The story behind China's two-speed economy

The great divide

Beyond China's eastern zone of prosperity lies a western region that is developing at a far slower pace.

By Joseph Catanzaro

Out in the harsh country of Gansu province in north-western China, where sun-blasted hills roll out towards the Gobi Desert, Yao Fei prunes vines in a rare patch of irrigated greenery. In her 20 years working at this vineyard on the outskirts of Wuwei, she says life has improved. Above the cloth she wears across her mouth and nose as protection against the spring sandstorms, the smile lines on her weathered face crinkle. “I make about 20,000 yuan a year now,” she says, clearly pleased with her income of roughly US$250 a month.

Gansu grapegrower Yao FeiSome 1500km east of Gansu, in the Beijing offices of tech start-up Ptmind, founder Zheng Yuan and HR chief Esme Lv are focused on staff retention. They say the average wage for an experienced web developer is 15,000 yuan per month – almost the amount Yao Fei makes in an entire year, but not enough to keep everyone happy. Lv says the average annual staff turnover for a company in China’s tech industry sits somewhere between 20 and 30 per cent. The Ptmind pair keep their turnover down to around 5 per cent a year by offering flexible working hours, time to play computer games, free meals and English lessons.

Most large countries have their rural poor and their tech-driven rich. Rarely, though, do you find the sort of disparity between entire provinces that exists in China. If you judged them only by their economies, some might think Gansu and Beijing were in two very different countries.

Beyond the zone of prosperity

Since the early 1980s, when the policy of reform saw the establishment of special economic zones in the south and east of the nation, development across China has been uneven. Many pundits now believe China, with its developed and developing areas, has become a two-speed economy. 

In a J-shaped zone of prosperity from Beijing to the south-east, decades of investment and economic growth have given rise to modern mega-cities peopled largely with a globetrotting, consumerist middle class. In contrast, the rest of the nation in the largely landlocked regions has advanced at a slower pace.

Professor Lu Ming, an economist and the director of the Centre for China Development Studies at Shanghai Jiao Tong University, says geography largely drove development in the coastal regions, which pumped manufactured goods out across the globe through some of the biggest seaports in the world. 

Now, the same regions are at the epicentre of China’s push to transition the economy towards domestic consumption. 

China’s service sector has overtaken manufacturing as its biggest employment market and now provides jobs for 38 per cent of adult workers nationally. Domestic consumption has remained strong in the coastal regions despite the slowing national economy.

The GDP gap

Cities such as Wuhan are progressing.Lu says GDP per capita in some of China’s richest provinces and municipalities is now actually greater than in some nations in Eastern Europe. According to the National Bureau of Statistics of China 2014 Yearbook, Shanghai’s GDP per capita was 90,092 yuan (US$13,760). In the same year, Hungary’s GDP per capita was US$11,888.

In stark contrast, however, Lu says much of western China’s provinces would still be considered developing nations by international standards. Guizhou, in the south-west, clocked the lowest GDP per capita figure for 2014, at 22,921 yuan. Gansu, at 24,296 yuan, was in the bottom three nationally. 

"Much of western China's provinces would still be considered developing nations by international standards." Professor Lu Ming, Shanghai Jiao Tong University

“Within the eurozone countries, the richest in terms of per capita GDP are about double the per capita GDP of the poorest countries,” says Lu. 

“If you compare China’s richest regions in the coastal areas with the poorest regions in the western areas, the GDP per capita [in 2015] can be almost five times [more in the rich regions than the poor regions].”

The comparison with Australia’s states is even more dramatic: GDP per capita is at its highest in New South Wales, but that figure is just 34 per cent higher than Tasmania’s.

Unlocking the west

Some regions are still immersed in tradition.Under its Go West plan, launched in 1999 to close the disparity gap between the east and west of China, the government has pumped billions of dollars into the poorer regions. Most of it has gone into big-ticket infrastructure projects designed to combat the logistical disadvantages that have been seen as holding back the regions. 

Lu says the problem is that, rather than trying to find and leverage local advantages, often the western regions have attempted to emulate investment choices that worked for the east, and they are not generating the same returns as their eastern counterparts. 

“In the past decade,” he says, “the Chinese central government invested heavily in the inland regions, the western and central parts of China. Those regions are now experiencing outward migration. 

"The 'new China' on the coast and in the north is consumer-driven and green tech and services." Jeremy Stevens, Standard Bank Group

“A lot of investment has been put into small and medium-sized cities, especially in heavy industries, but now they don’t have any return.”

Beijing-based economist for Standard Bank Group Jeremy Stevens calls the attempts at investment-led growth the “old China” economic model. The “new China” on the coast and in the north, he says, “is consumer-orientated and green tech and services”.

Related: China's newest super export: global infrastructure

The credit boom

Like Lu, Stevens believes that reliance on credit-driven investment in China spells trouble in the current, slowing economic climate and that it cannot continue indefinitely. 

“Different regions are facing very different realities depending on past credit growth, the role of investment and sector composition,” he says. “A third of China’s provinces have investment of more than 70 per cent of GDP and 11 provinces have seen a rise in credit since 2013 at more than 50 per cent of GDP. Almost all of these provinces are in the central and western parts of China. All of these provinces are growing at less than one-third the speed of the past five years, at best.”

Stevens adds, worryingly, that more than half of the credit extended to these provinces has come from smaller provincial banks rather than the larger, better-capitalised banks, and some of it may not have been well spent. “Most of the credit has been used to finance and refinance loans to bankrupt firms and unproductive projects,” he says.

A delicate balance

Not everyone worries about China’s west the way Lu and Stevens do. Wade Shepard, author of Ghost Cities of China, spent three years in western, northern and central China while doing research for his book. While he acknowledges the current disparity in living standards, he sees the gap closing.

High-speed rail links modern China.Central government development subsidies in the poorer regions are beginning to pay off in places like Wuhan, capital city of Hubei province, he says. The 16,000km of high-speed rail built in poorer regions in the past decade is now serving as a development grid and is attracting investment from big companies such as Foxconn and HP. 

Two new rail lines now connect western China with central Asia and Europe. They’ll play a role in the nation’s One Belt, One Road (OBOR) policy, which in part seeks to end the region’s not-so-splendid economic isolation. 

Shepard acknowledges the delicate balance the Chinese Government must maintain while restructuring the economy and opening more of it to market forces. “The authorities want to cap lending, but also avoid a credit-dependent economy … growing too slowly,” he notes. 

"The authorities want to cap lending, but also avoid a credit-dependent economy ... growing too slowly." Wade Shepard

Restructuring means retrenchments and potentially higher unemployment in the poorer regions, another factor that could slow growth further. 

Meanwhile, out in Gansu province, Yao Fei snips at her vines and says she’s not overly worried about economic matters. The vineyard she’s worked in for 20 years was only made possible because of a central government-subsidised irrigation scheme that made the desert country bloom, and she says expectations are that the OBOR scheme will open up new opportunities and improve the quality of life in her province even further. 

Yao adds that she doesn’t need designer clothes or a fancy car. Like many others in these poorer regions, she’s just happy to have a job.


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