Like the other northeastern provinces, neighbouring Jilin and Heilongjiang, its major industries were pillars of the command economy, benefiting from artificially cheap inputs and monopoly prices for their products.

The market-based reforms that enabled China’s unprecedented growth and poverty reduction in the 1980s and 90s exposed much of the industrial northeast to competitive forces it was not prepared to face. By 2016, Liaoning had fallen from China’s fourth-richest province to its 14th — and its slowest-growing. In April that year, it reported negative quarterly growth, the first province in seven years to do so. Once the home of the ‘iron rice bowl’, the three northeastern provinces are now China’s rustbelt.

For years, Chinese policymakers have been confronted by revitalising the northeast. The path forward remains unclear. How the Chinese government, at all levels, responds to the economic hardship in this region will be an important indicator of how China will manage change in its growth model — and whether it can engineer the country’s transition from middle to high income.

The economic difficulties in northeast China can’t and won’t be contained to just three Chinese provinces. They also matter for any economy that interacts with the world’s biggest trading nation.

After 40 years of rapid growth, China’s economy is beginning to slow, albeit more gradually than many international commentators expected. The makeup of the economy has changed, with consumption overtaking investment as the country’s biggest growth driver. Policymakers have turned to new areas of reform, seeking to improve competition in monopolised sectors; liberalise financial markets while revamping regulation; and reduce overcapacity in heavy industries, where deeply indebted zombie firms continue to drag down China’s economic prospects. Allowing interest rates and exchange rates to follow the market more closely will improve the allocation of capital and help China achieve reform.

But what do these reform objectives mean for the embattled northeast?

China’s economic development — like that of Japan, Hong Kong, Singapore or South Korea — has depended on encouraging industries that aligned with the country’s comparative advantage. Like Japanese cars or Chinese textiles in the 1980s, these are industries that would succeed even if exposed to an open global market. Governments played a major role by investing in public goods like education and infrastructure, identifying growth industries and export markets, and supporting some companies that took risks to innovate.

In a new report, a team at Peking University, led by former World Bank chief economist Justin Yifu Lin, seeks to apply these strategies to the ailing northeast. Its conclusions have sparked a deep debate among China’s heavy-hitting economists. The Jilin Report argues that the northeast region has long ignored light industry and that Jilin must ‘encourage the development of manufacturing in the textile, household appliance and electronics sectors’ as one of five industrial clusters.

Tian Guoqiang of the Shanghai University of Finance and Economics said the report is undermining the goals of structural reform, asking: ‘Should scholars or government policy determine the development of specific industries … or should the market make the call? The Jilin Report led by Lin almost ignores reform and systemic problems’.

In our lead essay this week, Hu Shuli points out that the roots of northeastern China’s economic predicament run deeper than its out-of-date industrial structure. The debate should not focus on whether Jilin should develop light industry’, she writes, ‘but whether local governments can change their planned-economy mindset to embrace a more market-oriented economic system’.

Hu’s comments touch on another central element of China’s reform story — the relationship between local and central governments. Considering local governments’ share of revenue and expenditure, China is the most decentralised nation on earth — developing or otherwise — as Arthur Kroeber has observed.

The often opposing objectives of local and central governments are sometimes summed up in a Chinese saying, ‘The higher-ups have policies, while the lower-downs have ways of getting around them’. ‘Northeast China has failed to attract investment because it is known as a place where local governments frequently interfere in companies’ market activities’, Hu observes. And for outside investors looking in, one bad experience ‘can scare off a fleet of enterprises looking to invest’.

‘Changes need to be made to make market forces more effective’, Hu concludes — and even amid the discordant response to the Jilin Report, this seems to be a sentiment that is widely shared.

The debate that rages now over what to do about the northeast rust belt is central to the course of China’s industrial future. Now, as in the past, for Chinese reforms to be successful, they need to be pursued with both social stability and the global market in mind. Without that, the benefits are likely to only be short-lived.

The EAF Editorial Board is comprised of Peter Drysdale, Shiro Armstrong, Ben Ascione, Amy King, Liam Gammon, Jillian Mowbray-Tsutsumi and Ben Hillman, and is located in the Crawford School of Public Policy in the ANU College of Asia and the Pacific.