Grinding The Rust Off China's Northeast

It has been a long downhill slide for China's industrial northeast. The region, first developed by colonial Japan, was championed by Mao Zedong, who worked with his Soviet allies to build sprawling mines and gleaming factories churning out coal, chemicals, steel, trucks, ships -- in short, everything that an industrializing communist powerhouse needed. The region's cities were showcases of the new workers' state, with leafy parks and "cultural palaces" for opera and dance performances. Workers in the northeastern provinces of Heilongjiang, Jilin, and Liaoning were among the most favored in China, earning hefty salaries and benefits. By the 1980s the northeast accounted for nearly one-fifth of China's industrial production, although it was home to just 8% of its citizens.

These days, all that seems so, well, 20th century. Many of those once-shiny factories are rusting hulks. The coddled workers? More than 28 million of them have been laid off in the past five years. Real unemployment tops 20%. In the far-northern city of Harbin, grubby men loiter on street corners, soaking up the coal-scented air and looking for day labor. In nearby Daqing two years ago, thousands of them took to the streets to protest unpaid pensions and layoffs.


As China has moved toward a market economy over the past quarter-century, the northeast has fallen further and further behind dynamic coastal provinces such as Shanghai and Guangdong. Today the northeast accounts for just 9% of industrial production. The region "fell behind because of the market reforms," says Zhang Juwei, deputy director of the Institute of Population & Labor Economics at the Chinese Academy of Social Sciences.

Now, Beijing wants to tip the scales back. In a campaign that echoes the "Go West" initiative -- launched five years ago to promote development of the rural west -- there's a new drive called "Revitalize the Northeast." Officials want to restructure, merge, and sell off state enterprises and to encourage industries such as software, tourism, and even organic farming. Although the west is far from forgotten, much of the attention has shifted to the northeast. Beijing is even ushering in foreign officials, such as U.S. Commerce Secretary Donald L. Evans, to give the region a boost. "Economic progress here in the old industrial base will create more jobs and opportunities," Evans said on a June visit to Harbin.

The plan has powerful backers. Premier Wen Jiabao is spearheading the drive. He and President Hu Jintao are committed to creating opportunities for residents of China's impoverished hinterlands. Also important: If the region continues to stagnate, labor unrest could boil over. The leadership "can't ignore it," says Cheng Li, a political science professor at Hamilton College in New York. "Unemployed workers feel lots of resentment toward the rich, coastal cities."

The plan to defuse this tension is largely an exercise in labor arbitrage. China is eager to sell investors the services of well-educated workers who earn a third what those in Shenzhen do. After decades of state support, infrastructure in the resource-rich region is still good, and some manufacturers might be competitive if they could shed their welfare burdens and restructure their debts. Local governments desperate for investment often provide land for next to nothing.

The area's problems, though, are vast. Some 70% of production in the three provinces remains in the hands of the state, compared with less than 20% in Guangdong. Local companies remain saddled with pension obligations and nonproductive assets such as schools and hospitals. The political culture is among the most corrupt in China. And local officials are unsophisticated in dealings with the outside world, especially when compared with rivals in boomtowns to the south. "While local governments are interested in promoting investment, they aren't always sure how to get information out," says Emory Williams, a vice-chairman of the American Chamber of Commerce in China.

Those hurdles don't faze Beijing. So far the National Development & Reform Commission has identified some 100 projects it wants to pursue in shipbuilding, autos, petrochemicals, and other fields. Total cost: $7.3 billion. While much of that will come from Beijing, local governments will also pitch in, and foreign investors are being asked to join the party. In June more than 100 top Hong Kong and Macao businesspeople visited northeastern companies such as a machine-tool factory, an auto maker, and a food processor.

There will be plenty of restructuring, too. In May, Harbin Aeroplane Industrial Group merged with Dong'an Group, a Harbin maker of automobile engines. The new company, a behemoth with $1.53 billion in total assets and 26,000 employees, plans to shed noncore businesses and streamline the labor force. The merger "was made to echo the state's determination to revitalize" the northeast, Heilongjiang Governor Zhang Zuoji told the local press on July 1. In June three big steelmakers merged, and a megamerger that would combine several additional steelmakers may be in the works, says Yong Zhiqiang, an analyst at Shanghai-based Haitong Securities Co. "The bigger the group, the stronger they are in negotiating" raw-material purchases and sales, he says.

In some cases, Beijing has deemed local industries beyond salvation and is encouraging local governments to diversify. Take the coal-mining city of Jixi, which has been in the national spotlight in recent months following disastrous mine and steel accidents that killed scores of workers. City officials want to promote organic farming and woo tourists to the expansive forests and pristine lakes nearby. "Jixi will be no longer just a city of coal, but also a city of green environment and tourism," says Vice-Mayor Li Jiuyun.

China is also hoping to bank on the region's proximity to Japan and Korea. So far that has only happened in the port city of Dalian, a rare pocket of affluence where scores of Japanese companies have invested. Beyond Dalian, the northeast has attracted just a few foreign investors. Volkswagen and Deere & Co. are there, and Anheuser Busch Cos. says it will buy into a Harbin brewery. More may follow, though, as Revitalize the Northeast picks up steam. Multinational manufacturers "should take a serious look at making an acquisition in the northeast," says Kim Woodard, chairman of Javelin Investments, a consulting firm.

Even without foreign investment, the government is determined to reverse the northeast's slide. That is "crucial to China's future development," says political journalist and Wen biographer Ma Ling. From the streets of rust-belt cities such as Harbin, it may look like a mighty challenge -- but it's one that China and its leaders can't afford to ignore.

By Dexter Roberts in Harbin

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