Bright spots amid northeast China’s economic gloom [Eye on Dongbei series]
Chinese academic Bo Chen explains why it has been especially hard for northeast China, also known as Dongbei, to transition from a planned economy to a market-oriented economy. While Dongbei’s economic growth still lags behind the faster-growing regions, all is not lost.
Northeast China, also known as Dongbei, mainly consists of three provinces: Liaoning, Jilin and Heilongjiang. The northeast corner of Inner Mongolia is also geographically recognised as part of that region. This region accounts for 15.3% of China’s territory but produces more than a quarter of the national total foodstuff.
More importantly, until 1990, this region maintained its status as the most industrialised base in China. It is the birthplace of China’s first automobile, the first ocean-going freighter and the first aircraft, earning it the nickname “the eldest son of the People’s Republic of China”.
A loss of economic momentum
Unfortunately, after the 1990s, this region lost its development momentum. According to the Statistical Bureau of China, the GDP per capita of Liaoning province ranked 4th in 1990 but dropped to 19th in 2023; Jilin’s ranking fell from 11th to 27th; and Heilongjiang’s ranking fell from 8th to 30th (making it the second poorest among all 31 provincial regions in mainland China).
Several factors are believed to have contributed to the region’s decline. First, there was a structural shift from traditional heavy industries (such as machinery) to light industries (such as textiles), particularly after China’s accession to the WTO in 2001. This trend aligns with the theory of comparative advantage in international trade: freer trade has led to a shift from capital-intensive industries (i.e., heavy industries) to labour-intensive industries (i.e., light industries).
For instance, even in 2023, after many years of adjustment, the top three industries in Liaoning’s manufacturing sector are the petrochemical, equipment and metallurgical industries, which respectively accounted for 32.4%, 28.8% and 14.3% of the total value-added in Liaoning’s manufacturing sector. Furthermore, tightening environmental regulations has also exacerbated the decline of heavy industries.
... it is much more difficult to transition from a planned economy to a market-oriented economy.
Secondly, the significant presence of state-owned enterprises (SOEs) hinders market reforms. As the most important industrial base in China after 1949, northeast China received substantial investment and built up a much larger scale of state-owned capital than elsewhere in the country, thereby benefiting greatly from the growth of the state-owned economy.
According to a study by the publication Manager (《经理人内参》), in 2001, SOE capital accounted for 78.2%, 86.2% and 87.2% of the total capital in Liaoning, Jilin, and Heilongjiang, respectively. In comparison, the national average was 53%. However, while other parts of China have started to enjoy the benefits of market-oriented reforms since 1978, northeast China has been trapped by the path-dependence problem: it is much more difficult to transition from a planned economy to a market-oriented economy.
Demographics and unfavourable business environment
Thirdly, the ageing population leads to an earlier evaporation of the demographic dividend. Northeast China is the first region in China to experience this ageing problem.
According to the provincial statistical yearbooks from 2020, the population share of those aged 65 and older in Liaoning was 17.42%, the highest in China; both Heilongjiang and Jilin had a share of 15.61%, the sixth highest in the country. A relatively larger share of elderly individuals inevitably creates an imbalance in the supply and consumption of public resources.
The famous oil city of Daqing and the coal city of Hegang are among the fast-shrinking cities in northeast China due to resource depletion.
In addition, the gradual exhaustion of natural resources, such as oil and coal, results in a rapid decline in resource-intensive industries. The famous oil city of Daqing and the coal city of Hegang are among the fast-shrinking cities in northeast China due to resource depletion.
Perhaps the most fundamental reason is the unfriendly business environment. A well-known saying in China is, “No investment beyond Shanhai Pass”. Since the Shanhai Pass is the gateway to northeast China, this saying serves as a warning to investors. Excessive government intervention and a lack of a credit system make business expansion quite difficult in this region.
In response to the development challenges in northeast China, then Premier Wen Jiabao proposed the well-known “revitalisation of northeast China” strategy in 2003. This strategy consists of six major missions: 1) promoting reform and adjustment in key industries; 2) modernising the agricultural sector; 3) emphasising reforms in resource-based cities; 4) accelerating the development of the tertiary industry (services); 5) improving the business environment; and 6) strengthening infrastructure construction, such as transportation, energy and water conservancy.
... few changes have been substantial since the strategy’s implementation...
Since 2003, the revitalisation strategy has been persistently implemented, with some updates. These updates mainly focus on financial reforms, ecological development, additional liberalisation measures, and the implementation of digital technology.
The strategy is well-targeted at the fundamental challenges facing northeast China. However, critiques have emerged, as few changes have been substantial since the strategy’s implementation: economic growth in this region has consistently lagged behind the national average, and development indicators show that it is falling further behind the national average.
Opportunities from the digital economy and BRI
Yet the future of the region may not be as gloomy as these general critics suggest. First, data shows that Liaoning and Jilin experienced a net inflow of population in 2023 after a decade of net outflow, signalling that people are beginning to be attracted by the opportunities in this region.
Secondly, the rapid transition to a digital economy presents significant potential for the region. In the agricultural sector, the mechanisation of farmlands can easily adopt new digital technologies in production, such as intelligent agricultural technology and the Internet of Things (IoT). In the manufacturing sector, capital-intensive industries also have advantages in implementing digital production methods.
The industrial IoT is being quickly adopted in this region. In the service sector, particularly in emerging industries like webcasting, there are notable comparative advantages in northeast China. For instance, one can enjoy urban life at the lowest living costs in the country, making Hegang a rising star city in the webcast industry.
... when the BRI was proposed, the three provinces accounted for only 0.43% of China’s total international trade, but this share surged to 2.95% in 2023.
Thirdly, geopolitical tensions have resulted in diverted trade channels, primarily through the Belt and Road Initiative (BRI). As these tensions accumulate, northeast China is once again demonstrating its importance for trade and investment. Its status as a gateway for Chinese manufactured products and foreign agricultural goods and resources is emerging, making it an alternative to the riskier traditional maritime trade.
According to the General Administration of Customs of China, in 2013, when the BRI was proposed, the three provinces accounted for only 0.43% of China’s total international trade, but this share surged to 2.95% in 2023. This rapid growth is mainly attributed to increasing trade with BRI nations. To take advantage of this trend, economic liberalisation for both domestic and international businesses is being accelerated, and the business environment is substantially improving.
Beneficiary of SOE reform
Fourthly, mixed ownership reforms designated for SOEs are ongoing, though at a slow pace. As the region with the highest share of SOEs, northeast China stands to benefit from such reforms. Resources for these reforms are being injected by the central government.
Interestingly, market forces are also actively seeking opportunities within the reform. They are interested not only in undervalued assets but also in the market entry privileges and competitive advantages that SOEs typically enjoy.
The importance of the revitalisation of northeast China extends beyond regional and economic concerns. It serves as a preview of how China intends to tackle its middle-income trap problem in its current development phase. Issues such as ageing demographics, changes in economic structure, and SOE reforms are typical challenges facing the entire nation today, but they were encountered by northeast China almost two decades earlier. Thus, those interested in China’s economic future should closely follow the revitalisation strategy for northeast China.
