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Professor Lu Ming of Shanghai Jiaotong University was the first to call the marked differences within China the “Europeanization†(or Eurozoneization) of the Chinese economy.
The euro area is made up of 19 European countries with a unified market and a single currency, but with great differences in productivity between them. This, of course, has many advantages, such as promoting the common internal market, reducing transaction costs, etc. However, the proper functioning of the euro area depends on whether its members have similar levels of productivity or public debt. If they are not, it will create a divergence of interests between the “core†countries with high productivity and low debt and the “peripheral†countries with low productivity and high debt.
For example, Greece and Germany use the euro, but Germany’s GDP per capita is more than double that of Greece, with much higher levels of productivity. But the euro exchange rate is the same in Germany and Greece. Thus, if the European Central Bank fixes the exchange rate under conditions favorable to Germany, then the currency will be “too expensive” for Greece. This would allow Greece to export and limit its credit scale. But if the ECB sets the exchange rate according to Greece’s economic standards, then the euro will be “too cheap” for Germany. It could lead to inflation and bubbles. It is difficult for the ECB to keep both Germany and Greece happy, and the difficulty is causing all kinds of political, economic and social problems.
With weak growth and high unemployment, and no way to stimulate the economy, northeast China has become Eurozone Greece.
Also in China, mainland China’s 31 provincial administrative regions use the same currency, the RMB, which serves as a unified market. But economic conditions vary greatly from province to province.
This fracture is accelerating. In 2010, for example, Shanghai’s GDP per capita was 3.7 times that of Heilongjiang. In 2019, the gap had widened to 4.3 times.
Like Greece in the euro zone, Heilongjiang cannot unilaterally devalue its currency to stimulate its economy. What is even more difficult for the province, compared to Greece, is that there are many ambiguities around the distribution of responsibilities between local and central Chinese authorities.
Business failures in the northeast, often accompanied by large indebtedness, complex debt relationships, and ambiguous and shifting government attitudes, have become a hot topic in Chinese economic news.
The biggest problem for eurozone “peripheral countries” like Greece (as well as Portugal, Spain, Italy, Ireland) during the European debt crisis of the past decade was that politics monetary policy was completely out of their control (it falls under the remit of the ECB mandate), while fiscal policy was only partially in their hands (euro area countries have a certain fiscal autonomy but are bound by regulations Unified Taxes), which has a lot in common with the situation Northeast China has faced over the past five years.
Business failures in the northeast have become a hot topic in Chinese economic news.
Since 2016, China has embarked on a fierce campaign of “deleveraging”, with a rapid credit crunch. In the second half of 2016, Northeast Special Steel, the northern largest special steel company headquartered in Dalian, whose major shareholder is the Liaoning State-Owned Assets Supervision and Administration Commission, has struggled with funding, defaulting seven times in four months, transforming himself overnight from contender for “the world’s largest special steel company” to “king of serial defaults.” Its president committed suicide.
Since 2014, economic growth in the three northeastern provinces has been below the national average almost every year. Liaoning even exposed itself to GDP falsification after the change of head of government. With weak growth and high unemployment, and no way to stimulate the economy, northeast China has become Eurozone Greece. It is in this economic context that young people in northeast China are leaving their hometowns. After all, it’s easier to move from Heilongjiang to Guangdong than to migrate from Greece to Germany.
In light of these developments, China’s population census has attracted special attention this year, especially from the real estate sector. Gone are the days when any domain in China could appreciate; 900 million of China’s 1.4 billion people already live in cities and towns, and according to the experience of developed countries, the rate of urbanization will only slow down in the future, which means that real estate investors need to pay more attention to the demographic breakdown. If the population is declining, investors should be careful.
Local governments in poor economic conditions find it increasingly difficult to obtain funding – Photo: Nate landy
The variations in real estate valuations due to the divergence in population growth could further exacerbate the “Europeanization†of the Chinese economy. The exodus of populations and the decline in local financial resources in the North-East are closely linked to the decline in the government’s public protection capacities. The decline in population is undermining the value of real estate, which in turn would affect local governments that rely heavily on land concessions. For some local authorities, income from land concessions can represent around a quarter of their financial resources, and the loss of this income will further weaken local public services and social security systems, triggering a new wave of exodus of the local population. and entering a vicious cycle.
Demographic changes have indeed hampered the economic growth of the Northeast in terms of labor contribution rates, but the total productivity of the Northeast has been a greater nuisance to economic growth in recent years than the negative impact. the exodus of the population.
In addition to the demographic decline, the demographic structure of northeast China exhibited the disturbing phenomenon of aging and childlessness. The three northeastern provinces rank first (25.7%, Liaoning), third (23.2%, Heilongjiang) and fourth (23.1% Jilin) ​​among the 31 provincial administrative regions in terms of proportion of people over 60, with Shanghai in second place. The three northeastern provinces are also at the same level with Shanghai on the proportion of the population aged 0-14. However, Shanghai is much richer than northeast China, with a GDP per capita 2.7 times that of the region’s richest province, Liaoning.
The three northeastern provinces rank first (25.7%, Liaoning), third (23.2%, Heilongjiang) and fourth (23.1% Jilin) ​​for the proportion of people over 60 years of age , with Shanghai in second place
By comparing the 2010 census data, it can also be seen that northeast China faced the greatest population reduction in the 14-59 age group of youth and adults, which is the most economically dynamic age group: Heilongjiang ranks first in the country with a reduction of 7.6 million people in this age group in ten years, while Liaoning and Jilin are rank fourth and fifth with 5.1 million and 4.9 million. In contrast, Guangdong’s population in this age group grew by more than 10 million, while that of Zhejiang grew by 4.1 million.
But the population decline is ultimately a symptom of northeast China’s economic decline, not a cause. By breaking down the sources of economic growth into labor, capital and total productivity (generally understood as the increase in economic efficiency due to technology or institutions), labor can only explain a tiny part of the economic growth of China, no more than 10% after 2000 The remaining 90% of growth comes mainly from capital (around 60%) and technological and institutional improvements (20-30%). Admittedly, demographic changes have indeed hampered economic growth in northeast China in terms of labor contribution rate, but the drag on economic growth in total factor productivity in northeastern China. east China in recent years has been far greater than the negative impact of the population exodus.
The population decline is ultimately a symptom of northeast China’s economic decline, not a cause.
The fate of the Northeast is not so much a demographic problem but rather an institutional problem with a strong historical inertia. Liu Shangxi of the Chinese Academy of Finance calls it the “Northeast Phenomenon”: When the national economy is doing well, the decent growth rate can often mask all the dysfunctions of the Northeast economy. But once there’s an economic downturn like the one that started in 2015 when money is tight and local financial autonomy is reduced, then northeast China is often the first to be hit. There are often jokes on the continental grid that “investing is not the only way to cross mountains and seas”, often due to the lack of separation between government and business in the North East. and the bad business environment.
China’s economic “sail against the wind” will be the norm in the future, but there could be many more problems to expose in the northeast. Demographic change is almost impossible to reverse, and it is difficult for capital accumulation: since 2018, many new credit loans have gone to the eastern coastal provinces: Jiangsu, Zhejiang and Shandong have received the more credit resources. Local governments in poor economic conditions find it increasingly difficult to obtain financing, with negative growth in the financing ladder in Heilongjiang and Liaoning, and only weak growth in Jilin.
The only way out for the Northeastern economy in the future is through efficiency and reform. It’s easy to say but hard to do. There is a serious lack of financial resources of local governments, unclear powers and responsibilities of the system. People from the northeast go to Beijing or the southeast coast. It’s called ‘voting with your feet’, in essence, and it’s sort of optimizing the allocation of resources: if the system stays the same, then I’ll leave.
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