China Economic Update: September 2016

The rust belt region has continued to underperform in recent times – as service focussed provinces have driven a greater share of China’s growth. In 2015, the three rust belt provinces were among the four weakest growing regions.

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Left behind – can China learn international lessons to revitalise its rust belt?

When we examine the transition currently underway in China’s economic model – away from investment (particularly in heavy industry) and towards a modern consumption based economy –we tend to focus on the net gains to the broader economy. However, periods of transition typically produce winners and losers, with the potential for negative impacts in some regions – an experience exhibited in many once prosperous industrial centres in many Western economies (the so-called rust belts).

The rust belt region has continued to underperform in recent times – as service focussed provinces have driven a greater share of China’s growth. In 2015, the three rust belt provinces were among the four weakest growing regions.

In part, the poor economic performance of the rust belt region reflects an inability to successfully transition to China’s new growth model. The rust belt’s economic growth has remained overly dependent on investment, and average wages in the region have lagged the national trend, limiting the capacity of consumers to contribute to the broader economic transition.

The experience of rust belts in Western economies highlights the challenges facing Chinese authorities during the economic transition. These regions have typically under-performed in terms of economic growth and have had higher rates of unemployment and social disadvantage. Sustained underperformance could have significant political implications in China – as highlighted by the rise of populism in a range of Western rust belt regions.

The partial reforms to the household registration (hukou) system limit the capacity of rust belt residents to relocate to more prosperous regions. Authorities – particularly at the local level – will have to continue the drive for reform in the rust belt provinces, to reduce the importance of industrial SOEs and support service sector growth.

For further details, please see the attached document: