ANALYSIS China’s Provincial Economies: January 2019 Growing Together or Pulling Apart? Prepared by Introduction Steven G. Cochrane [email protected] Chief APAC Economist Over the past decade, China’s inland provinces have begun to narrow the gaps in output, incomes and productivity with their more dynamic coastal peers, but with economic growth Shu Deng slowing across China’s provincial economies, this period of convergence has come to a close. [email protected] Senior Economist In this paper, we examine regional patterns of economic growth across China’s provinces, comparing changes in industrial structure, productivity growth and demographics. While large Abhilasha Singh [email protected] investments in manufacturing, infrastructure and resource extraction helped narrow inland Economist provinces’ overall gap with the coast, the growing prominence of services—particularly high- tech service industries—will shift the locus of China’s growth back to its coastal provinces. Jesse Rogers [email protected] Economist Brittany Merollo [email protected] Associate Economist Contact Us Email [email protected] U.S./Canada +1.866.275.3266 EMEA +44.20.7772.5454 (London) +420.224.222.929 (Prague) Asia/Pacific +852.3551.3077 All Others +1.610.235.5299 Web www.economy.com www.moodysanalytics.com MOODY’S ANALYTICS China’s Provincial Economies: Growing Together or Pulling Apart? BY STEVEN G. COCHRANE, SHU DENG, ABHILASHA SINGH, JESSE ROGERS AND BRITTANY MEROLLO ver the past decade, China’s inland provinces have begun to narrow the gaps in output, incomes and productivity with their more dynamic coastal peers, but with economic growth slowing across China’s provincial economies, this period of convergence has come to a close. In this paper, we examine O 1 regional patterns of economic growth across China’s 31 province-level administrative divisions , comparing changes in industrial structure, productivity growth and demographics. While large investments in manufacturing, infrastructure and resource extraction helped narrow inland provinces’ overall gap with the coast, the growing prominence of services—particularly high-tech service industries—will shift the locus of China’s growth back to its coastal provinces. Over the past 10 years, China’s inland economy as a Chart 1: The Four Regions of China provinces have outpaced their coastal peers whole downshifts. in output, income and productivity growth, Government marking a sharp detour from the prior three policies such as HI NI decades of dominance by provinces on the Belt and Road JL LI China’s east coast. While this grand reshuf- Initiative and Made XI IM fling owed partly to the greater maturity in China 2025 aim HE BE QI SA SD TJ GA of coastal economies, which benefited first to elevate growth SX HN JA East TI AN SH SI HB Northeast from China’s opening up to global trade, inland by forging ZH HU JI GZ Center two powerful forces revved up growth in deeper connections FU YU China’s interior. First, manufacturers’ search to economies in Eu- GX GN West Other* for cheaper labor propelled investment in rope and Asia and by factories inland, and second, the global com- drawing high-tech CH HA modities boom channeled investment into investment to Chi- Sources: NBS, Moody’s Analytics *Taiwan, Hong Kong, Macau resource-rich provinces in China’s interior. na’s interior. While Presentation Title, Date 1 However, slower growth in global com- these policies will pay dividends for China’s group them into four regions: East, Center, modity prices and the emergence of lower- inland provinces in the form of greater in- West and Northeast (see Chart 1 and Table cost manufacturing clusters in Southeast frastructure investment, they are unlikely to 1). This regional breakdown closely aligns Asia will be challenges for China’s inland surmount structural barriers to the growth with that of China’s National Bureau of Sta- provinces, making future output and produc- of high-tech industries such as lower educa- tistics. However, we separate the Northeast tivity gains harder to come by. Meanwhile, tional attainment and a shortfall of existing provinces of Liaoning, Jilin and Heilongjiang the rise of high-tech services in China’s investment in research and development. from China’s other eastern provinces given coastal provinces positions them to out- their geographic isolation, outsize reliance pace inland provinces even as the Chinese China, East to West on heavy industry, and economic stagna- To better understand the industrial struc- tion. With the exception of the Northeast, ture, economic performance, and compara- where metals, machinery and petrochemi- 1 For the purpose of this report, we do not include the Hong Kong and Macau Special Administrative Regions or Taiwan. tive advantages of China’s provinces, we cals manufacturing overshadows almost all 2 JANUARY 2019 MOODY’S ANALYTICS Chart 2: East, Center Power Export Thrust Although the Table 1: Province Abbreviations industrial composi- Exports, % of nominal GVA, 2017 tion of the East has East shifted toward ser- BE Beijing HI vices, manufacturing FU Fujian NI JL still accounts for a GN Guangdong IM LI XI very high share of HE BE HA Hainan QI SA SD TJ GA economic activity. HE Hebei SX HN JA TI AN SH Eastern provinces JA Jiangsu SI HB China avg=17 ZH HU JI also account for the SD Shandong GZ FU >20 YU overwhelming share GX GN 10 to 20 SH Shanghai <10 of China’s exports TJ Tianjin CH HA and rely more on ZH Zhejiang Sources: NBS, Moody’s Analytics trade than any other Presentation Title, Date 2 region (see Chart 2). Center other industries, economic drivers are diverse Although manufacturers have scrambled to AN Anhui across regions. High-tech manufacturing set up facilities in China’s Center and West, HB Hubei and tech-related services predominate in where land and labor costs are cheaper, fac- HN Henan the East, while more labor-intensive manu- tories in the East still churn out more than HU Hunan facturing industries and agriculture, energy 80% of China’s goods exports. JI Jiangxi and resource extraction anchor the Center Despite differences in size and geographic SX Shanxi and West. location, almost all of China’s eastern prov- The East remains China’s economic loco- inces played a leading role in China’s rise as West motive. Although its provincial economies a global manufacturing powerhouse. Manu- CH Chongqing have grown more slowly than those of the facturing behemoth Guangdong, whose early GA Gansu Center and West for most of the past de- growth was stirred by its proximity to Hong GX Guangxi cade, the 10 eastern provinces make up more Kong and access to foreign capital, remains GZ Guizhou than half of China’s GDP despite being home China’s largest provincial economy and is the IM Inner Mongolia to just over a third of its population (see origin of one-third of China’s goods exports. NI Ningxia Tables 2 and 3). The East region encompasses However, the eastern provinces of Fujian, QI Qinghai Beijing and all of China’s east coast provinces Zhejiang, Jiangsu and Shandong are also SA Shaanxi with the exception of Liaoning, which covers manufacturing heavyweights; their diverse SI Sichuan a small stretch of China’s coast just north of manufacturing industries account for more TI Tibet Hebei. Together, the East’s 10 provinces rank than half of the East’s exports and span con- XI Xinjiang as the world’s third largest economy, behind sumer electronics, personal computers and YU Yunnan only the U.S. and China itself. IT equipment, household appliances, petro- chemicals, and pharmaceuticals. Northeast While manufactur- HI Heilongjiang Chart 3: Coastal Provinces Magnetize FDI ing is a secondary driver JL Jilin in Shanghai and Beijing, Foreign direct investment, % of nominal GVA, 2016 LI Liaoning where financial services and the public sector Source: Moody's Analytics HI make up an outsize NI JL share of the economy, LI XI IM China’s financial and HE BE QI SA SD TJ political capitals are exports in the inland provinces of Henan, GA SX HN JA TI AN SH China avg=4 export giants in their Sichuan and Chongqing, the East still draws SI HB ZH own right: The nominal more than three-quarters of China’s total HU JI GZ >6 FU YU value of their combined foreign direct investment (see Chart 3). GX GN 3 to 6 <3 exports nearly exceeds While external demand and global con- CH HA that of India. And de- nections were instrumental to the East’s Sources: NBS, Moody’s Analytics spite recent growth in ascent, the birth of high-tech service indus- Presentation Title, Date 3 3 JANUARY 2019 MOODY’S ANALYTICS Table 2: Gross Value Added Compound annual growth rate Province 1995-2000 Rank 2000-2005 Rank 2005-2010 Rank 2010 to 2015 Rank 2015-2018 Rank East 10.4 12.4 10.8 7.1 6.8 BE Beijing 14.9 1 14.5 3 9.1 28 5.7 30 7.3 17 FU Fujian 10.3 7 8.8 28 11.8 10 8.8 12 8.6 8 GN Guangdong 10.6 6 12.2 10 10.5 21 6.7 24 7.4 16 HA Hainan 5.3 30 8.3 31 11.2 16 7.6 21 7.5 13 HE Hebei 10.2 8 11.6 13 10.1 26 6.6 25 3.2 27 JA Jiangsu 9.4 17 12.4 9 11.8 11 7.7 19 6.8 20 SD Shandong 9.0 20 12.9 7 11.5 14 7.6 22 7.1 19 SH Shanghai 13.3 3 11.4 14 9.0 30 5.7 31 6.5 21 TJ Tianjin 11.4 5 13.8 5 14.3 2 10.5 3 5.0 24 ZH Zhejiang 10.0 10 14.6 2 10.2 25 6.3 27 7.5 14 Center 9.1 10.7 11.3 8.3 7.3 AN Anhui 8.3 27 10.2 19 11.8 12 8.9 9 8.9 7 HB Hubei 8.7 22 9.9 23 12.0 8 8.9 11 7.6 12 HN Henan 9.6 16 11.3 15 11.1 17 7.7 20 7.2 18 HU Hunan 9.1 19 9.4 26 11.8 9 8.6 15 5.2 23 JI Jiangxi 9.3 18 11.0 17 11.4 15 8.6 14 8.0 11 SX Shanxi 9.8 13 13.9 4 9.1 29 6.1 28 8.0 10 West 8.7 11.0 11.9 9.1