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China economy

China’s ailing rust belt struggles to shake off reliance on state support

The former industrial heartland of northeast China is still struggling to move on from the old economic model of heavy industry backed by the government

PUBLISHED : Thursday, 30 August, 2018, 8:33pm
UPDATED : Thursday, 30 August, 2018, 11:13pm

The Tiexi industrial district in the northern Chinese city of Shenyang, once the face of China’s all-powerful state economy, has taken on fancy airs with its high-rise residential buildings, shopping malls and glittering office towers.

Gone are the chimneys belching smoke and the roads blocked by laid-off workers – a daily sight 15 years ago – and the land has been sold cheaply to developers

However, this gentrification in the capital of Shenyang province thinly veils the ongoing problems across China’s northeastern rust belt.

The Manchuria region of 120 million residents remains plagued by deep-rooted economic ills, including the continued reliance on inefficient state spending, the absence of private investment and a rapidly ageing population, analysts said.

Almost 15 years after Beijing decided to “revitalise” the region, its three provinces – Heilongjiang, Jilin and Liaoning – continue to post the country’s weakest growth rates.

Liang Qidong, the deputy head of the Liaoning Academy of Social Sciences, a think-tank owned by the provincial government, said northeastern China, an area about the size of France and the United Kingdom combined, has “the most extensive planned economy in the world” and is struggling to find a way out.

The region’s woes have been further exacerbated by the exhaustion of its mineral resources after decades of exploitation – about 100 once booming towns and cities in the region will wither as the oil and coal runs out, Liang said.

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The northeast became the cradle of China’s heavy industry in the 1950s, aided by funds and know-how from the neighbouring Soviet Union, an industrial system inherited from Japan’s second world war puppet state of Manchukuo, and massive investments from the new People’s Republic of China.

In the heyday of the planned economy in the 1950s and 1960s, Tiexi exemplified the industrial success of the new People’s Republic.

The district’s factories dominated the production of machinery as it sent out skilled technicians to build further factories across the country and aid dozens of overseas projects, ranging from a diesel engine workshop in Albania to a textile plant in the Republic of Congo.

The district’s glory days are remembered fondly. Ge Jianguo, a 58-year-old local taxi driver, can still point out the old sites of factories.

“When heading west from the Shenyang railway station, you could see lots of giant factories along Beier Road, making chemicals, paperboard and batteries,” he said.

The old industrial quarter has been completely rebuilt and the former vault-ceilinged workshop of the Shenyang Casting Co has been turned into the China Industry Museum, showing exhibits of the bygone days of the area’s industrial might.

“When I was young, I had long dreamed of working in such a large factory as a grade-eight fitter, which sounded like a superhero at that time,” said one visitor, a retired carpenter surnamed Huang.

“Few are willing to work in factories nowadays. Everything has changed.”

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The Soviet-style industrial model began to crumble in the 1980s and the misery of the Tiexi district, and the Manchuria region peaked in late 1990s when then premier Zhu Rongji decided to shut unprofitable factories, sacking millions of workers and leaving families who had once been promised cradle-to-grave welfare destitute.

Ge, the taxi driver, said he was one of those laid-off at that time. He had worked in a radio factory and was proud of being a state worker until the day he was asked to leave.

“All I got was compensation of 7,680 yuan [just over US$1,100 in today’s terms] for my 24 years’ service,” he said.

While China’s economic reforms have seen coastal regions – notably the Pearl River Delta in the south and the Yangtze Delta centred on Shanghai – have become the growth engines of the economy, the northeast of the country has stagnated despite periodic attempts by the central government to revive its fortunes.

Wen Jiabao, Zhu’s successor as premier, proposed a grand “revitalisation” plan to revive the region in 2003, using state funds to try to stimulate private investment in the region.

Initially the results from the state-led stimulus were promising.

The province of Liaoning reported a stellar economic performance over the next decade, with an annual average growth rate of 12.5 per cent through 2013.

Across the region, old factories were pulled down, new buildings sprang up, industrial facilities were upgraded, and infrastructure greatly improved.

The rust belt revitalisation initiative also received tremendous funding support from the China Development Bank, one of the government’s main ways of channelling money to projects it wants to aid. The central government-controlled policy bank extended a total of 148.9 billion yuan in loans to Shenyang city alone in the past decade to build roads, redevelop shanty towns and build more urban infrastructure.

But the private sector is still largely frozen out in the region.

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Only nine out of China’s top 500 private firms last year were based in the three provinces, according to a list released by the All-China Federation of Industry and Commerce.

Some of the surviving state-owned industrial firms were consolidated into large groups in the hope they would be able to compete internationally.

For instance, the Dalian-based Dongbei Special Steel Group was established in September 2004 with this goal in mind.

However, the steelmaker piled up billions of yuan worth of debt to fund a massive capacity expansion in an effort to become competitive.

But after defaulting on 10 straight bond payments in 2017, it filed for bankruptcy and eventually handed a controlling stake to the privately owned Shagang Group.

The state-led development model has started to lose its lustre in recent years, with growth in Liaoning slowing to 5.8 per cent in 2014 and 3 per cent in 2015.

The province shocked the whole country in early 2017 by admitting that it had significantly inflated its economic data and that the province’s GDP in 2016 actually contracted 2.5 per cent. Calculated in nominal terms, the province’s GDP shrank 23 per cent that year.

A series of corporate and political scandals have also taken their toll on Liaoning.

A popular mantra for China’s investment community states “no wise man would invest his money beyond the Shanhai Pass” – a reference to the gate on the Great Wall that leads to Manchuria.

Dongbei Special Steel, based in Dalian, became the poster child for bad corporate governance in the region after becoming the biggest Chinese firm to default on a bond in 2016.

Forty-five lawmakers from the province were expelled from the National People’s Congress, the country’s parliament, in a vote-buying scandal and last year its former party secretary Wang Min was jailed for life last year for corruption.

Zhao Ji, the head of Shenyang-based Northeastern University, told an investment forum in Shenyang in June that the state-funded revitalisation programme had to some extent covered up the deep-rooted problems in the local economy.

Zhao told the forum, hosted by Euromoney and the Shenyang municipal government: “Industrial vigour remains inadequate, the business environment needs much work to catch up with southern provinces and the proportion of the private economy is still not high.”

While Shenyang has a group of new industrial firms – including the state-owned Shenyang Machine Tool and Shenyang Blower Work Group – and has attracted foreign carmakers BMW and General Motors to set up joint ventures there, its overall economic momentum remains weak.

Liaoning’s GDP growth recovered in 2017 to expand by 4.2 per cent, although the rate was still below the national average.

In the first half of 2018, the growth rates of Liaoning, Heilongjiang and Jilin all remained below the national average.

But the local authorities are still working to woo foreign and domestic private investment. In Shenyang, the municipal government has cut red tape and improved government services for investors.

Slogans such as “Trying Our Best to Improve the Business Environment” hang high over government office buildings.

However, it will be an uphill battle because foreign investment inflows into China are not strong, especially given the escalating trade war with the US.

The actual inflow of foreign direct investment into Liaoning province plunged 42.2 per cent in 2016 to US$3 billion. Although it recovered to US$5.3 billion last year, that still accounted for only 4.1 per cent of the national total. Total private investment totalled 394 billion yuan in 2017, down 7.4 per cent from a year earlier.

Last December, the European Union Chamber of Commerce released a position paper saying that excessive government regulation, a loss of skilled workers and poor air quality had reduced Shenyang’s attraction to foreign investors.

The city might “risk losing out on potential foreign investment to other Chinese cities” if no improvements are made, the paper continued, advising the city authorities to “dig deep and plant the seeds of reform”.

Li Kai, deputy dean of the China Academy of Northeast Revitalisation, a think tank under Northeastern University, said such criticism puts pressure on local authorities to improve the business environment but there are no quick fixes for the “chronic” problem of the city’s heavy dependence on state enterprises and government spending.

In addition to its weak economic structure, the region faces another obstacle: its shrinking labour force and rapidly greying citizenry.

The resident population of the three provinces continues to fall, dropping by 350,000 last year alone, while its birth rate is only half of the national average of 1.24 per cent.

“It will be a long-term economic struggle given the region’s reliance on heavy industries and state-owned enterprises,” said Iris Pang, chief Greater China economist at ING.

“There is no obvious magnet for either foreign or [Chinese] private investors,” she added.