China's Rustbelt Rusting Once More

The north-east’s provinces—Heilongjiang, Jilin and Liaoning—ranked in the bottom five of China’s 31 provinces for GDP growth in the first three quarters of 2014. Their growth of 6% was 1.4 percentage points less than the national rate. Worse, their industrial output rose just 0.5% year-on-year in October, far below the national average of 7.7% (see [link]).

It is a troubling regression for China’s old rustbelt, which is home to 110m people. Until recently the north-east appeared to be experiencing a renaissance after a difficult couple of decades. The question now is whether its lapse is a passing phase, as it makes the transition from being a base for heavy industry to a centre for modern manufacturing and entrepot for north-east Asian trade; or whether its problems are chronic, the legacy of a centrally planned past in which it remains partially trapped.

Endowed with coal and oil, the north-east industrialised under Japanese military control in the 1930s. Mao Zedong later made it the heartland of heavy manufacturing. But its star faded as China opened to the world in the 1980s. The deltas of the Yangzi and Pearl rivers made more fertile ground for entrepreneurs; the government-led heritage of the north-east became a millstone. When Zhu Rongji, China’s then prime minister, took a knife to loss-making state-owned companies in the late 1990s, about a quarter of the 30m lay-offs were in the north-east. Unemployment soared and mass protests spread.

The government responded in 2003 with a plan to “revitalise the old north-east industrial bases”. The idea was to transform state factories into lean, modern entities; foster trade with nearby countries; and to broaden the economy by cultivating new industries, from tourism to software.

Judging by growth alone, the government achieved almost instant results. The north-east caught up with the average national growth rate of 10%, and then pulled ahead. Its average growth of 12.4% in 2008-12 was nearly three percentage points above the national pace, making it China’s fastest-growing region.

A little slowdown for the north-east might have been fine after such a period of outperformance—in line, moreover, with the central government’s efforts to steer the national economy back to a more sustainable pace of growth. But compared with the rest of the country, the north-east’s downturn has been unusually sharp and painful. It has exposed unresolved problems in its efforts to reinvent itself.

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