China’s regional slowdown: Painful but necessary?

Despite external shocks such as the conflict in the Middle East, China’s economy still grew by 5% in the first quarter of this year, exceeding expectations and underscoring the resilience of the world’s second largest economy. However, the regional GDP figures have been far less impressive than the national data.

In reviewing first-quarter GDP figures for the 31 provinces, municipalities and autonomous regions in mainland China, as many as 16 provinces surprisingly recorded growth rates below the national average of 5%, compared with only ten provinces in the same period last year. In many regions, economic growth in the first quarter not only lagged behind the national level, but also slowed markedly compared with last year.

Liaoning, which ranked last among all provinces and municipalities in terms of growth, recorded year-on-year GDP growth of just 2.8% in the first quarter — well below its full-year growth rate of 3.7% last year, and far short of the official target of around 4.5% set at the beginning of the year.

Data show that fixed asset investment (FAI) in this northeastern province fell by 20% year-on-year in the first quarter, once again ranking last nationwide; during the same period, total retail sales of consumer goods registered zero growth.

Hunan, which had the second lowest GDP growth rate, saw its economy expand by 3% in the first quarter, a clear drop from last year’s 4.8%. Although Hunan is among the top ten provinces in terms of overall GDP size, it also recorded negative growth in FAI in the first quarter, like Liaoning, while total retail sales of consumer goods even declined by 0.7% year-on-year.

Following the release of these figures, some netizens joked that Liaoning and Hunan are like brothers in arms, quipping that “Hunan is the Liaoning of central China”. Both provinces rely relatively heavily on traditional industries and are currently experiencing the growing pains and pressures of industrial transformation.

Shaanxi, whose main engine of growth is the automotive industry, is facing similar challenges. As competition in China’s car market intensifies, automobile production in Shaanxi fell by more than 50% year-on-year in the first quarter. Its GDP growth rate slipped from 5.1% last year to 4% in the first quarter, and its total GDP was overtaken by Jiangxi, causing its national ranking to drop from 14th to 15th.

Some netizens believe that although the latest GDP data may not look encouraging, they better highlight local problems and more closely reflect people’s lived experience. One netizen with an IP address in Liaoning remarked that the province’s weak growth had long been evident, adding that “previous figures were somewhat inflated — this year’s numbers are closer to the real level”.

There have been cases of local governments falsifying statistics to meet performance targets. In 2018, Chinese authorities issued regulations on supervising and punishing statistical fraud, and have since conducted multiple rounds of statistical inspections across provinces, regions, municipalities and government departments nationwide.

Last year, China’s National Bureau of Statistics called out Liaoning, Jiangsu, Zhejiang, Hainan, Shanxi, Ningxia and Chongqing for various statistical issues, including interference by officials in statistical work and inaccuracies in enterprise or project data. It stated bluntly that in Chongqing, “the problem of fabricating data to pursue false achievements still occurs”, and that “issues such as statistical falsification persist in some districts and counties”.

In January, Chinese President Xi Jinping said at a study session for provincial and ministerial officials that the evaluation system should be refined with differentiated criteria to enhance its relevance and scientific rigour, and to prevent a vicious cycle in which “numbers produce officials, and officials produce numbers”. A month later, the Chinese Communist Party launched an internal education campaign on “establishing and practising a correct understanding of governance performance”.

Observers believe that this five-month study campaign signals the Chinese leadership’s determination to reverse the narrow “GDP-only” mindset in evaluating officials’ performance, and to address the resulting problems of data falsification, local government debt and vanity projects.

Over the past two weeks, how officials define and pursue achievements has become a recurring theme as regional leadership reviews first-quarter economic performance. At a meeting of the Standing Committee of the Hunan Provincial Party Committee held on 23 April, it was proposed to guide and drive high-quality development with a “correct” view of governance performance, to carry out a post-mortem of the special campaign against statistical falsification, and to improve and refine statistical methods and systems.

This year, the Chinese government has set its full-year GDP growth target at 4.5% to 5%, marking the first time in over three decades that the target has been lowered below 5%, signalling that China is about to enter a phase of medium-speed growth.

Beijing’s decision to stop insisting on keeping GDP growth around 5% reflects both the need to account for rising external uncertainties and an effort to leave room to address domestic issues such as involution and deflation. In light of the current global situation, the move appears prescient; for local governments, it also provides greater breathing space and flexibility.

After emerging from the Covid-19 pandemic, China’s economy has continued to show a split pattern of “hot and cold”: macroeconomic indicators are strong and emerging industries lead the world, yet employment expectations among the masses are pessimistic and traditional industries remain in decline. Local governments must cope with a sharp drop in revenue caused by the property market slump while also bearing heavy debt repayment pressures; if they continue to pursue GDP growth blindly, it may push society into even greater difficulty.

That said, while a GDP-centric approach is clearly undesirable, what role GDP targets should play within a “correct view of governance performance”, and how much weight economic growth should carry in officials’ evaluations, has not been clarified by the higher ups. Striking a balance between economic development and improving livelihoods is again testing the wisdom of local officials.

On the same day that Liaoning released its first-quarter GDP figures, the Standing Committee of the Liaoning Provincial Party Committee held an expanded meeting. In addition to calling for firmly addressing and rectifying distortions and misalignments in officials’ approach to governance performance, it also urged efforts to “catch up with the country’s development pace as soon as possible”, to face up to the development gaps, and to further strengthen a sense of crisis, urgency and responsibility, “fighting a comeback battle in the second quarter and striving to complete the set targets and tasks”.

At first glance, the slowdown in local GDP growth is alarming; but if it can more accurately reflect the challenges of local economies and give society a chance to recuperate and recover, it may not necessarily be a bad thing.

This article was first published in Lianhe Zaobao as “当地方GDP开始减速”.

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