China 2.0

Regional Disparity Trap: Why China’s Economy Resembles Europe

The Northeast is the Chinese equivalent to Greece ...

In China, economic conditions vary greatly from province to province
In China, economic conditions vary greatly from province to province
Yang Lu

Professor Lu Ming of Shanghai Jiaotong University was the first to refer to the sharp differences within China as the "Europeanization" (or Eurozoneization) of the Chinese economy.

The Eurozone consists of 19 European countries with a unified market and a single currency, but with large differences in productivity between them. This, of course, has many advantages, such as promoting the internal common market, reducing transaction costs and so on. However, the smooth operation of the Eurozone depends on whether its members have similar levels of productivity or public debt. If they aren't, it will create a divergence in interests between the "core" countries with high productivity and low debt and the "peripheral" countries with low productivity and high debt.

For example, Greece and Germany use the euro, but Germany's GDP per capita is more than twice that of Greece, with much higher productivity levels. But the Euro exchange rate is the same in Germany and Greece. So, if the European Central Bank sets the exchange rate under conditions favorable to Germany, then the currency will be "too expensive" for Greece. That would Greek exports and limit its credit scale. But if the ECB sets the exchange rate according to Greece's economic standards, then the euro will be "too cheap" for Germany. That could lead to inflation and bubbles. It is difficult for the ECB to satisfy both Germany and Greece, and the difficulty causes all sorts of political, economic and social problems.

With low growth and high unemployment, and no way to stimulate the economy, Northeast China has become the Greece of the Eurozone.

In China, too, the 31 provincial administrative regions of mainland China use the same currency, the RMB, which serves as a unified market. But economic conditions vary greatly from province to province.

This divide is accelerating. In 2010, for example, Shanghai's GDP per capita was 3.7 times that of Heilongjiang's. By 2019, the gap had widened to 4.3 times.

Like Greece in the Eurozone, Heilongjiang can't unilaterally devalue its currency to stimulate its economy. What is even more difficult for the province, compared to Greece, is that there are many ambiguities around the division of responsibilities between China's local and central authorities.

Corporate defaults in the Northeast, often accompanied by large amounts of debt, complex debt relationships, and ambiguous and changing government attitudes, have become a hot topic in China's economic news.

The biggest problem for the "peripheral countries' of the Eurozone such as Greece (as well as Portugal, Spain, Italy, Ireland) during the European debt crisis last decade was that monetary policy was completely out of their hands (it falls within the ECB's remit), while fiscal policy was only partly in their hands (Eurozone countries have some fiscal autonomy but are bound by unified tax regulations). This has much in common with the situation encountered by Northeast China in the last five years.

Corporate defaults in the Northeast have become a hot topic in China's economic news.

Since 2016, China has embarked on a fierce "deleveraging" campaign, with rapid credit tightening. In the second half of 2016, Northeast Special Steel, the largest special steel enterprise in the north headquartered in Dalian, whose largest shareholder is the Liaoning State-owned Assets Supervision and Administration Commission, had financing difficulties, defaulting seven times in four months, transforming itself overnight from a contender for the "world's largest special steel enterprise" to the "king of serial defaults." Its chairman died by suicide.

Since 2014, economic growth in the three northeastern provinces has been lower than the national average almost every year. Liaoning even exposed itself to GDP falsification after the change of the head of the government. With low growth and high unemployment, and no way to stimulate the economy, Northeast China has become the Greece of the Eurozone. It is in this economic context that young people in Northeast China leave their hometowns. After all, it is easier to move from Heilongjiang to Guangdong than to migrate from Greece to Germany.

In light of these developments, the population census in China has attracted particular attention this year, especially from the real estate sector. The days when any estate in China could appreciate are over; 900 million of China's 1.4 billion people already live in cities and towns, and according to the experience of developed countries, the rate of urbanization would only slow in the future, which means that property investors need to pay more attention to the demographic split. If the population is decreasing, investors should be careful.

Local governments in poor economic conditions are increasingly struggling to secure financing — Photo: Nate Landy

Changes in property valuations due to the divergence in population growth may further exacerbate the "Europeanisation" of the Chinese economy. The population exodus and the decline in local financial resources in the Northeast are closely related to the decline in government public protection capacity. The population decline undermines the value of real estate, which in turn would affect local governments that rely heavily on land concessions. For some local governments, revenue from land concessions can account for about a quarter of their financial resources, and the loss of this revenue will further undermine local public services and social security systems, triggering a new round of local population exodus and entering a vicious cycle.

Demographic changes have indeed harmed the Northeast's economic growth in terms of labor contribution rates, but the Northeast's total productivity has been a greater nuisance on economic growth in recent years than the negative impact of the population exodus.

In addition to population decline, the demographic structure of Northeast China displayed the worrying phenomenon of aging and childlessness. The three northeastern provinces rank first (25.7%, Liaoning), third (23.2%, Heilongjiang), and fourth (23.1% Jilin) among the 31 provincial administrative regions in terms of the proportion of people over the age of 60, with Shanghai in second place. The three northeastern provinces are also on the same level with Shanghai on the population proportion of 0-14-year-olds. However, Shanghai is much wealthier than northeastern China, with a GDP per capita 2.7 times higher than that of the region's richest province, Liaoning.

The three northeastern provinces rank first (25.7%, Liaoning), third (23.2%, Heilongjiang), and fourth (23.1% Jilin) for the proportion of people over the age of 60, with Shanghai in second place

When comparing the 2010 census data, one can also see that Northeast China has faced the largest population reduction in the youth-adult age group of 14-59, which is the most economically dynamic age group: Heilongjiang ranks first in the country with a reduction of 7.6 million people in this age group in ten years, while Liaoning and Jilin rank fourth and fifth with 5.1 million and 4.9 million. In stark contrast, Guangdong's population in this age group increased by more than 10 million, while Zhejiang's increased by 4.1 million.

But population decline is ultimately a symptom of Northeast China's economic decline, not a cause. By breaking down the sources of economic growth into labor, capital and total productivity (generally understood as the increase in economic efficiency due to technology or institutions), labor can only explain a tiny portion of China's economic growth, no more than 10% after 2000. The remaining 90% of growth comes mainly from capital (around 60%), and technological and institutional improvements (20-30%). Admittedly, demographic changes have indeed harmed Northeast China's economic growth in terms of labor contribution rates but the drag on economic growth from Northeast China's total factor productivity in recent years has been much greater than the negative impact of population outflow.

Population decline is ultimately a symptom of Northeast China's economic decline, not a cause.

The plight of the Northeast is not so much a demographic problem but more as an institutional problem with strong historical inertia. Liu Shangxi of the Chinese Academy of Finance calls this the "Northeast phenomenon": When the national economy is doing well, the decent growth rate can often cover up all the dysfunction of the Northeastern economy. But once there is an economic downturn like the one that began in 2015 when money is tightened and local financial autonomy is reduced, then Northeast China is often the first to be hit. There are often jokes on the mainland network that "investment is not the only way to get through the mountains and seas', often because of the lack of separation between government and business in the Northeast and the poor business environment.

China's economic "sailing against the wind" will be the norm in the future, but there might be many more problems to be exposed in the Northeast. Demographic change is almost impossible to reverse, and it is difficult for the accumulation of capital: since 2018, a lot of new credit loans have been going to the eastern coastal provinces: Jiangsu, Zhejiang and Shandong have received the most credit resources. Local governments in poor economic conditions are increasingly struggling to secure financing, with negative growth in the scale of financing in Heilongjiang and Liaoning, and only weak growth in Jilin.

The only way out for the Northeast's economy in the future is through efficiency and reform. That is easy to say but difficult to do. There is a serious lack of financial resources of local governments, unclear powers and responsibilities of the system. People in the Northeast are leaving to go to Beijing or the southeast coast. That's called "voting with their feet," in essence, and is a kind of optimization of resource allocation: if the system remains unchanged, then I will leave.

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New Delhi, India: Fumigation Against Dengue Fever In New Delhi

Anne-Sophie Goninet, Jane Herbelin and Bertrand Hauger

👋 வணக்கம்*

Welcome to Thursday, where America's top general reacts to China's test of a hypersonic weapon system, Russia is forced to reimpose lockdown measures and Venice's historic gondola race is hit by a doping scandal. French daily Les Echos also offers a cautionary tale of fraud in the crypto economy.

[*Vaṇakkam, Tamil - India, Sri Lanka, Singapore]

🌎  7 THINGS TO KNOW RIGHT NOW

Top U.S. general says Chinese weapon nearly a "Sputnik moment": China recently conducted a "very concerning" test of a hypersonic weapon system as part of its push to expand space and military technologies, Gen. Mark Milley, the U.S. Chairman of the Joint Chiefs of Staff, told Bloomberg News. America's top military officer said that this was akin to the Soviet Union's stunning launch of the world's first satellite, Sputnik, 1957, which sparked the Cold War space race. Milley also called the test of the weapon "a very significant technological event" that is just one element of China's military capabilities.

Brexit: France seizes British trawler: A British trawler has been seized by France while fishing in French waters without a license, amid escalating conflict over post-Brexit fishing rights. France's Minister for Europe said it will adopt a zero-tolerance attitude towards Britain and block access to virtually all of its boats until it awards licenses to French fishermen.

COVID update: Russia confirmed a new record of coronavirus deaths, forcing officials to reimpose some lockdown measures, including a nationwide workplace shutdown in the first week of November. Germany also saw its numbers spike, with more than 28,000 new infections yesterday, adding to worries about restrictions this winter there and elsewhere in Europe. Singapore, meanwhile, reported the biggest surge in the city-state since the coronavirus pandemic began. Positive news on the vaccine front, as U.S. pharmaceutical giant Merck granted royalty-free license for a COVID-19 antiviral pill to help protect people in the developing world.

Iran nuclear talks to resume: Iran's top nuclear negotiator said multilateral talks in Vienna with world powers about its nuclear development program will resume before the end of November. The announcement comes after the U.S. warned efforts to revive the deal were in "critical phase."

First U.S. passport with "X" gender marker: The U.S. State Department has issued its first American passport with an "X" gender marker. It is designed to give nonbinary, intersex and gender-nonconforming people a marker other than male or female on their travel document. Several other countries, including Canada, Argentina and Nepal, already offer the same option.

China limits construction of super skyscrapers: China has restricted smaller cities in the country from building extremely tall skyscrapers, as part of a larger bid to crack down on wasteful vanity projects by local governments. Earlier this year the country issued a ban on "ugly architecture."

Doping scandal hits Venice's gondola race: For the first time in the history of the Venice Historical Regatta, a participant has tested positive to marijuana in a doping test: Gondolier Renato Busetto, who finished the race in second place, will be suspended for 13 months.

🗞️  FRONT PAGE

"End of the ice age," titles German-language Luxembourgish daily Luxemburger Wort, writing about how the ice melting in the Arctic opens up new economic opportunities with a new passage for countries like Russia and China but with potentially devastating effects for the environment. The issue of the Arctic is one of the topics that will be discussed at the COP26 Climate Change Conference which kicks off in Glasgow on Sunday.


#️⃣  BY THE NUMBERS

$87 billion

A new United Nations report found that extreme weather events such as tropical cyclones, floods and droughts have caused India an average annual loss of about $87 billion in 2020. India is among the countries which suffered the most from weather hazards this year along with China and Japan.

📰  STORY OF THE DAY

Air Next: How a crypto scam collapsed on a single spelling mistake

It is today a proven fraud, nailed by the French stock market watchdog: Air Next resorted to a full range of dubious practices to raise money for a blockchain-powered e-commerce app. But the simplest of errors exposed the scam and limited the damage to investors. A cautionary tale for the crypto economy from Laurence Boisseau in Paris-based daily Les Echos.

📲 The story began last February, when Air Next registered with the Paris Commercial Court. The new company stated it was developing an application that would allow the purchase of airline tickets by using cryptocurrency, at unbeatable prices and with an automatic guarantee in case of cancellation or delay, via a "smart contract" system. Last summer, Air Next started recruiting. The company also wanted to raise money to have the assets on hand to allow passenger compensation.

📝 On Sept. 30, the AMF issued an alert, by way of a press release, on the risks of fraud associated with the ICO, as it suspected some documents to be forgeries. For employees of the new company, it was a brutal wake-up call. They quickly understood that they had been duped, that they'd bet on the proverbial house of cards. Challenged by one of his employees on Telegram, the CEO admitted that "many documents provided were false", that "an error cost the life of this project."

⚠️ What was the "error" he was referring to? A typo in the name of the would-be bank backing the startup. A very small one, at the bottom of the page of the false bank certificate, where the name "Edmond de Rothschild" is misspelled "Edemond". Before the AMF's public alert, websites specializing in crypto-assets had already noted certain inconsistencies. The company had declared a share capital of 1 billion euros, which is an enormous amount. Air Next's CEO also boasted about having discovered bitcoin at a time when only a few geeks knew about cryptocurrency.


➡️ Read more on Worldcrunch.com


📣 VERBATIM

"A weapon was handed to Mr. Baldwin. The weapon is functional, and fired a live round."

— Following the Oct. 21 on-set shooting death of cinematographer Halyna Hutchins, Sante Fe County Sheriff Adan Mendoza told a press conference that the "facts are clear" about the final moments before Hutchins was shot. The investigation continues to determine what led up to that moment, and any possible criminal responsibility related to how the "prop" gun that actor Alec Baldwin fired was loaded.

✍️ Newsletter by Anne-Sophie Goninet, Jane Herbelin and Bertrand Hauger

Share with us your favorite gondola memories or worst crypto scams — and let us know what the news looks like from your corner of the world! info@worldcrunch.com

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