Sep 05, 2017 06:55 PM

Editorial: Northeast China Must Shed ‘Big Government’ Mindset

By Hu Shuli

How can the economy of Northeast China, the country’s backbone for three decades into the 1980s, be revived?

The question has become a hot topic of debate of late.

A Peking University panel of scholars led by former World Bank Vice President Justin Yifu Lin released a report in August, offering its therapy to restructure and upgrade the economy of Jilin, one of the three provinces of Northeast China.

This area, historically known as Manchuria, had served as the cradle for the country’s heavy industry after the founding of the People’s Republic of China in 1949. It is also one of China’s major agricultural bases. But the three provinces’ respective economies have been in trouble for the past three decades, gradually lagging behind the southern provinces and coastal areas, where market-oriented reform and opening-up have been creating economic wonders.

The report of Lin’s team said Northeast China should not just expand its advantageous industries and avoid what it is not good at. Instead, it should beef up its weak areas as well, it said. The report proposed five industrial clusters that Jilin province should focus on for economic upgrade, including “big agriculture, big health care, modern light industries and textile, modern equipment and machinery,” and a new technological cluster featuring new energy, new materials and new information technology.

The 300,000-word report said light industry and textiles are the missing layers in Jilin’s economy, as light industry can complement Jilin’s existing machinery industry.

Sun Jianbo, a former China Galaxy Securities analyst, posted an article on the internet saying Lin’s proposal to develop light industry is like pushing Jilin into “a pit of fire” as the province lacks the basic infrastructure and cannot compete with China’s coastal areas, where light-industrial production bases are already in place and running efficiently. Many other observers also cast their doubt over Lin's report.

Lin’s team has argued that the “light industry” mentioned in the report is not traditional textile and light industry, but modern light industry based on consumer electronics and home-appliance production with upgraded technologies. The team also said that all the reforms will be based on respect for the market, and the government is not supposed to pick the market players.

However, the question remains as to how to make sure the government will redefine its role and does not cross the line. The debate should not focus on whether Jilin should develop light industry, but whether local governments can change their planned-economy mindset to embrace a more market-oriented system.

It does not necessarily mean that the government doesn’t have to do anything under a system with the market playing a decisive role in allocating resources. The industrial clusters proposed in the Jilin report are mostly areas that private businesses are good at. The government’s main role is to nurture the market and create a good environment for business operation.

For years, Northeast China has been known as an area where local governments often interfere in companies’ market activities, and therefore it is not a good place to investment in.

The recent bankruptcy case of Dongbei Special Steel Group in Liaoning province, one of the three provinces in Northeast China, is a typical example. During the reorganization bankruptcy process, the local governments did not keep in close communication with the national bank creditors, and were reluctant to disclose information, including some major information required by state regulations and law. The local governments have used heavy-handed interference, even manipulating the judicial process. Although the move temporarily kept public stability and avoided the layoffs of a large number of workers, the governments have being paying a big price — the rates of government bonds and corporate bonds have been skyrocketing, as the market sought vengeance.

To improve the investment environment through systemic changes, the local governments should watch their every word and move. In a market economy, the governments can no longer introduce investment by administrative orders — a bad investment case can scare off a fleet of enterprises looking for investment.

The slogan of “Northeast China Rejuvenation” has been in place for more than a decade since the leadership at the time raised the idea in 2004. Numerous government documents have followed in the past years. But the region’s economy has been sluggish, with growth falling even more drastically since 2014.

On the surface, it appears that the reason lies in limited range of industries and serious outflow of labor forces. But in essence, it is a matter of system: poor environment for businesses, lingering concept of “big government” inherited from the planned-economy era, and the unpredictable administrative interference.

To solve the problem, the local governments need to seriously follow the central government’s policies released in recent years aimed at redefining the government’s role in a market economy, including peeling off some of their administrative controls in certain areas and letting the market have a bigger say. Some scholars have proposed establishing a special economic zone in Northeast China. But even a special economic zone needs the local government to shrug off their systemic burdens in order for it to take off.

It has been widely agreed that systemic limitation is the biggest obstacle for the development of Northeast China. Changes need to be made to the system so that market forces can become more effective, the local governments can be clear about what they should do and what they cannot do, and the region can better develop industries that fit this region’s resources and advantages.

Hu Shuli is the editor-in-chief of Caixin Media.


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