Beijing: China is growing at a very steady pace — fluctuating between 6.7 per cent and 6.9 per cent for the past three years. But under the hood, there’s a wide divergence among its 31 regions in the first half of this year — from a 2.5 per cent expansion for north-eastern Jilin to a 10 per cent boom for south-western Guizhou.
Such divergence makes it hard to crack down on debt across the nation with a one-size-fits-all policy, as the stimulus that may be needed in Inner Mongolia might cause too much lending in more prosperous regions such as Shanghai.
The government borrowing crackdown is having an effect nationwide — investment decelerated in the first half of this year to the slowest pace in two decades, as local governments were forced to curb debt. Much of the red across northern China shown on the map is due to lacklustre private economies and dependence on heavy industries in those provinces, according to Bloomberg economist Qian Wan in Beijing.
“Regions dependent on state-led infrastructure spending were hurt more than others by the deleveraging campaign,” said Robin Xing, chief China economist at Morgan Stanley in Hong Kong. “So the politburo is adjusting the pace of the debt curbs, and we’ll probably see the expansion of total social financing stabilise in the second half.”
There’s also the hangover from data manipulation in some provinces, with the cleanup of the data in Tianjin, Jilin and Inner Mongolia hurting their headline growth numbers, Wan said.
The economy of Guizhou, a less-developed south-western province which recently made a major bet on the big data industry, is at the top with a 10 per cent growth pace. Its neighbour Yunnan, famous for its scenic landscape, also posted an impressive 9.2 per cent, while north-eastern Jilin, which borders North Korea, expanded at the slowest pace of 2.5 per cent.
But provinces don’t out-perform forever. Chongqing, the province-level city on the Yangtze River that grew the fastest in 2014 through 2016, expanded 6.5 per cent in the first half, below the national pace. Tianjin, ranked first in 2010 through 2013, fell to near the bottom, rising a mere 3.4 per cent.
Chongqing’s story is a cautionary tale for other investment-fuelled regions, according to Haitong Securities Co.
“As financial strains shows up and fiscal spending slows down, the investment can hardly sustain the previous rapid pace,” analysts Jiang Chao and Chen Xing wrote in a note.
“Whenever the local governments can no longer sustain the funding, [the] investment-driven growth model will face challenges,” they wrote, noting that Guizhou had the highest debt-to-gross domestic product ratio among provinces in 2016.
Nominal economic growth shows a different picture. The pace of expansion, unadjusted for inflation, signals the local government’s capability to service their debts, as interest is charged on the nominal value of the loan, and their income from taxes is also unadjusted for price changes. Crackdowns on fake data and also the differences in prices between provinces may account for some of the differences between this data and the real growth numbers.
Businesses are investing more in the stronger performers. Fixed-asset investment, which covers spending on real estate, infrastructure, manufacturing and other assets, jumped 17.4 per cent in Guizhou while slumping 19.5 per cent in Shanxi, whose coal-focused economy has struggled for years.
Factory momentum also varied. Manufacturers in Yunnan boosted their output more than 10 per cent, which puts the 1.8 per cent increase in Chongqing in the shade. Liaoning, a rust belt province which was mired in recession two years ago, saw its factories fire up again.
Looking ahead, export-oriented regions may see production disruptions due to the trade war with the US. However, coastal provinces including Guangdong, Shanghai and Zhejiang, which would be hit the hardest, have the most economic resilience, according to Bloomberg’s Wan. That’s because they have lower debt and the most dynamic private sectors.