Economic improvement in China’s northeast rust belt is just skin deep as state firms continue to bleed
- Liaoning reported 6.1 per cent growth in the first quarter of 2019
- But its state-owned industrial giants continue to haemorrhage funds
When China’s central government chose Shenyang Machine Tool, a state-owned manufacturing behemoth in the northeastern province of Liaoning, to undergo a programme of reform two years ago, it probably imagined it would provide a yardstick for the broader regeneration of the region as a whole.
It could not have been more wrong. While the provincial authorities reported growth of 6.1 per cent in the first quarter, which was on a par with the national figure, little of that upturn came courtesy of Shenyang Machine Tool.
In fact, the company’s decline, coupled with years of losses due to mismanagement and political meddling, has been exacerbated in recent years by its investment in an automation system known as i5.
Sources said the situation was now so dire that the company was struggling to pay even half of its workers.
“The company has received orders [for i5 automated system tools], but it does not have the funds to buy the raw materials to make them,” one of the sources said.
Last year, the company chalked up losses of more than 2 billion yuan (US$290 million), according to earlier state media reports.
Shenyang Machine Tool’s plight exemplifies the dilemma faced by most state-owned enterprises (SOEs) in China’s northeast, whose futures often depend on their ability to innovate successfully.
And that in turn is key to the success of Beijing’s drive to revitalise the so-called rust belt, which also comprises the provinces of Jilin and Heilongjiang.
Heilongjiang Longmay Mining Holding Group is another SOE that has been steadily sinking into the mire in recent years, recording a net loss of 978 million yuan in the first quarter of this year, according to state media reports.
The recent upturn in Liaoning’s fortunes comes after years of dwindling economic performance and accounting scandals. After the local government admitted to falsifying its figures between 2011 and 2014, the provincial economy actually contracted by 2.6 per cent in 2016.
“The 6 per cent growth figure holds huge meaning for Liaoning, as it shows the economy has walked out of its most difficult period,” provincial governor Tang Yijun said in a press conference in Beijing late last month.
Earlier in June, the State Council’s leading group on revitalising the northeast, led by Premier Li Keqiang, met to discuss new measures to further the opening up of its markets, boost restructuring and upgrades, and attract more talent and investment.
But those efforts continue to face obstacles, like a deeply entrenched state planning mindset and local government protectionism, which resents change and reform despite their proven success in driving China’s development over the past three decades.
And Liaoning’s economy is not out of the woods yet, given the impact of the trade war and the government’s deleveraging programme to reduce debt and risky lending.
Liang Qidong, vice-president of the Liaoning Academy of Social Sciences, a government think tank, said the province’s economic foundation was still not firm and the transition between old and new growth drivers was at a critical stage, with weak prices for raw materials like coal, steel and oil affecting growth most.
Also, “America is Liaoning’s fourth-largest trading market for electromechanical products, steel and hi-tech products, so higher tariffs will inevitably affect its trade with the US,” Liang said in a blog post.
“At the same time, we should stay alert – the US-China trade war could trigger another cycle of [adverse] impact on global commodity prices, which could easily affect the province’s economic base, creating a second bottoming risk for the economy.”
Liaoning’s industrial output grew just 6.7 per cent in the first five months of 2019, compared with a 10.5 per cent rise for the first quarter of last year. Output from SOEs in the January-May period climbed 3.4 per cent, while private firms recorded 10.6 per cent growth, according to figures from the provincial statistics bureau.
Provinces with shaky economic bases like those in the northeast are bearing a bigger brunt of the national economic slowdown. Growth in Jilin, for example, has been much more subdued, with the economy growing 2.1 in the first quarter of the year and industrial output expanding by 1.5 per cent.
In a bid to improve figures, local officials have introduced changes to improve the environment for doing business and restore confidence in the government. Measures to reduce the cost of doing business, such as tax breaks and lower required pension contributions for employees, have also helped, local business groups say.
“There is improvement from the government perspective,” said Liu Qi, vice-president of the Liaoning General Chamber of Entrepreneurs. “But in a business environment, it’s not just about government efforts, enterprises have to upgrade and change.”
