China’s Regions Exhibit Significant Economic Divergence: Rustbelt Struggles While Cities Thrive

China’s regional economies displayed noticeable divergence in performance during the first half of 2016. Provinces dependent on steel manufacturing and mining experienced weak or stagnant growth, while some larger cities thrived.

Recent provincial growth data reveal increasing imbalances as the government aims to shift the economy from its reliance on heavy industry and exports to one more driven by domestic consumption.

Liaoning, a northeastern province focused on steel production, reported a 1 percent contraction in its economy compared to the same period the prior year, making it the only province in China to see such a decline. This downturn sharply contrasts with the national growth rate of 6.7 percent.

Liaoning’s statistics were released later than those of many other provinces, with the more industrialized Heilongjiang yet to disclose its figures. The province’s economy is hindered by an oversaturated steel industry, leading to significant reductions in fixed asset investment and real estate development, which fell by 58.1 percent and 31.5 percent, respectively, year-on-year, according to an official from the provincial bureau of statistics. Provincial revenues also dropped by 18.6 percent.

Shanxi, another industrial region, had a slightly better outcome, registering the lowest growth in the country at 3.4 percent, well short of its annual target of 6 percent. The province, reliant on coal, noted the effectiveness of capacity-cutting initiatives, with first-half coal output declining by 14.4 percent. However, conditions might deteriorate further as the province plans to intensify capacity reduction efforts in the latter half of the year.

Economists have indicated that as these capacity reductions increase, there are significant risks to the traditional manufacturing sector. They anticipate that while overall economic growth may slow in the coming months, further divergence will occur between the old and new economies. The government could potentially increase spending and implement reforms in provinces that depend heavily on traditional industries.

Conversely, urban areas with more diversified economies experienced much stronger growth. Chongqing in the southwest achieved a growth rate of 10.6 percent, the highest in the country, aside from Tibet. The city reported double-digit growth in fixed asset investment and retail sales at 12.5 percent and 12.9 percent, respectively, with private investment increasing by 9.5 percent, marking a departure from national trends that have seen private investment falter.

Chongqing, home to over 30 million people, serves as a crucial transport hub in central China and boasts growing sectors in electronics, automobiles, and manufacturing. Major cities like Beijing and Shanghai each recorded a 6.7 percent growth rate in the first half.

Overall, the Chinese economy grew by a slightly higher-than-expected 6.7 percent in the quarter ending in June, spurred by infrastructure spending, a housing boom, and unprecedented bank lending. Nevertheless, a slowdown in private investment raises concerns about the sustainability of this growth, which increasingly relies on government spending and mounting debt.