China's Economy Crippled By Central Planning

The Northeast of China is in recession due to its location at the higher stages of production. Raw material production slows first and to a far greater degree than the lowest stage of the production cycle, retail consumption.

Caixin: Central Planning Got the Northeast in Trouble – and Won't Save It
Even today the planned economy, dominated by centrally owned enterprises, still prevails in the region, leading to the worship of officialdom and power. Song Donglin, the head of Jilin University of Finance and Economics in Changchun, said that centrally owned businesses account for over 60 percent of Heilongjiang's industry, and a whopping 95 percent of the medium and large enterprises in Jilin.
A little history:
In the 1950s, the government wanted its core economic belt near the border with the former Soviet Union because it considered this region the safest. And so it is today that the economy of the northeast bears the most resemblance to the Soviet-style planned economy.
Also (cough) Japan (cough, cough) developed the region (cough).
A restructuring of Dongbei's SOEs is bound to face much stronger resistance than similar changes in other regions, due to the huge social implications. An incident involving Tonghua Iron & Steel Group offered an early clue to this likelihood. In 2009, a restructuring plan sparked a huge strike and demonstration that led to a general manager being beaten to death.

The lack of a business culture in the northeast means that when leaders there try to attract foreign investment, the first thing that springs to their minds is the opportunity for personal gain. This is, of course, not very attractive to foreign investors.

These and other problems have led to a brain drain that is exacerbated by the fact this region, more than any other in China, is heavily dependent on "guanxi," the social networks built around business leaders and government officials. Over the past five decades Dongbei has developed great technical proficiency, but now many engineers being lured to more developed regions in the south and east.
The North of China is more communist than the South, the South is more cosmopolitan. Teasing what is communism and what is deeper cultural issues is difficult, but for now, the South has huge cultural advantages on the North. Also demographics:
In fact, the entire northeast suffers from a wider decline in population. The Heilongjiang Provincial Academy of Social Sciences said that in the first three decades of the PRC, Dongbei had a net population inflow of 7 million people. However, the last three decades have seen 4 million people leave. Liaoning saw its two big cities grow, but overall the province's population has shrunk. Retirees in Dongbei outnumber the people joining the labor force every year.
The article leaves off the largest act of central planning in the past 20 years: real estate development. The local governments directed infrastructure and housing projects all over the country in a bid to drive GDP growth. The northeast provinces in particular turned to real estate when the industrial sector slowed.

From October 2014: Liaoning Sounds Warning on Chinese Economy
Although China's slowing real estate market draws the most attention, industrial sectors such as steel have been hit hard. Suffering from overcapacity and now a slowdown in demand, the sector led the slowdown in real estate. There is a feedback loop for some areas of the country, where the production of raw materials for real estate development fuel the local economy, which is also has its own real estate bubble. The result is rapidly slowing growth that could be a harbinger for the wider economy.

The data shows that real estate investment is plunging in the heart of China's industrial economy. The slowdown in real estate is happening nationally, with investment growth figures sliding in most provinces, but the three northeastern provinces are doing the heavy work of pulling down the national figure. One province among them is doing most of the work: Liaoning is the fourth largest province in terms of real estate investment, with 6.5% of the national total in September.
I concluded:
Liaoning is more exposed to the higher stages of production and therefore is one of the provinces most likely to experience a slowdown first assuming a normal contraction phase of a business cycle. We know steel and other industrial sectors have overcapacity. Problems in steel surfaced in late 2011, but wider economic growth was not impacted until very recently, following a steady deterioration in the market for more than 2 years and then a slowdown in real estate as well.

Liaoning's slowdown could be a false signal, but it could also be the beginning of a much sharper slowdown in China's economy. Industrial production in Shanxi province, which leans more on the coal industry, also slumped in recent months. Real estate was the replacement growth source for economies experiencing recessions in their main industries; now that real estate is slowing, the remaining economy is revealed.

Liaoning has sounded a warning bell on China's economy. The real estate slowdown and economic slowdown that had been broad and general, is now turning acute. This process is slow at first and it might take until the middle of 2015 for a national trend to emerge. There's no reason to panic yet, but Liaoning is warning that this slowdown may not be a gradual one.
The Northeast is in worse shape because of its reliance on SOEs, but it is partially reliant on SOEs because the central government maintains control of these industries. Yet even if there were no SOEs, industrial companies would likely be concentrated in the Northeast and the recession would still be happening in these industries. The real cost of central planning lies in the local and provincial government's direction of infrastructure and real estate development to increase GDP growth. Provinces in the south have a stronger economy to fall back on, but they cannot avoid the fate of all central planners.

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