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China's 'North-South divide' to worsen as COVID hits economy

Oil prices and state-owned companies in northern regions hinder growth

The economic divide between China's lagging north and thriving south is widening fast. (Source photos by Ken Kobayashi and Akira Kodaka)

BEIJING -- The economic divide between China's lagging north and thriving south is widening fast, complicating macroeconomic and monetary policy.

The gross regional product of provinces and municipalities located south of the "Qinling-Huaihe line" was the same compared to the north in 1960, but the south became 57% larger in 2017, and 83% larger in 2019.

The line roughly divides China into north and south. The two regions differ greatly from each other in climate, culture and lifestyle.

Northern China includes 15 provinces, municipalities and autonomous regions, such as Beijing and Liaoning. Southern China includes 16, including Shanghai and Guangdong. While the economy in the north has remained heavily dependent on state-owned enterprises, the south has grown faster thanks to a robust private sector.

The total economic output of the northern regions in 2019 was 34.9 trillion yuan ($4.93 trillion), while that of the south 63.8 trillion yuan. This gap is expected to grow in the coming years as the COVID-19 pandemic has depressed crude oil prices, delivering an additional blow to the north, which accounts for most of China's oil production. Moreover, the north suffers from a shrinking population.

Another major factor behind the widening gap is the north's move to correct inflated figures for the gross regional product. In early 2020, when provinces announced 2019 GRP, they also revised the figures for 2018. The revisions are based on the results of the 4th National Economic Census, released in November 2019.

GRP is usually revised upward after the economic census because the survey covers small businesses not included in the initial calculation. However, 14 regions revised their statistics downward, claiming they did so in line with the National Bureau of Statistics' directions. The most logical explanation for this seems to be that those regions were inflating their initial numbers and corrected them.

Of the 14 regions that made downward revisions, 12 were in the north. In total, the north revised downward by 7%, while the south made an upward correction of 4%.

The North-South gap started to widen from 2013, according to a paper written by Chen Zhang and others. Chen is a professor at the Renmin University of China. The two regions grew at roughly the same pace from 2007 to 2012, with the north's share of China's GDP staying at around 43%. Of the top five areas that grew fastest, four were in the north.

During the five years through 2017, however, the south outpaced the north in average annual growth by 1.1 points, according to the researchers. The north was responsible for 88% of China's economic slowdown during this period.

Southern China's economy, which includes Shanghai, is now nearly twice as large of that of northern regions.

The difference in economies is another reason for the gap. State-owned companies accounted for 33% of the north's industrial output in 2011, against 21% for the south. Heavy industries and chemical industries have been the backbone of the north, while the south's growth has been driven mainly by the private sector.

From 2007 to 2012, state-owned companies were the major beneficiaries of the government's 4 trillion yuan stimulus package after the global financial crisis, essentially buttressing the economy in the north. Nevertheless, after 2013, state-owned companies started to suffer from the spending spree, leaving them with excess capacity and debt. To address the growing supply-demand gap, Beijing ordered companies to slash production capacity of coal and steel.

The north's economy also took a massive hit from oil prices. The north accounts for 90% of China's crude output. According to Chen, domestic crude prices plunged 51% between 2013 and 2016. This pushed down the north's economy by 0.4 points. On the other hand, the south, which imports 90% of the oil it consumes, was able to save $270 billion to purchase oil.

The oil plunge caused by the pandemic this year will likely keep the north in an economic predicament.

Another key factor behind the North-South gap is differences in the local government's mindset and business culture. Hui Xinan, the top Communist Party official of Weifang, Shandong Province in the north, caused a stir in 2019 when he criticized the north's business culture after touring five cities in the south.

"[The people in northern China] are sloppy in doing work," Hui said. "We are satisfied with the status quo and put too much importance on face-saving while not paying much attention to substance."

His candid remarks drew attention, leading to many online comments castigating the business culture of the north. "Nothing is done without a banquet in Shandong. In the south, a cup of coffee is all you need," lamented one.

An operator of a textile trading company in Shaoxing, a city in Zhejiang Province said: "In Shandong, many local government officials are corrupt. They offered to sell insider information to me." On the other hand, "in Zhejiang, [in the south], local officials were keen to help and cooperate with the private sector. It's very different," he said.

One official from the central government -- who toured Liaoning in the north and Zhejiang in the south -- was surprised to see the differences in local government officials. Municipal officials in Liaoning summoned local company executives and bossed them around. In Zhejiang, however, officials showed respect for corporate executives and thanked them profusely for their cooperation during the tour.

"Local officials in the north have not changed from the days of the planned economy. They behave like companies are subordinates of the government," he added.

The European Union is facing macroeconomic policy challenges due to the economic gap; northern countries like Germany have healthier economies, while southern countries like Greece and Italy are struggling.

China could also find itself with a similar problem. If Beijing handles monetary policy in line with the economic performance of the south, for instance, the policy could further weaken the north.

The North-South gap is expected to further widen, creating headaches for Chinese policymakers in the future.

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