The root of Northeast economy slow growth

The Northeast economy grows slowly. On April 10th, Premier Li Keqiang held the Northeast economic work meeting in Changchun to stabilize the economy of the Northeast. The north-east’s provinces—Heilongjiang, Jilin and Liaoning—ranked in the bottom five of China’s 31 provinces for GDP growth in 2014. In 2014, the Northeast GPD only grew averagely 5.9%, much lower than the East of 8.1%, the Middle of 8.9% and the West of 9.1%.

The Northeast is old Industrial base, with fastest economic growth rate in China after 1949. However, after 1994 when Chinese economy turned to market economy, the Northeast GDP growth rate was obviously slower than that of Yangtze River and Pearl River Delta. In 2005, the country strategy was to revitalize the Northeast economy, then the situation changed. The Northeast economy grew faster, the GDP year-on-year growth kept pace with the Yangtze River and Pearl River Delta, and entirely surpassed them in 2010.

Why did the Northeast economy grow slowly from the year 2013? Let’s look back at the 2010 economic data. The Liaoning, Jilin and Heilongjiang provinces’ secondary industry year-on-year GDP growth were separately 26%, 27% and 28%, entirely much higher than Yangtze River Delta of 18.7% and Pearl River Delta of 18.6%. And manufacturing’s share of the Northeast GDP rose to 50% in 2013 from 47% a decade earlier while the contribution of services declined,  which has gone in the other direction with the whole country.

This shows in recent years, the Northeast Economy prosperous time was promoted by the secondary industry, and the large state-owned enterprise (SOE) contributed a lot. Large sum of credit was invested to the Northeast SOE during the four trillion stimulus policy.  

However, the performances of these SOE were disappointing. With so large sum of credit, the Northeast state-owned enterprise market shares kept on declining. Take Liaoning Province as an example, the industrial output of SOE dropped from 54% in 2005 to 40% in 2008, and dropped again to 27% in 2012. It should be good thing as this can benefit the private enterprise development. However, the state-owned enterprise total profit proportion dropped more quickly, which dropped from 44% in 2005 to -6% in 2008 (gross loss), and for a time raised to 15% in 2010, but continually went back to loss in 2012. This is typical kind with output but no profit. That is why from 2013, the Northeast economy grew slowly.

In comparison, Guangdong state-owned enterprise scale is small but with good profit. The Guangdong Industrial value share is always much less than Liaoning’s. It dropped from 2005 of 18% to 2012 of 16%, and the profit rate during the same period dropped from 20% to 12%. Even though Guangdong state-owned enterprise profit was less than private enterprise, but it had small difference compared with market shares. It’s much better than those SOEs in the Northeast.

Therefore, the root of the Northeast economy slow growth is because there are so many state-owned enterprises with too large scale, which not only killed the market energy and restrained competition, but also take crowding-out effect to other market entity. In 2005, on premise of the Northeast state-owned enterprises without thoroughly market-oriented reform, the policy of revitalizing the Northeast economy cannot solve the problem at source, but will strengthen the state-owned enterprise monopoly position of in important fields. Even though it promote the economy growth in short time, but in the long term will make economy growth to more dangerous situation. This is the present situation of the Northeast.

The Northeast example gave a lesson to all the state-owned enterprises reform in the whole country. The Northeast state-owned enterprise market share and the importance in economy life are much higher than the country average level. So high market share did not turn into profit, but resulted in entire deficit from 2012. The Northeast economy can never recover if the state-owned enterprises do not change.

The reason why Guangdong, Shanghai and other places state-owned enterprise have good efficiency is not because of their competition, but largely because the two places’ private enterprise economy is relatively dynamic. The state-owned enterprises can depend on their monopoly and competitive position in industrial chain to gain rents from upstream and downstream private enterprises to contribute to profit. This is the reason why the Northeast economy resulted in deficit as the market lack enough private enterprise to contribute profit to them.

From long term, the Northeast economy recession is destined. The cold weather in the Northeast badly prevents people’s outdoor activities, and the economy and life cost are much higher than the South. All of these have bad effect on development of service industry. With service industry’s higher and higher proportion of GDP and people’s consumption upgrading because of higher income, people would more like to work and live in the South. That is another reason why the Northeast net outflows of population. Now America also have labor outflow from the North to the South. Maybe we should be used to the Northeast economy recession.

Published in Beijing News | 2015-4-20