China is facing an uphill battle to revive its ailing rust belt

The State Council’s latest plan to rescue the economies of the northeast by 2020 might not be enough to overcome the magnitude of the challenges facing the rust-belt provinces, analysts say.

The government tried but failed to rejuvenate the region in 2003 after it was hit by massive protests by workers at state-owned factories when the authorities introduced plans to shut down unprofitable firms.

Now, the region has again become a major source of concern over fears of social instability as the government prepares to shut down ailing “zombie” state firms, amid slower growth.

Hao Hong, managing director at BO COM International, said the “[previous] plan for the northeast region is dated, now that the economic base and demographic have changed”.

Hong said the latest initiative was to transform old heavy industry into a more diverse and sophisticated economy.

“It’s a challenge because of the brain drain from the region,” he said. “Whether a rejuvenation of the economy could stop and reverse the situation remains to be seen.”

Louis Kuijs, chief economist at Oxford Economics in Hong Kong, said that while the northeast had been the subject of special economic policies for some time, the scale of the downturn and overcapacity in much of the heavy industry that formed the basis of its economy meant the problems it faced were much more serious than imagined.

“Basically, there is a much larger need to somehow cut excess capacity in heavy industry and re-channel people and resources to other, better-placed sectors of the economy than was envisaged even just three years ago,” he said.

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The State Council said the government would eliminate up to 150 million tonnes of steel-making capacity and 500 million tonnes of surplus coal production in the next three to five years, which means up to 1.8 million job cuts.

The government also reportedly aims to lay off 5-6 million state workers over the next two to three years as part of efforts to curb industrial overcapacity. The government has earmarked 100 billion yuan (HK$120 billion) in funds to help deal with the impact of the huge lay-offs in the steel and coal sectors over the next two years.

It is the country’s most significant nationwide retrenchment since the restructuring of state-owned firms from 1998 to 2003 led to about 28 million redundancies.

The government said in the blueprint released early last week that it would push ahead with economic structuring and take measures to nurture and support new start-up businesses and innovation. The government would also pay particular attention to improving people’s livelihood, it said.

Calling the document a “major policy for the new century”, it said that significant achievements and breakthroughs must be made by 2020.

Alicia Garcia-Herrero, chief economist for the Asia-Pacific region at Natixis, said the new plan was more about politics than economics. “They fear people on the streets so they need to show they care with an ad hoc plan, which will basically throw additional good money into bad,” Garcia-Herrero said.

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