China's rust belt need reform

Though the Chinese economy as a whole is restructuring for quality growth, its old industrial heartland seems to be missing the party.

The world's second largest economy slowed to a 24-year low of 7.4 percent last year amid efforts to diminish reliance on investment and low-end manufacturing. The country's traditional manufacturing base in the northeast has seen growth slow even more dramatically.

Despite a cooling economy, jobs are holding up well and consumption is contributing more to growth for China. But a much steeper slowdown in three northeastern provinces is a disturbing sign that China's rust belt is still stuck in the old growth model as the nation gears up for a transformation.

Economic growth of the northeastern provinces of Liaoning, Jilin and Heilongjiang trailed behind the national average last year, at 5.8, 6.5 and 5.6 percent respectively.

The northeast was among the first regions in China to become industrialized last century. State-owned companies have played a dominant role in the region's heavy industry. A revitalization plan helped the region bounce back to lead economic growth after the central government reformed its inefficient state sector in the late 1990s.

But weakened overseas demand and falling commodity prices over the past year took a fresh toll on the region's economy and led to a slowdown that once again exposed regional economic problems that previous government rescues have failed to address.

In Jilin, a local subsidiary of China's largest state-owned oil producer, PetroChina, reported heavy losses as oil products piled up in its warehouses.

In neighboring Heilongjiang, state-owned coal company Longmay is struggling with government subsidies after a whopping 5 billion yuan ($800 million) loss last year.

In the coastal city of Dalian in Liaoning province, workers at state-owned Dalian Shipbuilding Industry Co Ltd are busy finishing an offshore oil drilling platform, which the company's deputy general manager Yin Xuelin said is their only order in the past 13 months.

Vestiges of the old planned economy are stalling efficiency gains in the northeast. An underdeveloped private sector cannot cushion the impact of slowing manufacturing activities in the region's state firms.

While market-based reforms are granting more freedom to entrepreneurs and boosting productivity in more developed regions, they have progressed slowly here.

Foreign equipment in the factories of state firms also points to their lack of proprietary technology, putting these firms at a disadvantage in global competition.

It is tempting for officials to blame weak overseas demand and tapering investment for the region's problem. But a consensus has emerged from the local business community that the region needs to cultivate a more supportive environment for innovation and accelerate market reforms.

In an action plan released in August, the State Council, China's cabinet, laid out in broad strokes reforms aimed to reverse the cooling trend in the region.

High on the central government's agenda is improving efficiency and competitiveness of the region's state-owned firms by selling stakes to private investors. The government also pledged more support for tech-heavy industries such as robotics, marine engineering and integrated circuits.

It also seeks to boost the region's service sector to provide more jobs and address years of unbalanced development.

Not all companies in the northeast are reeling in the face of strong economic headwinds. Some with better technology and better responses to market demands have shown flickers of promise.

A 19-meter-deep, 15,000-square-meter underground machine tool manufacturing base in Dalian offers a model for the northeast to regain its past glory.

"We keep temperature fluctuations here within one degree Celsius because even a minor change in humidity and temperature will affect the precision of machine tool manufacturing," said Yu Dehai, chairman of Dalian Guangyang Science and Technology Engineering Co Ltd.

The company's machinery has been exported to Germany, making it a prime contender for major overseas players such as Japan's Fanuc and Germany's Siemens.

Yu said his company is planning another 240,000-square-meter underground factory to accommodate waves of orders that have overwhelmed the existing facility.

The difference between Yu's company and those struggling to keep their heads above water presents a make-or-break decision for the region: cling to the dated economic system and watch the region's problems turn from bad to worse, or begin a transition that could prove painful but also presents opportunities to reinvent the rust belt into a renewed growth engine.

"There are always bad times in the market, but nobody knows what happens next," said a businessman based in Shenyang, capital of Liaoning. "That's when you need to reform old systems to unleash innovations, which will in turn lead to new territory."