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The economic scene

By Wang Bo and You Nuo (China Daily)
Updated: 2009-05-25 08:04

China's coastal economies are fighting a grim battle to adapt to changes and to generate new business opportunities at a time when overseas trade is weakening and much of the fiscal stimulus is going to the interior provinces.

These coastal provinces and cities used to be the powerhouses of the country's rapid economic growth in the past 20 years.

But with the financial crisis sweeping across the world, it is now easy to see the difficulty they are in, as their gross domestic product (GDP) records declined compared with the rest of the country in the first quarter of the year.

Stumbling champions

Construction workers labour near a skycraper in the Bund, Shanghai. [CFP]

In the first quarter of this year, in terms of year-on-year growth, Shanghai, the largest business city in the country, found itself placed second from bottom (3.1 percent) of all the Chinese mainland provinces - better only than Shanxi province (minus 8.1 percent), an energy-producing province that suffered from a major fall in product prices.

Zhejiang province, once regarded as China's cradle of private enterprise and boasting perhaps of the largest cluster of small and medium-sized private companies in the country, fell to the third position from bottom (3.3 percent).

Guangdong province, the largest province in China in terms of economic strength (in both GDP and foreign trade), was only slightly better (5.8 percent), and ranked sixth from the bottom.

The three regions' GDP fell below the national average of 6.1 percent, with only Beijing's performance matching the national standards.

Shanghai and Zhejiang also showed larger declines from their growth records in the same period last year (Shanghai minus 8.4 percentage points and Zhejiang minus 8.5 percentage points) than most other provinces.

With the central government trying to maintain the economy's growth by extending huge fiscal stimulus to projects such as expressways and bridges, mostly in the poorer central and western regions, areas in the relatively developed eastern and southeastern regions would have to be more creative in evolving a future business model.

Take Shanghai, for instance. Fixed assets investment (FAI) grew only 1.7 percent in the first quarter from the same period last year, in a stark contrast with the 34.3 percent growth in the provinces of Central China.

In Guangdong, although FAI showed a more decent expansion of 12.7 percent over last year it still remained far below the national average of 28.6 percent.

Related readings:  China GDP forecast raised  City government expects grim news on Q1 GDP  Yangtze Delta sees slower Q1 GDP growth  Beijing GDP growth slower in first quarter

Lack of services

The main problem for China's coastal cities and provinces is the lack of overseas orders. But on a deeper level, the pain in adjustment comes from a prolonged imbalance between the strong manufacturing and weak services. It is only now that these regions, especially the cities, are trying to work out their own strategies to effectively boost the growth of their services industry.

In fact, although both the Yangtze and the Pearl Delta have developed so much as to be comparable to the economies of Taiwan and Hong Kong, in terms of GDP and in manufacturing diversity, the local service industry has only commanded a markedly smaller share. In most of the mainland coastal economies, services account for less than 50 percent of the GDP, much lower than in Taiwan more than 20 years ago.

In the developed countries of the world, this proportion is often more than 70 percent of the entire economy.

Shanghai is the only exception, where services account for more than 60 percent of the GDP. But this was only reported in the first quarter, after it had lost considerable steam in its manufacturing industry.

Shanghai's difficulty is also partly reflected in its foreign trade records. Its imports declined 32.1 percent, while exports fell 20.8 percent, both larger than the national average (30.9 percent for imports and 19.7 percent for exports).

Economists have for long been criticizing that the service industry is enjoying too little latitude, let alone incentives, from the government in China and should have developed more quickly.

Domestic consumption is a smaller component of the GDP than it is in many other countries. Through the economic reform, which first started in 1978, the service industry has outpaced the manufacturing industry only in a few periods. For a few years till the onset of the global financial crisis, the manufacturing sector continued to show a faster growth rate.

Catching up

Officials in the coastal cities have now realized that if their cities do not catch up in services, they stand to lose considerable overseas and domestic opportunities in the future.

The cities cannot expect to prosper by dispatching endless shipments of manufactured goods all over the world. They also cannot expect to prosper domestically by just re-directing to the interior provinces the manufactured goods that they cannot sell in the global market. The interior provinces are now getting ample development funds from the central government for building their own public infrastructure and soon enough, their own manufacturing capacity.

Indeed, the only way for the Chinese coastal cities to maintain growth is to develop services - for both overseas and domestic clients.

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