In China industrial heartland city of Chongqing, a painful economic transition is on full display

19-Jan-2019 Intellasia | South China Morning Post | 6:00 AM Print This Post

In China industrial heartland city of Chongqing, a painful economic transition is on full display

As night begins to fall, crowds gather near the top of Hongya Cave, a group of stilted buildings overlooking the Yangtze and Jialing rivers, both of which pass through the city of Chongqing in the west of China.

They take jammed lifts down to the ground floor and walk across the street, holding up their mobile phones to capture the architecture, glittering at night, before posting on the popular short video mobile app, TikTok.

TikTok helped turn the mountainous city of 30 million residents into an internet sensation last year, inspiring the municipal government to turn to tourism to support an economy that is slowing rapidly after a decade of breakneck growth.

But tourists aren’t spending enough money to stave off the economic headwinds facing this megacity, the population of which is spread over an area the size of Austria.

“On consumption per capita, we are still behind other popular tourism destinations,” said Yang Yimin, who runs a local travel company, and who is hoping to capitalise on the tourism boom.

Chongqing was among the poster children for China’s spectacular economic boom. It posted double-digit growth for more than a decade, until it fell below 10 per cent in 2017.

The rise and fall of its economy offers a micro view of China’s painful process of rebalancing its economy from investment-led growth to consumption and services.

It also lays bare the downbeat outlook over the country’s economy in 2019, after many analysts lowered their forecasts and some provinces abandoned ambitious growth targets.

The Chinese National Bureau of Statistics (NBS) will release GDP figures next Monday, January 21, which are expected to show that China’s growth dipped to 6.4 per cent in the fourth quarter, according to the median forecast of a Bloomberg survey.

This would match the historically low quarterly growth rate posted in the first quarter of 2009, at the start of the global financial crisis.

The sharp slowdown in Chongqing is a bad sign for the Chinese national economy as a whole, given that Beijing once hoped that inland regions like Chongqing could maintain robust growth when the coastal zones ran into trouble.

And that theory worked until recently. As rich coastal provinces suffered from plunging export orders during the global financial crisis of 2008-2009, Chongqing’s urbanising economy powered on, bolstered by massive infrastructure investment.

Beijing views it as a key hub connecting China’s wealthy east coast with the underdeveloped west, simultaneously linking China to Eurasia as part of Xi Jinping’s flagship “Belt and Road Initiative”.

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The government pumped it full of investment capital and its growth was propelled by debt-fuelled and state-led projects, while the local government lured Fortune 500 firms to the remote southwest through relocation incentive packages, which helped build modern manufacturing facilities in a city which was a base for traditional heavy industries.

The eye-catching economic performance helped Chongqing weather the dramatic falls of two Communist Party chiefs between 2007 and 2017.

Then, last year, as the Chinese economy began to groan under the weight of a painful restructuring and a bitter trade war with the United States, the music stopped.

Over the first three quarters of 2018, the city’s gross domestic product (GDP) grew by only 6.3 per cent, below the national average of 6.7 per cent and the lowest reading since Chongqing was designated as a provincial-level city in 1997.

Few will be surprised if it misses its yearly target of 8.5 per cent set at the beginning of the 2018, nor would it be alone.

This week, the mayor of Guangzhou, China’s fourth largest city by GDP, announced that it missed its 7.5 per cent growth for last year. Wen Guohui blamed plunging export orders and weak private investment.

A series of weak economic indicators paint a bleak picture for Chongqing. In the past, fixed asset investment (FAI), which includes infrastructure spending, contribute close to 90 per cent to its annual GDP, based on statistics from 2017.

For the first 11 months of last year, FAI grew only 7 per cent, compared to 10 per cent from the same period in 2017, according to the city’s statistics bureau.

Meanwhile, retail sales increased by 6.8 per cent after inflation, falling from 9.8 per cent a year earlier. Industrial output grew by a paltry 0.6 per cent in real terms.

The negative influence from previous policies will take time to fix. The municipal government under the rule of Bo Xilai (2007 to 2012) crushed the rule of law and the private economy.

Yi Xiaoguang, director, Chongqing Comprehensive Economic Research Institute

Chongqing was a typical example of China’s state-led growth model. Its former party chief Bo Xilai, who was disgraced and removed from office in 2012, initiated massive infrastructure investment in the city, financed by funds from state lenders such as the China Development Bank.

Sun Zhengcai, his successor, continued that path and the city still relies heavily on capital spending for growth, given the weakness of its private sector.

On January 14, the Chongqing Daily, a party-controlled newspaper, ran an article written by Yi Xiaoguang, head of the Chongqing Comprehensive Economic Research Institute, a body that advises the local government on economic policy.

Yi said the city’s deepest structural problem was its private sector, which accounted for only half of the city’s GDP in the first three quarters of last year. This was lower than the nationwide average of 60 per cent.

“The negative influence from previous policies will take time to fix. The municipal government under the rule of Bo Xilai (2007 to 2012) crushed the rule of law and the private economy. Sun Zhengcai (2012 to 2017) also brushed over the private sector. The result is that we missed the golden period of a prospering private economy,” Yi wrote.

In a meeting on January 3, Chen Miner, the city’s party chief who is close to President Xi Jinping and has been praised for his previous work in growing the backwater economy of Guizhou Province in southern China, warned that Chongqing faced “huge downward pressures on supporting industries, low returns from investment, and operational difficulties among companies”.

Chongqing is China’s largest provincial-level manufacturer of cars and home to some of the country’s largest carmakers. Production in the city fell by 15.8 per cent in the first 11 months of 2018, partly because of low sales.

Last year, Chinese auto sales dropped by 2.8 per cent year-on-year, to 28.08 million units. Passenger car sales plunged even further, by 4.1 per cent to 23.7 million, the first fall since 1990, according to the China Association of Automobile Manufacturers.

Car production accounted for around one-fifth of Chongqing’s industrial output in 2018. However, one person who was briefed at a recent government meeting, said that falling production is now acting as net drag on the local economy.

Last year, US car manufacturer Ford Motor, whose largest production base outside Detroit is in Chongqing, posted its worse sales in China since 2012, at 752,243 units. This was mainly due to a devastating 50 per cent drop in sales about 417,215 units for the Chongqing-based Changan Ford, a 50-50 joint venture between Ford and the Chinese state-owned car maker Changan Automobile.

The fall looks even more dramatic compared to Changan Ford’s heyday sales of more than 950,000 in 2016.

Ford is making a major push for the Chinese market, with more than 10 new products to be launched this year and more than 30 by 2021. But two sources close to the matter said the initiative has come too late.

Domestic brands have studied the local market, sources said, and are catching up with their international competitors, launching new models that are better suited to Chinese tastes.

Ford dropped the catchline “One Ford” from its China advertising strategy and replaced it with “In China, For China” only in 2017.

Lower orders have washed through the whole auto supply chain and put pressure on jobs in a city in which hundreds of thousands of workers are employed by the car sector.

Since October, some downstream manufacturers of auto parts have found their clients extending their payment periods from three months to six because of poor cash flows.

Big manufacturers such as Changan Ford, which employs about 18,000 people, or 40 per cent of Ford’s total employees in China, have also started to cut costs.

One senior technician, who is not authorised to speak to the media, said the company had laid off many assembly line workers, most of whom were contractors rather than full-time employees. He was personally forced to take 1 1/2 months off until the end of February, on only a basic salary.

Normally, the authorities would intervene to prevent massive lay-offs at a big firm like Changan Ford to keep maintain social stability particularly when the state holds a 50 per cent stake.

Changan Ford told the South China Morning Post it was taking measures to “make the company more healthy, structure of costs more appropriate, and operations more efficient”, without specifically identifying the scale of layoffs.

The company also said it would help car dealers reduce inventories and match manufacturing with sales orders this year.

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The Chongqing government’s answer to a weak car industry is to encourage manufacturers to step up the development of electric and smart vehicles, dishing out massive subsidies along the way.

By 2022, these hi-tech vehicles should account for half of annual car production, according to an official government plan.

The government itself plans to buy a chunk of these, which should cover at least 50 per cent of new purchases and replacements of official vehicles. A Changan Ford spokesperson said that by 2025, all of its models will have an electric version, along with their traditional counterparts.

On the other hand, Beijing has decided to gradually wind down national subsidies for making electric vehicles and end them completely in 2020.

“Fewer subsidies mean more competition. As subsidies retreat, it should be clear who has real strength and who is going ‘skinny dipping’,” said Lei Yu, an analyst from the privately-owned company, Chongqing Sokon Industrials Group, implying that those “skinny dippers” will be the firms that are unprepared for market conditions.

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Despite dwindling sales, Chongqing Sokon Industrials pumped at least 600 million yuan into plans to produce its own electric vehicle by September this year, over the course of the first three quarters of 2018, according to a company disclosure.

Since January 1, the Chongqing Daily has devoted several pages each day to describing emerging industries such as cloud computing and artificial intelligence.

But these nascent industries are still too small to offer much support to the overall economy. In the meantime, if you need a short-term boost, there’s always infrastructure investment.

Beijing last year approved the city’s new five-year plan to build an urban rail transit system in Chongqing extending over 820km that cost 45.5 billion yuan to build and a separate high-speed rail would have a top speed of 268km and an eye-watering price tag of 53.5 billion yuan.

While the city houses subsidiaries of big multinationals such as Taiwanese electronics giant Foxconn, and continues to open its arms to foreign investors, its business environment falls well short of international standards.

Some 2,467 companies in Chongqing were funded by overseas investors in 2017, compared to more than 35,590 in Shanghai, according to official figures. This is despite the fact that there are more registered companies in Chongqing than in Shanghai overall.

The southwest branch of the European Chamber of Commerce in China noted in its position paper from late last year that many foreign firms in the city are concerned about the weak rule of law, unpredictable public policies, and poor communications with the authorities.

A survey conducted by the chamber showed that more than a third of member companies had signed contracts that were not honoured in Chongqing. A common example was service providers not being paid in full or on time.

Furthermore, both state-owned and private companies had attempted to amend or disregard contract terms such as payment, fees and rental leases.

Because of the lengthy trial process in Chongqing, European companies rarely take their cases to court and usually settle them privately. Either course can be expensive given the legal fees involved.

“Chongqing will need to take a multifaceted approach to resolving inefficiencies in the business environment if it is to become a truly international city,” the chamber said.

“Creating an independent and efficient judicial system is necessary to resolve widespread problems with contract enforcement, yet unless the authorities concurrently take steps to ensure equal treatment for all firms, judicial reform will fail to be meaningful.”

This slowdown is far from obvious in a popular underground hotpot restaurant, which has gained rave reviews on TikTok, in which the Post dined with a group of local residents.

As people feasted on spicy meat and vegetables, the conversation about a weakening economy flowed, as if the hot chilli peppers loosened their tongues.

Traditional Bian lian dancers performed their face changing routine as diners enjoyed their meals. At 157 yuan (US$23) for a five-minute dance, this would be out of reach for most local Chongqing residents, who earn on average 2,000 yuan per month.

“Locals rarely come to this kind of touristy restaurant. But when I walked onto Jiefangbei district, I was impressed with how bustling it was,” said one Sichuanese diner.

As the economic picture worsens, one wonders whether these dancers will be making such a handsome living this time next year.


Category: China

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