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    Greater China
     Sep 14, 2005
Reviving northeast China
By Tom Miller

BEIJING - Once China's industrial heartland, the country's northeast region has turned into a "rust belt" populated by moribund state-owned enterprises (SOEs) and legions of laid-off workers. The first week of September, as part of the government's ambitious plan to rejuvenate the region, the vice-premiers of five northeast Asian countries and representatives from 52 Global 500 multinational companies met in Changchun, the capital of the northeast's Jilin province, to discuss how foreign investment and cooperation might help get the region back on its feet.

The inaugural northeast Asia Investment and Trade Expo, which ran September 2-6, featured big-name participants like General Motors, Siemens, Royal Dutch-Shell and Wal-Mart. For Jilin's provincial government, it was the latest attempt to kick-start local redevelopment after the failure of a scheme in the 1990s to turn

the Tumen River, which also washes the banks of North Korea and Russia, into an international transport, trade and industry hub.

Designated a "priority project" by the United Nations Development Programme (UNDP) 10 years ago, the Tumen River scheme was earmarked for US$30 billion of infrastructure investment. But lack of interest from Russia, North Korea and China's central government scuppered the plan. Now that China's leadership has launched a concerted attempt to revitalize the entire northeast region, the UNDP is considering reviving the project.

The latest scheme to revitalize the northeast, launched with much fanfare by Premier of the State Council, Wen Jiabao, at the end of 2003, embodies a mix of motives. Politically, it represents the Hu Jintao-Wen Jiabao regime's effort to stake out a power base distinct from that of the Shanghai clique that dominated China through former leaders Jiang Zemin and Zhu Rongji and their respective patronage networks. Over the past two years, the top levels of the region's provincial governments have been staffed with Hu and Wen loyalists.

Economically and socially, the strategy is a central government attempt to pull a failing region up by the scruff of its neck. Once the bastion of China's planned economy, the northeast has slipped behind the surging economies of the coast, especially the greater Shanghai region and the Pearl River Delta area around Hong Kong. The region was the worst casualty of the decay of state industry in the 1980s and 1990s, and suffered tremendously under the drastic restructuring of state-owned enterprises initiated by Zhu Rongji in 1997.

The northeast endured nearly a quarter of the 30-40 million lay-offs of SOE employees, and has been the epicenter of worker protests. According to Song Xiaowu, the deputy director of the government office responsible for coordinating the revitalization strategy, the highest proportion of petitioners who come to Beijing to vent their frustrations are from the northeast. "If the northeast had remained stable," he admits, "we would not have had to take such care of it now."

The northeast revitalization scheme is the second explicit regional development launched in recent years, following the "Develop the West" project that started in 2000. While the campaign in China's poor West focuses on massive infrastructure spending - around $75 billion to date - the broad goals of the northeast project are structural: industrial diversification, further state-sector reform, and encouragement of the stunted private sector.

The government hopes it can soak up the legions of unemployed workers by creating a dynamo to match the growth engines of Guangdong and Shanghai. According to Song, the main numeric target is simply to reduce the region's unemployment rate to the national average. Although official figures put the unemployment rate in the northeast at 7%, this does not take into account the thousands of workers who remain contractually tied to their work units - xiagang or "off-post" - while remaining effectively out of work. Local officials and academics agree that real unemployment is somewhere between 10 and 15%.

The region is piloting a social security reform that puts xiagang workers directly onto unemployment benefits, relieving SOEs of their remaining financial liabilities to excess workers. This has pleased employees and will help to make unemployment figures more transparent, but many workers have reacted angrily to losing their xiagang allowance. Song says furious oil workers from Daqing, China's largest oilfield, forced their employer to pay severance packages of Rmb100,000 (around US$12,000) per worker as compensation.

The Daqing oil workers were lucky: oil companies have the funds to placate rioting employees. In fact, the oil industry accounted for more than 80% of industrial profits in the northeast last year. Unfortunately, the northeast's oil fields are mature. Oil output from Daqing fell below 50 million tons in 2003 for the first time since production began in 1960, and continues to decline. Not only is the region too reliant on the state sector, it remains vulnerably reliant on a handful of industries - oil, steel, autos, and coal - both for profits and employment.

The northeast needs to diversify its industrial base and create new labor-intensive jobs in private businesses. Although the government talks about creating jobs in the private sector, state planners continue to rescue capital-intensive, heavy industries from bankruptcy. According to a recent World Bank report, the financial condition of locally controlled SOEs in the region worsened substantially over the past few years. Rather than letting zombie enterprises die, however, the government is lending a helping hand by allowing northeast enterprises to buy capital goods without paying VAT.

The government cannot afford to lay off more workers, but vast over-employment in unprofitable industrial sectors by bankrupt SOEs suggests further layoffs are inevitable. A handful of major SOEs, such as Harbin's power equipment company, are already internationally competitive; others, notably Angang Iron and Steel, are showing signs of renewed life. But, for the rest, it is a matter of finding a merciful way of putting them out of their misery so that the private sector find space to bloom.

How well the revitalization scheme serves Jilin ( ATol map), the worst-performing and poorest province in the northeast, remains to be seen. Lacking a coastline, oil profits or any significant private sector, Jilin has struggled more than its neighbors since China started reforming 25 years ago. In Changchun itself, nearly 80% of economic output is generated by just one giant SOE, First Auto Works, which has its own car assembly and component plants as well as joint ventures with Volkswagen and Toyota.

Zhu Yejing, Changchun's mayor, admits that Jilin's performance in terms of developing private enterprise has been "rather slow". But he is optimistic that the drive to revitalize the northeast is beginning to bear fruit. Five years ago it would have been impossible to attract so many multinationals to the city. "This is a chance not to be missed," he says. "I think it's even fair to say it is our last chance."

Tom Miller is the Beijing correspondent of the China Economic Quarterly (CEQ), a magazine that reports on the Chinese economy and business environment. He can be contacted at tpxmiller@gmail.com.

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China's border barometer (JUn 9, '05)

China kicks off VAT reform in NE China (Sep 22, '04)

Jilin province to benefit from stronger auto sector (Dec 2, '03)

China seeks to revitalize its growing 'rust belt' (Aug 15, '03)

China faces growing unrest in 'rust belt' (Aug 3, '02)


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