even more than 4 trillion yuan, given its scope and the difficulty of reviving struggling enterprises," Yuan said.

From Jiamusi in Heilongjiang province to Liupanshui in Guizhou, the plan covers 95 cities and 25 districts in first-tier cities, including the Shijingshan district of Beijing and the Minhang district of Shanghai, which are the cradles of these cities' heavy industry.

Under the scheme, the central government will set aside funds for relocating the plants and arrange fiscal transfers to local governments to support the economy during the transition.

It will also encourage investment firms to issue bonds to finance infrastructure construction in the sites vacated by the old plants.

Relocating heavy industries is a costly exercise. In Shijingshan, the relocation of steelmaker Beijing Shougang to Caofeidian, a district in Tangshan, Hebei province, took six years, finishing in 2010. It cost more than 50 billion yuan.

Local governments are, however, not too concerned about the money. The relocation projects are to be funded by the central and provincial governments. Moreover, local officials may receive additional funding for other projects under the plan.

"We should prepare for more support [from the provincial and central governments]," Sichuan's Neijiang government said on its website last month.

Neijiang used to be "the sugar city" of the planned economy. Three state-owned sugar producers were the main source of the local government's coffers until the 1990s, when they lost out to the competition because of their inferior quality, higher prices and poor management.

Since the companies' bankruptcies, Neijiang has turned its attention to metallurgy, building materials and the drug-making and chemical industries - all bad for the environment but good for economic growth.

Zhao Xijun, a finance professor at Renmin University in Beijing, said the scheme was a "continuation and expansion" of the "northeast revival" plan kicked off a decade ago that aimed at restructuring and strengthening state-owned enterprises.

The drive "made some progress", Zhao said, in the three provinces that it covered - Heilongjiang, Jilin and Liaoning, home to the country's steel, oil, machinery, locomotive industries - by selling shares in state-owned enterprises to private investors and updating industrial technology.

What the central government would do next was to make these places suitable for the high-speed rail, aircraft, renewable power and biochemical industries, Zhao said.

"They will not simply abandon these old bases, which were constructed with the help of the former Soviet Union or independently by generations of Chinese workers and technicians," he said.

It is up to the local governments to develop a detailed plan. The principle laid down by the State Council was that the development had to be based on the existing industrial foundation.

For example, Wuhu of Anhui province, the headquarters of Chery Auto, will focus on the car industry. Anshan in Liaoning province will stick to the steel industry and upgrade its technology to supply products to the high-speed rail sector.

Niny Khor, a China-focused economist at the Asian Development Bank, said: "Overall, any plan that encourages the development of infrastructure will boost development in the short term. But I think the danger, and this is something the Chinese government should be very careful of, is that the government should not be sustaining sunset industries and prolonging them unnecessarily."

Labour productivity on the mainland is still low despite the growth of the past 10 years, she pointed out, adding that productivity in the manufacturing sector was less than 10 per cent that of Singapore and the US, and about 20 per cent of South Korea's.

"These types of plans should be aimed at increasing productivity and stream into industries that are high value added. That is what we hope the government will focus on."

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