China Operations 2004

USCBC Snapshots: Dongbei at a Glance

First Half, 2004

China's Northeast, once the heavy manufacturing base of China's centrally planned economic system, has been left behind as other parts of the country move toward a market economy. While other parts of China are attracting foreign investment and boosting the private sector, China's northeastern provinces, Heilongjiang, Jilin, and Liaoning, have yet to step out of the shadow of the state-owned economy. State-owned enterprises (SOEs) still dominate the Northeast and are the region's largest employers. Because of increasingly fierce competition and decreasing financial support from the government, a large number of SOEs in the region are losing money and have laid off more than a million workers overall. In recent years, unemployment has sparked social unrest in some areas, catching the attention of the central government. Unsurprisingly, unemployment is currently a top concern of the three provincial governments.

In an attempt to narrow the gap between China's northeast and other coastal areas, and tackle the region's serious unemployment problems, the central government launched the "Revitalize the Northeast" plan in the fall of 2003. This government-driven project is similar to the "Great Western Development Strategy" launched four years ago. Compared to China's hinterland, the Northeast has better infrastructure and richer human resources. Indeed, one positive legacy of the centrally planned economy is that roads, railways, and sea ports are well established in the Northeast, facilitating shipment of materials and finished products in the region. Moreover, technical workers are fairly well trained, though they may not be up to speed with the latest technologies.

How successful the "Revitalize Northeast" campaign will be depends heavily on successful SOE reform. Poor management and inefficiency, coupled with the enormous social service burdens that large SOEs bear--which include hospitals and schools--have undermined their ability to compete. The "cradle to grave" model of social welfare, nearly gone in the booming Southeast, is still common in northeastern areas. According to the State Council Development Research Center (DRC), by the end of 2002, SOEs in northeast China oversaw 7,183 different types of social services, employing 491,000 workers and costing RMB 15.4 billion ($1.86 billion).

Inefficient and uncompetitive companies will close as SOEs reform, resulting in even more layoffs. In Northeast China, 428 SOEs are reportedly slated to close and will lay off nearly a million more workers. According to China Statistical Yearbook 2004, the total number of registered urban unemployed in northeast China hit 1.4 million at the end of 2003. The official number is widely considered to be much lower than actual unemployment, as it excludes unregistered unemployed, unemployed men over 50 years old, and unemployed women over 45.

Attracting foreign investment still tops the agenda of the leaders of the three provinces, as foreign direct investment (FDI) will not only bring capital and advanced management and technology but will also create much-needed jobs. The Northeast has attracted relatively little foreign investment to date because the investment environment is poor and local officials have less market economy experience than their counterparts in the Yangzi and Pearl River Deltas. In 2003, the amount of utilized FDI in Heilongjiang, Jilin, and Liaoning was $320 million, $190 million, and $2.82 billion, respectively. These amounts equal only 3.0 percent, 1.8 percent, and 26.7 percent, respectively, of FDI used by Jiangsu province in the same year. Nevertheless, some foreign strategic investors have already shown interest in the region. In June, Anheuser-Busch Companies, Inc. purchased Harbin Brewery Group Ltd for $717 billion. A leading Chinese brewer, the Harbin Brewery owns the "Hapi" brand, which dominates the Northeast beer market. The acquisition has not only set a good example for other strategic investors interested in the region, but it has also strengthened local government confidence in attracting more foreign strategic investors to participate in SOE reform through mergers and acquisitions.

Revitalizing Northeast China

PRC Premier Wen Jiabao first proposed the "Revitalizing Northeast China" strategy in August 2003. In early 2004, the State Council established the Leading Group for Revitalizing Old Industrial Bases in Northeast China, also known as "the Revitalizing Northeast China Leading Group," which is formally led by Premier Wen Jiabao, with Vice Premier Huang Ju and Zeng Peiyan as deputy directors. Zhang Guobao, vice chair of National Development and Reform Commission (NDRC), is the office director of the leading group and is responsible for overseeing day-to-day work. The main goal of the campaign is to reform ailing SOEs and to create jobs. To relieve financial burdens and improve competitiveness of SOEs, the central government has already issued some preferential policies. Others are expected in the near future.

Major preferential policies

Other policies in pipeline

The three provinces are also drafting their own strategies and policies. For example, in April, the Jilin provincial government issued measures that give foreign investment projects in the encouraged category a corporate income tax of 15 percent for three more years after the state-stipulated tax break ends. The secure measures allow new foreign investment of more than $10 million in an existing FIE to be eligible for preferential tax policies.

Politics

In Northeast China, only Heilongjiang changed its party secretary and governor following the central government leadership change in March 2003; provincial leaders in Jilin and Liaoning remained unchanged. In Heilongjiang, Governor Song Fatang, 61, became secretary of the Heilongjiang Provincial Party Committee, and Zhang Zouji, 58, replaced Song as governor after serving as Minister of Labor and Social Security for five years. In March 2004, Bo Xilai, former governor of Liaoning, was appointed Minister of Commerce to replace Lu Fuyuan, who fell seriously ill; Zhang Wenyue, former vice governor, took over as governor of Liaoning.

As we go to press, a political earthquake is shaking Heilongjiang's provincial government. On October 10, 2004, five high-level provincial officials left their posts. Vice Governor Fu Xiaoguang, Vice Chair of the Provincial People's Congress Fan Guangju, President of the Provincial High Court Xu Yandong, and Procurator of the Provincial High Procuratorate Xu Fa "resigned," while Secretary General of the Provincial Government Zhang Qiuyang was removed from his position. It is rare for so many top provincial officials to leave their jobs at the same time. Although it is difficult to know what really happened behind the scenes, most observers believe that these officials have been implicated in corruption charges.

Looking Ahead

The problems plaguing SOEs in the Northeast, which have been worsening for a decade, will not be solved overnight. The central government has limited resources to help these ailing industries; it cannot order state-owned banks to lend to unpromising SOEs when the banks themselves are struggling to reform in order to face foreign competition in 2006. The central government will likely write off old SOE debt and use preferential tax and land-use policies to help these enterprises. Experience has shown, however, that these measures often have limited success. The best hope for SOE reform may lie in the introduction of modern corporate governance and diversification of SOE ownership structures, and China is encouraging some SOEs to list on the stock market in an effort to improve their corporate governance.

Heilongjiang

Heilongjiang boasts significant crude oil reserves and is China's main gateway to Russia. The province's major industries include smelting, power, coal mining, textiles, and petroleum refining. The Daqing oil field, China's largest, produces some 56 million tons of crude annually--more than one-third of the country's total crude oil production. Heilongjiang is also currently developing its pharmaceutical industry. The Harbin Pharmaceutical Group, located in the provincial capital, is China's second-largest producer of antibiotics.

Heilongjiang is home to China's largest graphite, sillimanite, basalt cast stones, basalt asbestos, marble cement, dye loess, volcanic ash, marble glass, and potassium feldspar reserves and is also a major producer of selenium, cadmium, gold, and smelt quartz crystals. With more than 10 percent of China's arable land and a fertile black soil found only in Heilongjiang and parts of Eastern Europe and North America, the province is also an agricultural leader. Heilongjiang is China's largest milk producer and soybean grower as well as a leading producer of wheat, corn, beets, flax, and flue-cured tobacco. After massive forest fires in the late 1980s and early 1990s, Heilongjiang's timber industry has recovered and now accounts for one-third of China's timber resources.

Heilongjiang shares a 3,000 km border with Russia, its largest trade partner. The prosperity of the province's 22 state-level frontier ports is tied to Russian trade. Indeed, trade with Russia dwarfs trade with the province's second-largest trading partner, South Korea, by a factor of four. The governors of Heilongjiang and the Russian Maritime Territory hold annual meetings to discuss investment and infrastructure issues. Efforts are currently under way to build and improve highways between urban areas in the two regions.

Jilin

Jilin is a major agricultural center, located along the Chinese, North Korean, and Russian borders. The province boasts the country's largest per capita grain production, topping 960 kg in 2000. Jilin is also a major producer of corn, soybeans, sorghum, millet, rice, small red beans, tuber, sunflower seeds, tobacco, and beets, and its western Ke'erqin Prairie is renowned for its fine wool and commercial cattle.

Jilin's leading industries include automobiles and petrochemicals, which are dominated by the Changchun First Automobile Works Group (FAW) and the Jilin Chemical Industry Group, respectively. Other main industries include machinery, medicine, food, metallurgy, forestry, and increasingly, electronics.

In southeast Jilin lies the Yanbian Korean Autonomous Prefecture, located near the mouth of the Tumen River along the border of North Korea and Russia. Home to slightly less than 2.2 million people, the prefecture has received a total of more than $520 million in FDI and is part of a Tumen transport corridor development program sponsored by the United Nations. The program, launched in 1991, aims to foster economic development and links between North Korea's Rajin-Songbong Area, Russia's Primorsky Territory (which includes Vladivostok), landlocked eastern Mongolia, and Northeast China.

Liaoning

The economy of Liaoning, in the heart of China's northeastern rust belt, relies on traditional industrial mainstays such as metallurgy, petrochemicals, chemicals, and machinery. Two of China's largest iron and steel producers, the Anshan Iron & Steel Co. and the Benxi Iron & Steel Co., are based in Liaoning, one of China's top three iron- and steel-producing provinces. Liaoning's coastal areas are home to shipbuilders, machine builders, pharmaceutical companies and, increasingly, electronics and textile factories, all of which take advantage of nearby ports.

Liaoning contains China's largest reserves of iron ore, magnesite, borax, diamond, talc, and jade, and its Liaohe oil field is China's third-largest. The province also supplies one-fifth of China's electrical power and is the major power source for the rest of the Northeast. With the recent laying of a 500-kilowatt cable connecting Liaoning's Suizhong with Tianjin, the province will also play a role in alleviating forecasted power shortages within the Beijing-Tianjin-Tangshan area.

Liaoning is in the midst of structural economic reforms geared toward making its SOEs more efficient and competitive. To deal with the resulting tide of unemployment, the central government began a three-year social welfare and pension pilot reform program in the summer of 2001 that, if successful, will be extended to the rest of China. Provincial leaders also hope that Liaoning's large labor supply will entice more foreign investment--and provide new jobs.

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Last Updated: 23-Nov-04