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Can Russia Save Northeast China’s Economy?

 
 

Once the industrial base of China, northeast China (the three provinces of Heilongjiang, Jilin, and Liaoning) has been going through a tough time in recent years. Between 2003 and 2012 the northeast’s average GDP growth rate was considerably higher than China’s national level, but since 2013, it has dropped sharply and ranks at the bottom among all the provinces of China. With the recent disclosure that the Liaoning government fabricated its 2011-14 fiscal data, the actual economic situation of the region could have been even worse.

What went wrong? It is commonly believed that a manufacturing-oriented economic structure made the northeast too dependent on outside markets. This became clear when China’s general economic downturn from 2011 significantly reduced market demand for products such as steel, cement, and coal — exactly the pillars of the northeast’s economy.

While this explains the northeast’s sudden economic drop, what caused the region’s structural imbalance in the first place? Why does manufacturing take up as much as 50 percent of the region’s economy? The answer is rooted in the policies of Japanese occupation period and China’s planned economy era. But those historical reasons do not explain why the situation hasn’t improved in recent decades.

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The answer is simple: most of the manufacturing companies in the northeast are state-owned enterprises (SOEs). No matter how poorly managed or how large their deficits are, they are mostly kept alive by government investment, thanks to their numerous employees and deep connections with the region’s political elites. The private sector and service industry, despite being the real sustainable growth points for northeast China’s economy, cannot compete with SOEs both in terms of market share and attracting investment.

In fact, the issues of oversized SOEs and the northeast’s unbalanced industrial structure were noticed as far back as the 1980s, during China’s marketization reforms. As the situation kept deteriorating in the 21st century, Beijing implemented a series of plans to tackle these problems, with hardly any significant progress to speak of. In 2003, for instance, the central government led by Premier Wen Jiabao adopted the Northeast Area Revitalization Plan. The plan aimed to improve the effectiveness of SOEs and to develop new industries. However, a large portion of the program’s investments was eventually used to simply feed the northeast’s SOEs.

Not only have the old troubles remained, but a new problem has also appeared. To counter the global financial crisis in 2008, Beijing issued the 2008-09 Economic Stimulus Program, which invested 4 trillion RMB ($586 billion), primarily into manufacturing. This pushed the northeast, as well as other parts of China, to produce more than the market needs. As a result, overcapacity became another issue for the region’s economy. To illustrate the extent of overcapacity, within the first 10 months of 2016, the Liaoning government closed 44 coal mines and reduced steel capacity by 13.61 million tons — more than Canada’s annual steel production — in order to meet the national agenda of overcapacity-cutting. Similar actions were taken in Heilongjiang and Jilin as well.

In face of this situation, in August 2016, Beijing issued the Three-Year Rolling Plan to invest 1.6 trillion RMB ($232 billion) in the northeast. This time, the investment aims at promoting administrative reform and improving the local investment environment for the private sector in order to optimize the northeast’s economic structure. Additionally, at the end of 2016, Beijing issued the Thirteenth Five-Year Plan for Northeast Revitalization (2016-2020), which prioritizes the reform of SOEs.

Will these new plans solve the structural problems? Based on previous experience, the issues of industrial imbalance and the dying-but-lingering SOEs are not likely to see any major improvements. After all, previous efforts also tried to tackle these same issues, but failed to reach significant outcomes. Moreover, since these issues are deeply tied up with the interests of the northeast political elites, a higher level of political reform is needed, however far in the future, to effectively solve economic problems.

Despite these looming difficulties, the problem of overcapacity may see realistic progress in the context of changing international politics. As the Crimean crisis pushes Russia to “pivot to the East,” it will open a new channel to northeast China.

In July 2015, Russian President Vladimir Putin signed the law on Vladivostok Free Port (VFP). The VFP covers 15 municipal entities of the Primorsky province and all key ports of the southern Russian Far East, along the border with China, North Korea, and the coast of the Sea of Japan. The main task of the VFP is to utilize the geographical advantage of the Russian Far East to increase trade turnover with Asia-Pacific countries. As a part of this project, two international transport corridors (Primorye 1-2) were proposed. While these corridors should bring about 100 billion rubles ($1.7 billion) per year to Russia’s treasury by 2030, Beijing will benefit even more than Moscow as these corridors will link the landlocked Heilongjiang and Jilin almost directly with the Sea of Japan. Primorye-1 routes from Heilongjiang’s Harbin to Russia’s ports of Vladivostok, Nakhodka, and Vostochny; Primorye-2 links Jilin’s Changchun with Russia’s Port of Zarubino.

Currently, products from Heilongjiang and Jilin have to go through Bohai Bay — more than 620 miles away via a congested railway — to be shipped overseas. The cost in time and money makes it difficult to transfer the overcapacity of northeast China outside of the region. With the help of Primorye corridors, these costs will be significantly reduced. Moreover, once connected through the Sea of Japan with major Chinese ports in the south, northeast China will be able to integrate with China’s “One Belt, One Road” initiative and open up a much broader external market for its products.

Although joint Sino-Russian projects could take decades to finish, as the two cross-border bridges on the Amur River have proven, Russia’s current eastward policy seems set to accelerate this process. The official negotiations on the two Primorye corridors between the governments and companies of the two countries began in April 2016. A joint Sino-Russian company managing the project is also being organized. Yury Trutnev, the deputy prime minister of Russia who is in charge of the Far East, has been frequently meeting with political and business leaders of China. These are not negative signs. If the construction of the corridors proceeds without major obstruction, it could relieve the overcapacity issue of northeast China, therefore bringing a new light to the region’s troubled economy.

Qiyang Niu is a master student in European and Russian Studies at Yale University. He was a former intern at EastWest Institute and UNDP.

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