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Northeast China needs to shed its ‘big government’ mindset

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Employees work at a factory of Dongbei Special Steel Group Co. Ltd. in Dalian, Liaoning province, China, 16 March 2015. (Photo: Reuters/China Daily).

In Brief

How can the economy of Northeast China, once the backbone of the country’s economy, be revived? The question is now at the centre of a hot debate.

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Northeast China, historically known as Manchuria and consisting of Liaoning, Jilin and Heilongjiang provinces, was the cradle for the country’s heavy industry after the founding of the People’s Republic in 1949. It is also one of China’s major agricultural bases.

But these three provinces have been in economic trouble for the past three decades, lagging behind provinces in the south and coastal areas where market-oriented reform and opening-up policies have created economic miracles.

A Peking University panel of scholars, led by former World Bank vice president Justin Yifu Lin, released a report in August setting out a plan to restructure and upgrade the economy of Jilin Province. The report suggests that Northeast China should not just expand the industries in which it has comparative advantage and avoid those in which it does not — instead, it should beef up its weak areas as well.

The report proposed five industrial clusters on which Jilin should concentrate: ‘big agriculture, big health care, modern light industries and textiles, modern equipment and machinery’, as well as a new technological cluster featuring new energy, new materials and new information technology. Modern light industries and textiles in particular were pinpointed as the missing elements in the economy, as they can complement Jilin’s existing machinery industry.

Sun Jianbo, a former China Galaxy Securities analyst, said that Lin’s proposal to develop light industry is like pushing Jilin into ‘a pit of fire’, as the province lacks the basic infrastructure and cannot compete with China’s coastal areas, where light-industrial production bases are already in place and running efficiently. Many other observers cast doubt on Lin’s advice.

Lin’s team countered that the ‘light industry’ mentioned in the report is not traditional textile manufacture and light industry, but a modern version based on consumer electronics and home appliance production with upgraded technologies. The team also said that reform would be based on respect for the market, and that the government was not being encouraged to pick the market players.

But that response misses the point: the debate should not focus on whether Jilin should develop light industry, but whether local governments can change their planned-economy mindset to embrace a more market-oriented economic system.

For years, Northeast China has failed to attract investment because it is known as a place where local governments frequently interfere in companies’ market activities. The recent bankruptcy of Dongbei Special Steel Group in Liaoning province is a typical example. During the reorganisation phase of the bankruptcy process, local government officials interfered heavy-handedly, even manipulating the judicial process. They did not stay in close communication with the national bank’s creditors and were reluctant to disclose information, including some crucial information required by state regulation and law.

Although the move managed to temporarily maintain socio-economic stability by avoiding the layoff of a large number of workers, the local government paid a high price — the rates on government bonds and corporate bonds skyrocketed as the market sought vengeance.

To improve the investment environment through systemic changes, local governments need to watch their every word and move. In a market economy, the government can no longer introduce investment by administrative fiat — a bad investment experience can scare off a fleet of enterprises looking to invest.

The slogan of ‘Northeast China Rejuvenation’ has been in place for more than a decade since the leadership at the time raised the idea in 2004. Numerous government documents related to this idea have followed. But the region’s economy has remained stagnant, with growth falling even more drastically since 2014.

On the surface, it appears that the reason lies in the limited range of industrial potential in Northeast China and the large emigration of labour from the region. But in essence, it’s the system that is broken: a poor environment for businesses, the lingering concept of ‘big government’ inherited from the planned-economy era and unpredictable administrative interference.

Local governments need to take seriously the central government’s policies aimed at redefining the government’s role in a market economy, including peeling away some of their administrative controls and letting the market have a bigger say.

Some scholars have proposed establishing a special economic zone in Northeast China. But even a special economic zone needs the local government to shrug off its systemic burdens if it is to take off.

The problem with the system is the biggest obstacle for the development of Northeast China. Changes need to be made to make market forces more effective. Local governments should be clear about what they can and what they cannot do, so that the region can better develop industries that suit its resource base and comparative advantage.

Without that, no amount of light industry promotion, the establishment of special economic zones or rejuvenation sloganeering will boost Northeast China’s growth.

Hu Shuli is the editor-in-chief of Caixin Media. A version of this article was originally posted here on Caixin Global.

One response to “Northeast China needs to shed its ‘big government’ mindset”

  1. I have lived in Northeast China (both Jinlin and Liaoning provinces) for sometime in the 1970s and early 1980’s, and left Shengyang in late 1981 when I finished my undergraduate study at the Northeast University. China as a whole has moved on from the planned economy since then but it seems from this post that the Northeast has not grown as rapidly as the rest of China.
    I cannot comment on the recommendations of Lin’s team for Jilin Province, but the point on textile industry may be problematic, given that China may have lost or is soon to lose its comparative advantages due to rising income levels.
    In terms of potentially setting up a special economic zone and the concerns over the outdated mentality of local governments in the Northeast, why not establishing some conditions for the special economic zone in terms of government behaviours to prevent them from intervening the market improperly or inappropriately?

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