Why you should care

Because America’s Midwest isn’t the only struggling Rust Belt.

Echo Zhang has long given up on moving back to her hometown in northeast China to be closer to her aging parents. There simply aren’t any jobs.

“In Beijing I see new technologies changing the city continuously,” the 39-year-old engineer says. “But when I go back to Jilin, it’s like stepping back in time — it’s developed so slowly.”

Jilin, Liaoning and Heilongjiang, the three provinces of northeast China, were once the pride of the country’s planned industrial economy. But they have been among the worst hit by the scaling back of traditional heavy industries such as coal and steel and by the long-term decline in its state-owned enterprises. The northeast’s contribution to the gross domestic product almost halved to 7 percent in 2016, from 13 percent in 1980.

[The battle over the future of the northeast] is a proxy debate for the choices facing China, between market-orientated reforms or state-driven industrial policy.

Andrew Batson, China research director, Gavekal Dragonomics

As China’s economic growth slows, economists warn that bad loans and loss-making “zombie” companies are concentrated in trouble spots such as the northeast. One of its three provinces, Liaoning, last year suffered the first official recession in China since 2009, shrinking by 2.5 percent.

“The northeast’s decline is a major risk to the Communist Party’s goal to deliver a moderately prosperous society,” says Kathryn Rand, a former political officer at the British Embassy in Beijing. “This is a particular concern given the northeast’s geopolitical importance bordering North Korea and Russia, where economic and social stability is seen as essential to maintaining the status quo.”

Beijing has sought to revitalize the region by subsidizing the state-owned agricultural, steel and petroleum enterprises that dominate the northeastern economy, but this strategy has come under fire from some of the country’s most prominent economists.

“A strategy that expands the output of enterprises that are not viable is a strategy that goes against comparative advantage,” Justin Yifu Lin, a former World Bank chief economist, wrote last year.

He proposed a switch in state support to sectors in which the region enjoys advantages over the rest of the country, such as labor-intensive light industry, which would benefit from the region’s relatively cheap wages, and tourism. Hu Shuli, founder of business magazine Caixin, responded that the region should “shed its big-government mindset” and allow private business to flourish.

Andrew Batson, China research director at the Gavekal Dragonomics consultancy, says the battle over the future of the northeast “is a proxy debate for the choices facing China, between market-orientated reforms or state-driven industrial policy.” Government pledges to allow the private market to flourish are at odds with continued state subsidies for government enterprises, and locals are increasingly vocal about the failure of local officials to enact market-driven policies.

While three-quarters of Chinese graduates chose to work in their home regions last year, according to the Beijing-based consultancy Mycos, the figure was less than half in the northeast. About 1.8 million are estimated to have left the northeast in the past decade.

“I have no hope for a ‘northeastern revival,’” says Hao Xuesong, a property developer, back in Jilin city for a school reunion. His pessimism is shared by former classmates, who say the northeast’s sluggishness is the result of its officials being too “left” — bureaucratic, rigid and wedded to the old ideal of the planned economy. The bureaucracy is also riddled with corruption, according to a former Liaoning civil servant who now works for a multinational company in Shanghai. She says she left “because I couldn’t find a suitable job” in the civil service.

“I think the problem is not that getting a promotion is difficult; the problem is it’s not transparent,” she says. “I don’t have the social connections to secure a job in state-owned banks or even local commercial banks. Private companies in Liaoning are less well paid.”

The northeast has also struggled to attract investors. It was the only region in China in which private fixed-asset investment fell from 2016–2017. Ma Jiantang of the Chinese Academy of Governance told a recent government conference that many entrepreneurs believed “investment should not cross the Shanhai Pass,” a section of the Great Wall of China that divides the northeast from the rest of the country.

Zhang Lihua, director of tech company Changchun Boli, also acknowledges that the northeast is at a competitive disadvantage. “There’s a good foundation for growth here, if we can make reforms. But the southern provinces compete aggressively for talent and companies, and the northeast is some way behind.”

Lu Xiaomeng, assistant professor at the Shanghai Advanced Institute of Finance at Jiao Tong University, who grew up in the northeastern city of Harbin, is confident private investment will slowly rise. But this can happen only if the power of the state-owned enterprises is curbed. “The problem of SOEs’ influence is a nationwide issue,” she adds. “It’s just that SOEs dominate the northeastern economy. My hope is the private sector can thrive.”

Additional reporting by Xinning Liu and Yingzhi Yang.

By Yuan Yang

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