Winners and laggards seen in China’s regional growth GDP

BEIJINGEven as China continues to anchor global growth, a look under the hood reveals a divergence in regional economies that the nation’s policymakers should be wary about.

Eight provincial-level regions reported slower growth in the first-half (1H) of this year from the result in the first-quarter (1Q), while 12 showed a pick up. Twenty-seven of 31 had reported as of late last Friday, with expansion unchanged in seven regions and the nation as a whole.

With gross domestic product (GDP) figures seen as a performance report for local officials, competition has traditionally been fierce between provinces, with each trying to lure businesses and lobby for infrastructure projects. However, a crackdown on faked statistics and the move to curb local debts may be changing all that. President Xi Jinping said this month that officials are liable for bad debt-management decisions “for life”.

“Competition between cities and provinces has played an important role in China’s growth,” said Larry Hu, head of China economics at Macquarie Securities Ltd in Hong Kong. “How the competition pans out in the future depends on how the central government evaluates local officials. Economic growth is always a key performance indicator, but it will probably be less important in the next five years.”

Since Xi took office, there’s been a shift in the evaluation of regional development, with increasing focus on the environment, according to Yang Weimin, vice minister of the Office of the Central Leading Group on Financial and Economic Affairs.

The key tasks of some regions are industrialisation and urbanisation, while some areas’ priorities are farming or conservation, Yang said at a briefing last Thursday.

For the 1H, only five regions out of the 27 reported an expansion slower than the nation’s 6.9% pace.

Unexpected Laggards

Growth in three very different provinces was more than one percentage point lower in the 1H compared to the 1Q.

Tianjin, a directly-administered municipality near Beijing, seems the most unlikely laggard. The port city had the fastest growth from 2010 to 2013, expanding by as much as 17.4% in a year.

The cooling property market there has become a drag. The volume of sales slumped 21% and development investment in the sector dropped 0.8% from a year earlier. Major cities in China rolled out strict curbs on purchasing properties early this year to control runaway prices.

Environment protection may have also become a constraint as the city gets wealthier. It has overhauled and rehabilitated more than 15,000 lowerend, polluting firms this year to “force them to upgrade”.

Gansu, the poorest region in China by per-capita income, saw growth slump to 5%, less than half the 12.6% pace in 2012.

That can be attributed to the aggressive anti-corruption drive in the province, according to Chua Han Teng, head of Asia research at BMI Research in Singapore. “Many officials are currently under investigation, resulting

in political uncertainty, and that has resulted in the halting of project developments that have links to the officials who are suspected of corruption,” Chua said.

Hainan, China’s answer to Hawaii, also reported a deceleration. Swings in real estate and hotel markets have made the resort island’s economy volatile.

The priority for Gansu and Hainan is protecting their environment, rather than economic growth, Cong Liang, an official at the National Development and Reform Commission, said last Thursday.

Diverging Rustbelt

The picture from the rust belt is diverging. Shanxi — the coal country of China — rebounded to match the national growth figures, while Liaoning, with its base of heavy industry, struggled.

After recovering in the 1Q from last year’s recession, Liaoning slowed again in the 2Q. Industrial output continued to decline even as corporate profits improved, according to the regional government.

“Liaoning continues to suffer from overcapacity in most of its heavy industries, and this has been weighing on investment activity,” BMI’s Chua said.

Shanxi appeared to have successfully turned around. Benefitting from a commodity resurgence, industrial firms recovered, private investment jumped and property sales surged 46% from a year earlier by value.

Hebei, the home of most of China’s steel mills, and Heilongjiang in the northeast, both accelerated. Jilin, a struggling northeastern province, is yet to release 1H data.

Booms and Busts

Xinjiang, Guizhou and Tibet saw the fastest expansion of fixed-asset investment, all exceeding 20%. The central government has prioritised these under-developed regions with large ethnic minority populations in the west for infrastructure funds and stimulus cash.

“For the western provinces without strong fiscal revenue, funding support from the central government is key,” said Beijing-based Bloomberg Intelligence economist Wan Qian. “Yet not all poor provinces enjoy the sugar equally.”

Real Estate

The nation’s real estate market is also fragmented. Provinces such as Hubei saw results from efforts to reduce excess housing inventory, with the total stock able to be sold in just 2.1 months at the current pace. On the other hand, Liaoning reported early this year that it would take 19.2 months for them to do the same.

As for the 2H, it may be tough for the regional and national economies to keep up such expansion rates.

“Given that central and local governments’ fiscal expenditures already surged to support growth in the 1H, the economy is pressured to maintain the positive momentum,” Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong, wrote in a note last Friday. “Hence, we forecast a higher but conservative growth of 6.7%.” — Bloomberg