Shandong Province recently released its state-owned enterprise operating budget “report card”. Over six years, state capital operating budget revenue has cumulatively reached only 5.5 billion yuan, drawing widespread public attention to provincial SOE dividends. It is said that due to limited local state capital returns and numerous legacy issues and follow-up reforms facing SOEs, the collected state capital returns are mostly used for the SOEs themselves and to support the development of advantageous enterprises, making it difficult to supplement social security and other livelihood expenditures.

The author recently visited Shandong, Shanghai, Jiangsu and other provinces and found that against the backdrop of generally declining SOE profits, raising the proportion of state capital returns turned over year by year for livelihood security and urban infrastructure construction still faces considerable challenges.

Divergence Emerges in Local “Q1 Reports”

As of now, all 31 provinces have released their “Q1 reports”, with some provinces posting growth rates at new periodic lows. Heavy chemical industry provinces in particular are showing weak growth momentum.

Meanwhile, increasing investment in infrastructure and livelihood areas such as transportation, water conservancy and shantytown redevelopment to provide effective “micro-stimulus” to economic development has become the investment priority for some localities.

Weak Growth in Heavy Industry Provinces

Unlike previous years when most provinces grew faster than the national average, this year 11 provinces grew slower than the national average, with some even below 6%.

Among them, Heilongjiang ranked last among all provinces with Q1 growth of 4.1%. Analysis shows the main reason was lackluster industry: in Q1, the province's secondary industry value added grew only 0.9% year-on-year, dragging fixed asset investment down by 25.9%.

Heilongjiang Governor Lu Hao previously pointed out the main reasons for the industrial decline at the province's Q1 economic situation analysis meeting. As a major energy industry province, Heilongjiang has a very high proportion of energy industry, but in Q1 the energy industry growth rate turned negative for the first time, at -2.2%. Daqing Oilfield, which accounts for about 50% of the province's above-scale industry, saw negative value-added growth unprecedented in many years; in addition, affected by overcapacity in several domestic sectors, the province's petrochemical and equipment industries saw growth slow to 0.5% and 5.1% respectively in Q1.

Besides Heilongjiang, several other heavy chemical industry provinces are also not optimistic. Among them, Hebei, which has vigorously cut overcapacity to tackle environmental pollution, grew only 4.2% in Q1; Shanxi, a major coal province, grew only 5.5%; Inner Mongolia, which led the nation in growth for over a decade, grew only 7.3%, below the national average.

Yi Baozhong, a member of the Jilin Provincial Government Decision-Making Advisory Committee and professor at the Northeast Asia Research Institute of Jilin University, told the author that in the past two years, international and domestic commodity prices have continued to decline, dealing a relatively heavy blow to provinces focused on raw material production. In addition, although structural transformation in Northeast China has been discussed for many years, the energy industry still accounts for too high a proportion, the state-owned economy is too large a share, and economic development relies mainly on state-owned investment.

National Bureau of Statistics data show that in January-March, among above-scale industrial enterprises nationwide, profits in coal mining and washing fell 41.2%, oil and natural gas extraction fell 6.3%, ferrous metal smelting and rolling fell 19.9%, and non-ferrous metal smelting and rolling fell 13.6%.

Central Region Remains Steady

It is not just these heavy chemical provinces; economic growth has slowed across all regions. In Q1, Yunnan, Gansu and Guangxi all saw growth decline to varying degrees.

Overall, compared with the same period last year, only two provinces did not see their economic growth decline. Qinghai was flat, and Henan was slightly higher.

On the whole, the central region performed very steadily in Q1. Apart from Shanxi, a major coal province, which declined noticeably, other provinces saw growth slow somewhat but all remained above the national average. The four provinces in the middle reaches of the Yangtze River—Hunan, Hubei, Jiangxi and Anhui—all grew by more than 9%.

Xiao Jincheng, director of the Institute of Territorial Development and Regional Economy at the National Development and Reform Commission, and Wu Chuanqing, director of the Regional Economy Center at Wuhan University, both believe that provinces along the Yangtze River in central China, with abundant water resources and plains, huge populations and consumer markets, are close to the east for industrial transfer and close to central and western markets, and have the greatest potential and space for future development.

Infrastructure and Shantytown Redevelopment “Micro-Stimulus” Underway

With weak external demand and limited expansion of domestic demand, how can localities achieve steady economic growth? Investment is clearly the most effective lever. Of course, choosing the investment areas is crucial.

Qiu Yuhua, vice chairman of the Guangzhou Private Enterprises Chamber of Commerce and chairman of Guangzhou Hua'anda Industrial Co., Ltd., told the author that manufacturing enterprises are generally not optimistic. “The main problem is that overcapacity has never been resolved. From the second half of last year through next year, the overall environment will not be good.”

Under overcapacity, the industrial sector clearly cannot remain the focus of investment. Local investment in basic areas that people still urgently need, such as subways and shantytowns, and that do not cause overcapacity, can both meet people's real needs and provide effective “micro-stimulus” to economic development.

For example, according to the Shandong Provincial Development and Reform Commission, the National Development and Reform Commission recently approved the “Shandong Province Bohai Rim Intercity Rail Transit Network Plan (Adjustment)”, which includes 21 intercity railway projects across the province, including the Jinan-Qingdao high-speed railway, covering all 17 cities in the province.

According to the Chongqing Municipal Development and Reform Commission, eight corporate bonds totaling 10 billion yuan were recently approved by the National Development and Reform Commission, including 1 billion yuan for Jiangbeizui Central Business District Investment Group Co., Ltd., 1.5 billion yuan for the Bonded Port Area Development and Management Co., Ltd., and 2.3 billion yuan for the High-tech Zone Development and Investment Group Co., Ltd., greatly helping to promote local infrastructure investment.

Heilongjiang proposed making increased fixed asset investment the main driver of economic growth, effectively curbing the current economic downturn and seeking growth points from major infrastructure construction. This includes: advancing water conservancy infrastructure, completing project approval, examination and environmental assessment in the shortest time, with projects to start before June 25; accelerating transportation infrastructure, with the Harbin-Jiamusi railway striving to start in June, the Harbin-Mudanjiang railway bridge, culvert and tunnel restrictive works to start in October, the Mishan-Xingkai Lake tourism expressway project striving to start in June, and accelerating the Harbin airport expansion and Harbin railway station renovation projects.

These infrastructure projects can also, to some extent, absorb the local energy industry's overcapacity. Heilongjiang explicitly stated that “for industries related to these infrastructure projects, the raw materials and products needed shall, under the premise of the same quality standards and specifications, be sourced within the province wherever possible.”

“Once industrial products are produced in excess, they are in excess. But investment in shantytowns, railways and other infrastructure can drive demand for industrial products and resolve overcapacity, which is very good for economic growth,” Wu Chuanqing said. The key to investment lies in whether it is effective and in demand; shantytown redevelopment and railway construction are very necessary, as they can not only drive economic development but also help improve people's livelihoods.

Yi Baozhong cautioned that for provinces with lower economic growth, now is both a crisis and a turning point. Times may be tough at present, but the current situation is also forcing these places to adjust. Economic growth can be a bit lower, but these places should accelerate structural adjustment and industrial transformation—for example, Northeast China should step up the development of the private economy rather than relying too heavily on state-owned investment.