How one Chinese region shows risks of relying on heavy borrowing

Wed Feb 22, 2017 5:52am EST
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By David Stanway

SHENYANG, China (Reuters) - A flurry of construction in the Chinese city of Shenyang belies a regional economy in crisis, a striking example of the increasingly diminishing returns from a policy of investing heavily in infrastructure to prop up economic activity.

A new exhibition center has just opened its doors in the city, the capital of Liaoning province in northeastern China, and the skyline is dotted with cranes working on high-end shopping malls and apartments.

But beyond Shenyang's building sites, the real Liaoning is different. After years of investment in infrastructure, some of it encouraged by the central government, Liaoning is China's only shrinking provincial economy, its population is in decline and its debt is almost three times annual revenues.

Liaoning highlights the risks of relying on repeated borrowing to invest in infrastructure and fuel economic activity - a regular fall-back policy China has used when GDP risks missing annual targets, including in 2016.

It also points to the urgency for China to move away from a reliance on state firms, which for decades provided China’s economic backbone. Most other provinces have reduced their reliance on state-firms to a much greater extent than Liaoning and its neighbors, Heilongjiang and Jilin. But they still wield considerable influence nationwide.

Traditionally, state-raised investment funds have been channeled through state-owned enterprises (SOEs) because they are big tax payers and employers. This has provided a life support mechanism for many dying state industries while crowding out the private sector on which China is staking its future.

Some local authorities have provided all sorts of preferential support to state firms, said Han Liang, a section-chief in the Liaoning government pricing bureau, “over protecting them and making them lose their motivation to innovate.”

Liaoning's provincial government, and its local development and reform commission, declined repeated requests for comment.   Continued...

People shop at a market in Dalian, Liaoning province, China, June 9, 2016.   REUTERS/Stringer/File Photo