China's manufacturing conveyor belt is still humming along. Photo: iStock
China's manufacturing conveyor belt is still humming along. Photo: iStock

China’s northeastern provinces were traditionally the biggest contributors to its GDP prior to President Xi Jinping’s ascendancy. Liaoning, Heilongjiang and Jilin provinces, the country’s heavy manufacturing centers, are now China’s rustbelts and are in desperate need of reform.

What these three provinces’ embody are the prospects of Chinese reform writ large. What happens here will dictate the shape of China’s recovery from heavy manufacturing, ushering it out of the middle-income trap that plagues many ascending economies.

On the eve of Deng Xiaoping’s opening of the country to western capitalism, Liaoning remained the most populated of China’s 31 provinces, with a GDP 20% larger than that of Guangdong, the country’s populous southern province. However, decades of growth have diminished this trio, with Liaoning falling to 14th place among provinces ranked by income. How China revitalizes its old industrial bases will reveal much of China’s future growth in managing the transformation from export substitution toward a consumption/service-based economy. China specialists throughout the West continue to measure the Chinese pivot in the hope of salvaging defunct industries. By any measure, this remains a daunting challenge, but the need to reform China’s rustbelts cannot be ignored any longer.

There are three distinct cultural features hindering reform, each of them indigenous to the northern provinces

There are three distinct cultural features hindering reform, each of them indigenous to the northern provinces.

One, all three provinces suffer as remnants of Maoist planning that left them heavily dependent on Beijing. The Paulson Institute’s Dr Houze Song calculated that Liaoning’s share of GDP has fallen to minus 1%. This is dangerously volatile given that Chinese state-owned enterprises account for 17% of Liaoning’s industrial jobs.

Two, the demographic profile of the northeast has plummeted. With over 110 million people, the median age of workers throughout the northeast remains at 39.2, making it the province with the oldest workers in China. This metric, coupled with low fertility, hamstrings the growth prospects of human-capital intensive enterprises.

Three, historically, China’s northeastern provinces have had an unusually strong collectivist tradition, making them inimical to reform. Aside from Chairman Mao Zedong’s collectivist ambitions, the northeast was captured and controlled by Japanese imperialists from 1932 to 1945. Having endured two distinct types of tyranny, the managerial ethos of the northeast remains deeply autocratic.

Achieving reform in recalcitrant provinces was the goal of Justin Yifu Lin, who served as the World Bank’s chief economist from 2008 to 2012. Lin argued that Beijing ought to treat its northern provinces as it would any emerging economy requiring heavy investments in agriculture, textiles and pharmaceuticals. Contradicting this assertion is Sun Jianbo, a founder of China Vision Capital, a hedge fund management company. He firmly believes that China’s northern provinces’ stagnation is linked to culture and fiscal institutions, not industrial or macro structure incentives. Sun views these stagnant industries as inimical to reform because they remain moderately rich yet stagnant. A collectivist mentality has for decades rendered them unable to break a lethal self-imposed cycle of dependency and corruption, making them difficult prospects for foreign direct investment.

All three provinces are struggling with unusal levels of corruption and political meddling, rendering even Beijing’s political interference ineffective. The northeast is said to be China’s “eldest son,” but “prodigal son” may be a more fitting term.

As Xi Jinping continues to centralize his administrative efforts, he needs to reconsider broader lessons derived from these three northern provinces.

Can China compete when provinces are pursuing autarky? How does Beijing pull itself out of the middle-income trap when personal connections are more important than productivity, and when business is characterized by protectionism?

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William Holland

William Holland is North American recruiter for Wikistrat global consultancy monitoring Pakistan's nuclear program.