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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