The EconomistFebruary 24th 2018 251M
AO ZEDONG called China’s three
north-eastern provinces—Heilong-
jiang, Jilin and Liaoning—the country’s “el-
dest son”. In the Chinese tradition the fam-
ily’s future rests on that child’s shoulders.
But this one is failing in his duties. Debate
rages over what has gone wrong and what
to do. Many experts conclude that the re-
gional economy needs to be run a different
way. Their analysis has lessons for the na-
tional economy, too.
Mao made the north-east the centre of
heavy industry. It still contains many of
China’s largest makers of cars, aircraft and
machine tools. In 1978, on the eve of Deng
Xiaoping’s economic opening, Liaoning,
the most populous of the trio, had the
third-largest economy among mainland
China’s 31 provinces. ItsGDP was 20% big-
ger than that of Guangdong, the southern
province with the biggest population. But
40 years of rapid national growth have left
the north-east lagging behind. By 2016
Liaoning had fallen to 14th among prov-
inces by income and had only one third of
Guangdong’sGDP. In 1978-2016 its share of
China’s output fell by more than half.
As long ago as 2003 a worried national
government drew up a plan “to revitalise
the old north-east industrial bases”. It did
so by vastly increasing state investment,
which jumped from 30% of regional GDP
in 2000 to 60% five years later. Even this
was not enough. In 2016 the government
ladled out another vast dollop of money.
Three unusual features account for
some of the region’s problems. First, Mao-ince of Jiangsu, having lived in the north-
east for 30 years. He wrote last year that
Chinese people from other regions “can-
not imagine how accustomed” north-east-
erners are to government control. History,
he says, explains the difference. The north-
east was a puppet state of Japan in 1932-45
and endured autocratic planning for a gen-
eration longer than elsewhere.
Still, itis possible to exaggerate the re-
gion’s peculiarities. Other provinces have
failingSOEs. Half a dozen have declining
populations. The region is not, on average,
poor (see map, nextpage). And although it
is near the bottom of China’s league table
of growth, the north-east is growing fast by
the standards of rust belts globally. Accord-
ing to official figures, itsGDP expanded by
almost 7% a year in 2011-16, though the Liao-
ning provincial government admitted to
falsifying its accounts for 2011-14, so the offi-
cial statisticsare suspect.The national interest
All of which makes the question of how to
revive the region more than a parochial
one. It is, says Andrew Batson of Gavekal
Dragonomics, a research firm, “a proxy de-
bate about the future of China: should
there be more interventionist industrial
policy or more free-market solutions?”
Controversy flared last August with the
publication of a 500-page report on Jilin,
commissioned by the province from a
well-known Chinese economist, Justin
Yifu Lin, who was the World Bank’s chief
economist in 2008-12. Mr Lin argued that Ji-ist planning left it more dependent on
state-owned enterprises (SOEs) than other
areas. In China as a whole 17% ofindustrial
jobs are in SOEs. In Liaoning the share is
40%; in Heilongjiang 55%. These firms are
inefficient and many are unprofitable.
Houze Song of the Paulson Institute, a
think-tank, calculates that the return on as-
sets of Liaoning’sSOEs fell from 3% in the
mid 2000s to minus 1% in 2015—ie, they
were losing money (see chart, nextpage).
Second, the region, which has 109m
people, is ageing fast, even by Chinese
standards. At 39.2 years, Liaoning’s median
age (the point at which half the population
is older, half younger) is the oldest in the
country. The north-eastern provinces have
a fertility rate—a measure of how many
children women are likely to have—below
one. The only other provincial-level areas
that have such ultra-low fertility are the cit-
ies of Beijing, Shanghai and Tianjin.
The north-east is losing its best and
brightest. Jiang Ping graduated in 2015 from
the prestigious Number 3 High School in
Harbin, the capital of Heilongjiang. She,
along with 19 of her 47 classmates, left for
universities in Beijing. All of them expect
to stay in the capital when they graduate.
In contrast, all butone of her father’s high-
school classmates live and work in Harbin.
The Harbin Institute of Technology is one
of China’s top engineering universities.
Only 3% of its alumni stay in the province.
Third, the north-east has an unusually
strong collectivist tradition. Song Changtie
manages a textile firm in the coastal prov-Regional developmentThe bribe factory
HARBIN
Debate about how to revive China’s north-eastern rust belt holds lessons for the
country as a wholeChina
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