The Manchurian Recession

Coming back from my own trip out to the provinces, I find that Simon Denyer of the Washington Post has an excellent report on the economic problems of China’s northeast. As is becoming increasingly clear, if you want to find China’s recession, the northeast is the place to look. And you don’t have to look very hard: in the first half of 2015, nominal GDP growth in both Liaoning and Heilongjiang provinces was negative (Jilin managed a meagre 4.4% gain).

The three provinces that comprise most of historic Manchuria are more dependent on heavy industry and more dominated by state-owned enterprises than the rest of the country. So they are extremely vulnerable to the current downturn, whose main feature is stagnant or declining demand for many of the products, like steel, that are made by state-owned heavy industrial companies. The northeast is not the only part of China effectively in recession: coal-mining provinces like Inner Mongolia and Shanxi are suffering, as is Hebei, the nation’s largest steel producer. But these northern and northeastern provinces are at the center of China’s current problems, as is quite clear from the data:

2015Q1-provincial-GDP-tradmap

Simon’s piece has a couple of choice observations that encapsulate some of the problems the northeast is facing. Here is one:

“Everyone knows what the problem is. It is structural,” said an official dealing with economic policy in the Liaoning government who spoke on the condition of anonymity because he was not authorized to talk to the press.

“Everybody knows what to do. You need to change the economic structure. But what concrete steps to take? Nobody knows,” he said. “What can we do? Financial sector? You can’t compete with cities like Shanghai. High-tech industries? Those won’t flourish overnight.”

and another:

Zhou Dewen, who runs a business association in Wenzhou, scouts out investment possibilities throughout China. He has led 20 small-business delegations to the northeast, but he has not been able to work up much enthusiasm for the region.

“The northeast still thinks of itself as the big brother, because they were the first to get rich after the new China was founded,” he said. “They are sitting on their glories and not advancing with time. Their mind-set is still the old planned-economy stuff. They don’t see that small businesses can do big things.”

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