Economy, Talking Point

It’s grim up north

Why has growth halved in Hebei, Shanxi and Heilongjiang?

A man talks on his phone near a new residential compound in Taiyuan

Looking to sell? Taiyuan’s economy has been suffering and so too its property market

No one knew the full extent of Xing Libin’s wealth when he first made headlines hosting an ostentatious wedding for his daughter in Hainan two years ago. “Tens of billions” was one estimate, which would have been more than enough to cover the Rmb70 million ($11.23 million) of celebrations. Private jets and Taiwanese pop stars featured, while a fleet of Ferraris tastefully escorted the horse-drawn carriage conveying the bride to the ceremony (see WiC144).

The surroundings would soon get a lot less spectacular for Xing, one of Shanxi’s leading coal barons. The deteriorating position of his Liansheng Group, once the largest private coal firm in Shanxi, forced a court-ordered restructuring in December and creditors lined up across the province. Xing’s fall from grace was complete when he was arrested in March. But the financial problems at his company look to be anything but rare in Shanxi, as the debt-laden province struggles to adjust to a ‘new normal’ of slowing growth. And as the economic picture continues to darken, other provinces are encountering similar difficulties too.

Bigger picture, the news on the economy is gloomy…

China hasn’t missed an annual growth goal for 15 years but the first-quarter numbers suggest that this year’s target is under pressure. The economy grew 7.4% in the first three months, slower than the final quarter of last year. As we discussed in WiC230, policymakers have tried to avoid setting a specific target for growth this year, although something close to 7.5% seems to be anticpated. Premier Li Keqiang has set a floor on the range by indicating that 7.2% is the minimum necessary for job creation.

Much of the current anxiety about the economy stems from weakness in the property market, which accounts for about a quarter of fixed investment in the economy. Here the outlook looks set to worsen after property under construction and sales both fell sharply in floor space terms in April. But the story is mixed across the country. “Our surveys show clear divergence in price trends with first tier major cities experiencing mildly rising housing prices,” a spokesman from the National Bureau of Statistics announced. “In some second-tier cities prices are shaky and in third and fourth-tier cities, especially those with ample supply, prices have come down.”

What’s going on at a local level?

Outsiders tend to focus their attention on the national GDP figure. But in a continental-size economy, this masks significant regional disparities. In fact, the odd thing is these have gained little attention. After all, when we look at eurozone growth rates, economists break down the figures to show which countries are lagging or leading. Last Friday’s first quarter GDP figures showed the 18 members of the currency bloc growing at an average of 0.2%. However, there were major divergences in the group: Germany and Latvia grew at 0.8% and 0.7% respectively; the Netherlands contracted by 1.4%, Italy by 0.1% and France had zero growth.

Ranking map

What constitutes China’s GDP? Ultimately the performances of the mainland’s 22 provinces, five autonomous regions and four municipalities. The map above shows the performance of the five worst and five best in the first quarter – based on data released by the provincial governments at the end of April.

And given the worries about the slowdown, it should be no surprise that most attention is being paid by the local press to the bottom five rather than to those that are the top performers (though interestingly Chongqing leads the rankings, suggesting that the fallout from the Bo Xilai purge hasn’t dented the municipality’s growth. Or perhaps that’s not a coincidence: two of the others in the top five – Xinjiang and Qinghai – are also deemed politically sensitive. Their special status may have shielded all three from the worst of the economic fallout).

Bottom of the league are Heilongjiang, Hebei and Shanxi, which tend to be more focused on heavy industry and more reliant on fixed asset investment to reach their growth goals.

Hebei, the leading steel-producer, saw 4.2% growth in the first quarter, down from 8.2% in the final quarter last year. Shanxi also reported weak data, following sluggish demand for the province’s coal. WiC has mentioned Shanxi’s coal barons in the past, including plans to diversify into other businesses like banks (see WiC206) and telecoms (see WiC193). Those that did so will be relieved, as the media is reporting grim conditions for many of the coal producers.

Cities like Gujiao are some of the worst affected. Once the largest coking coal production base in China, Gujiao is now struggling with shutdowns, says National Business Daily, following the closure of at least 23 enterprises engaged in mining coal and iron ore. That has led to declines of nearly Rmb2 billion in local GDP, “equivalent to half of Guijao’s economy,” the city’s Party secretary has revealed.

Shanxi’s bosses seem to be hoping that the province can reinvent itself, with a new focus on tourism. (At the Yungang Grottoes outside Datong – another city dominated by collieries – workers have been brushing coal dust off thousands of statues in the cave complex, the New York Times reports.) Is that really going to make up the financial shortfall from the declines in Shanxi’s traditional industries?

One local bureaucrat told National Business Daily that transforming more of the province’s mines into higher-tech coal-to-oil or coal-to-gas production would be a better bet for local revival. But recasting the economy along these lines is expensive and could take as long as 20 years, he admitted.

Is Shanxi’s experience unusual?

A number of provinces have been hit by the same triple-whammy. New policy measures from Beijing are seeking to cut overcapacity and close production at the heaviest-polluting operators. Their impact has been made more severe by the slowdown in property construction, which has sapped demand for the likes of steel and cement.

Of course, many of these cities are also reporting pressure on local house prices after overbuilding by developers.

Figures released by the National Energy Commission also indicated power consumption grew slowly in April – which will hardly cheer the coal producers.

This slew of bad news has analysts searching for the parts of China most likely to be suffering from the downturn. “In a nutshell, the worst hit so far tend to be the central provinces, second and third-tier cities, companies related to construction, real estate and heavy industry, smaller manufacturers and blue collar workers at the lower end of the wage pyramid,” James Kynge suggested in the Financial Times earlier this month.

Another badly hit province is Heilongjiang, which grew at just 4.1% in the first quarter, or less than half of its target rate. It is home to Daqing, a high profile city in the domestic oil industry (see WiC34 for more on its celebrated history). But like Shanxi, Heilongjiang is also hurting from its heritage as an energy hub, especially as the campaign to shut down its poorest performers starts to bite. It was home to 4,388 industries classed as “large scale” in the first quarter, says the province’s economic development agency. Of this total, 1,270 firms saw reductions in output, while 722 stopped production completely in the first three months of the year.

Of course, many of these firms will hope to reopen if conditions improve. But changes of fortune look unlikely unless the central government steps in. And that’s something that Xi Jinping and Li Keqiang have said that they won’t be doing – at least not with another massive round of stimulus spending.

Signs of trouble elsewhere?

Red lights have been flashing in the property market. Zhejiang is traditionally one of China’s more vibrant economies, for instance. But newspapers have expressed concerns on signs that three of its cities – Hangzhou, Ningbo and Wenzhou – are struggling with the greatest oversupply of new apartments.

And reports from Jiangsu, another of the wealthier provinces, confirm that even Huaxi – commonly described as ‘China’s richest village’ (see WiC27) – isn’t immune from the pressure.

Huaxi started to prosper when an enterprising politician gave villagers shares in a local factory a generation ago. The business grew into the Huaxi Group, which now extends to more than 100 enterprises. An inner-circle of villagers continues to take dividends from the company, although much of their annual return is reinvested and they can’t sell their stakes. But Huaxi has also been looking to reinvent itself after seeing its core interests – primarily chemical fibre production but also steel and non-ferrous metals – make lower returns (profits were less than 1% of revenues in 2012).

In fact, Huaxi was ahead of the rest in seeing the need to broaden its portfolio, CBN reports. About 10 years ago it set goals for half of its profits to come from service industries. One of the more recent ploys was to trade on its national reputation to bring in tourists. So it built a huge hotel to house visitors lured by a nearby park filled with replicas of landmarks like the Statue of Liberty.

But progress has been limited. As WiC reported last year, tourist arrivals have been low for months. Media reports suggest that the villagers are receiving coupons – which can only be spent at the hotel – in place of their normal dividends.

Time to accept the ‘new normal’…

If Huaxi is finding it difficult to make the transition away from its industrial past, what hope is there for rust-bucket towns in provinces like Heilongjiang?

One response to that question is that the slowdown is a function of government policy. As Beijing instigates reforms, the “new normal” for the economy will likely be slower but less wasteful growth.

“China is still in a significant period of strategic opportunity. We must boost our confidence, adapt to the new normal conditions based on the characteristics of economic growth in the current phase and remain cool-minded,” Xi Jinping urged during a recent trip to Henan. The People’s Daily picked up on the same theme, acknowledging that this change of circumstances isn’t going to be painless. “Although in the transition process, China’s economic growth will experience a slowdown, the quality and efficiency of the economy will be greatly improved, with a transition from the ‘world factory’ to the ‘world market’ – from ‘Made in China’ to ‘Created in China’,” it promised.

On Tuesday, Zhang Ji, a senior minister in the Commerce Ministry, warned that China could no longer rely on exports to supercharge the economy either. “Generally speaking, the era for foreign trade to maintain continued high growth is gone forever. Our country’s foreign trade is expected to operate at a reasonable range of medium-to-low-growth,” he told reporters in Beijing. Zhang added that labour costs in China’s coastal regions are now as much as three times higher than those in India, Vietnam and Cambodia.

HSBC’s Chief China Economist Qu Hongbin accepts that China’s growth figures have been “relentlessly disappointing” this year. But in a piece of research co-authored with his colleague John Zhu this month, Qu also argues for some perspective – if only because the conditions were worse when China faced similar challenges 20 years ago.

Back then half the state-owned enterprises were losing money; non-performing loans were thought to have reached 30% of bank debt; and inflation was much more unpredictable. But China coped with the crisis and then benefited from a major restructuring of its economy. Today, Qu sees no reason why the leadership should not succeed again. “The economy is stronger for the previous reforms,” he concludes, “and policymakers now have more options to deal with the shocks.”

In the meantime, it will pay to focus on how Hebei, Shanxi and Heilongjiang do in the quarters ahead. Indeed, just as the struggling Italian economy is often viewed as the litmus test for the prospects for a recovery in the eurozone, so too these three provinces could speak volumes as to whether China’s current malaise is worsening.

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