A Look Under China’s Hood Reveals an Economic Divergence
- Three provinces have sharp decelerations as investment slows
- Rustbelt Shanxi turned around while Liaoning still sluggish
Even as China continues to anchor global growth, a look under the hood reveals a divergence in regional economies that the nation’s policy makers should be wary about.
Eight provincial-level regions reported slower growth in the first half of this year from the result in the first quarter, while 12 showed a pick up. Twenty-seven of 31 had reported as of late Friday, with expansion unchanged in seven regions and the nation as a whole.
With gross domestic product figures seen as a performance report for local officials, competition has traditionally been fierce between provinces, with each trying to lure businesses and lobby for infrastructure projects. However, a crackdown on faked statistics and the move to curb local debts may be changing all that. President Xi Jinping said this month that officials are liable for bad debt-management decisions “for life.”
“Competition between cities and provinces has played an important role in China’s growth,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “How the competition pans out in the future depends on how the central government evaluates local officials. Economic growth is always a key performance indicator, but it will probably be less important in the next five years.”
Bottom of Form
Since Xi took office, there’s been a shift in the evaluation of regional development, with increasing focus on the environment, according to Yang Weimin, vice minister of the Office of the Central Leading Group on Financial and Economic Affairs. The key tasks of some regions are industrialization and urbanization, while some areas’ priorities are farming or conservation, Yang said at a briefing on Thursday.
For the first half, only five regions out of the 27 reported an expansion slower than the nation’s 6.9 percent pace.
Growth in three very different provinces was more than 1 percentage point lower in the first half compared to the first quarter.
Tianjin, a directly-administered municipality near Beijing, seems the most unlikely laggard. The port city had the fastest growth from 2010 to 2013, expanding by as much as 17.4 percent in a year.
The cooling property market there has become a drag. The volume of sales slumped 21 percent and development investment in the sector dropped 0.8 percent from a year earlier. Major cities in China rolled out strict curbs on purchasing properties early this year to control runaway prices.
Environment protection may have also become a constraint as the city gets wealthier. It has overhauled and rehabilitated more than 15,000 lower-end, polluting firms this year to “force them to upgrade.”
Read More: China Counts Costs of Tackling Its ’Grave’ Pollution Problem
Gansu, the poorest region in China by per-capita income, saw growth slump to 5 percent, less than half the 12.6 percent pace in 2012.
That can be attributed to the aggressive anti-corruption drive in the province, according to Chua Han Teng, head of Asia research at BMI Research in Singapore. “Many officials are currently under investigation, resulting in political uncertainty, and that has resulted in the halting of project developments that have links to the officials who are suspected of corruption,” Chua said.
Hainan, China’s answer to Hawaii, also reported a deceleration. Swings in real estate and hotel markets have made the resort island’s economy volatile.
The priority for Gansu and Hainan is protecting their environment, rather than economic growth, Cong Liang, an official at the National Development and Reform Commission, said on Thursday.
The picture from the rust belt is diverging. Shanxi — the coal country of China — rebounded to match the national growth figures, while Liaoning, with its base of heavy industry, struggled.
After recovering in the first quarter from last year’s recession, Liaoning slowed again in the second quarter. Industrial output continued to decline even as corporate profits improved, according to the regional government.
“Liaoning continues to suffer from overcapacity in most of its heavy industries, and this has been weighing on investment activity,” BMI’s Chua said.
Shanxi appeared to have successfully turned around. Benefiting from a commodity resurgence, industrial firms recovered, private investment jumped, and property sales surged 46 percent from a year earlier by value.
Hebei, the home of most of China’s steel mills, and Heilongjiang in the northeast, both accelerated. Jilin, a struggling northeastern province, is yet to release first half data.
Booms and Busts
Xinjiang, Guizhou and Tibet saw the fastest expansion of fixed-asset investment, all exceeding 20 percent. The central government has prioritized these under-developed regions with large ethnic minority populations in the west for infrastructure funds and stimulus cash.
“For the western provinces without strong fiscal revenue, funding support from the central government is key,” said Beijing-based Bloomberg Intelligence economist Wan Qian. “Yet not all poor provinces enjoy the sugar equally.”
The nation’s real estate market is also fragmented. Provinces such as Hubei saw results from efforts to reduce excess housing inventory, with the total stock able to be sold in just 2.1 months at the current pace. On the other hand, Liaoning reported early this year that it would take 19.2 months for them to do the same.
As for the second half, it may be tough for the regional and national economies to keep up such expansion rates.
«Given that central and local governments’ fiscal expenditures already surged to support growth in the first half, the economy is pressured to maintain the positive momentum,» Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong, wrote in a note on Friday. «Hence, we forecast a higher but conservative growth of 6.7 percent.»
— With assistance by Xiaoqing Pi