10 March 2014
A potentially significant shift in China’s domestic economic development is emerging as Beijing creates centrally coordinated regional economic zones encompassing multiple provinces with similar or potentially complementary industrial structures. This approach has emerged from the central government’s struggle to negotiate and maintain relative parity among the often-conflicting interests of China’s geographically, culturally and economically diverse regions.
These zones take their cue from the Yangtze and Pearl River delta regions, which emerged as the country’s major economic centers in the 1980s and 1990s largely because of state-led investment into cross-provincial transport and logistics infrastructure. This infrastructure then enhanced interprovincial trade and facilitated the formation of region-wide industrial supply chains. After these successes, and in order to bolster the competitiveness of other politically significant regions, China’s leaders have begun experimenting more widely with the notion of cross-provincial economic zones.
In the past five years, plans and proposals for economic macro-regions have taken shape. In many ways, these proposals build on the core aims of sweeping national programs like the “Go West” and “Rise of Central China” initiatives, launched in 1999 and 2004, respectively. The regional plans fine-tune the general mandates of those initiatives to reflect the conditions and needs of specific provincial clusters.
Most recently, President Xi Jinping publicly supported efforts to create a North China economic region encompassing Beijing and Tianjin municipalities and Hebei province. At a conference at the end of February, Xi called for integrated and coordinated regional planning and stressed the need to avoid “identical development” by harmonizing the economic structures and trajectories of the three regions. The Beijing-Tianjin-Hebei zone, a much-discussed but long-stalled effort, in many ways crystallizes the historical and geopolitical logic behind Beijing’s push to build economic macro-regions superseding provincial boundaries and attempting to better reflect regional geography. At the same time, it reflects the immense political, economic and institutional challenges that could limit the economic effectiveness of many of these policy initiatives.
From Regions to Provinces
From the time of Confucius, who lived through China’s first great period of fragmentation, the struggle for supremacy between central and regional interests has formed the backbone of Chinese political history. To maintain unity in the face of centrifugal forces of geographic, cultural and economic diversity, China’s successive rulers have sought to balance the country’s regions against one another while cultivating dependence on the center.
In the modern era, the division of regions into smaller units — provinces and municipalities — that often do not cohere to regional geographic or historical conditions has exacerbated these inherited tensions. The Sichuan Basin, previously a single political unit, was thus split into Chongqing municipality and Sichuan province in 1997. The Ming Dynasty’s Wuchang administrative division has become Hubei and Hunan provinces, and the Qing Dynasty province of Zhili is now divided between Hebei province and the Beijing and Tianjin municipalities. These divisions grew from the strategic imperatives of post-revolutionary China. The newly-installed Communist Party sought to reassert central control over the country and prevent the emergence of regional power bases by repartitioning China’s major geographic regions — some of which had briefly reasserted themselves as political entities during the Warlord Era — along provincial lines similar to those established under the Qing Dynasty.
The Party, based like prior dynasties in the North China Plain, effectively gutted rival power bases like the Pearl and Yangtze River Delta regions, and in turn brought their pieces — Shanghai, Zhejiang, Guangdong and so forth — under the control of Beijing and the north. However, the division of regions into provinces, all dependent on the center and thus competing for favor, had unintended and adverse consequences. Provinces seldom cooperated. Inter-provincial trade was low. A lack of coordination between provincial policymakers and economic planners led to local industrial structures that overlapped and competed more than they complemented one another, thus creating economic inefficiencies and imbalances. These complications continued well after Mao’s death and still shape Chinese regional politics and economic development.
Amid China’s political and economic evolution, the strategies and tactics necessary in an earlier era — in this case, the division of regions into provinces separated by thick institutional walls and motivated to compete rather than cooperate — have in many ways outlived their usefulness. In some cases, they have become liabilities, constraining Beijing’s ability to better bind China’s provinces and regions into a unified national economy.
This is the backdrop against which China’s leaders have begun experimenting with economic planning and development initiatives that use whole regions as their base units. The goal of centrally coordinated regional economic zones is to eliminate the overlap and inefficiencies generated by an institutional structure that fosters political competition and protectionism among provinces and to replace this structure with one more responsive to natural macro-regional affinities and historical trade networks. By shifting from provincial to regional economic planning, Beijing hopes to lay the groundwork for long-term integration of the regions themselves into larger interactive units (such as the Yangtze River corridor, which connects the river’s upper, middle and lower sections). Ultimately, it sees these regional zones as the bedrock of a more integrated nationwide industrial supply and demand chain, seamlessly linking western producers to central manufacturers and, eventually, coastal and inland urban consumers.
The North China Zone: A Case Study
The prospective Beijing-Tianjin-Hebei economic zone illustrates the need and potential for — as well as the constraints on — region-oriented development policy. The three regions (two centrally administered municipalities and a province) share strong geographic and cultural ties and have been associated politically throughout Chinese history. Likewise, their economies are deeply intertwined, with Hebei province serving as a key supplier of energy, electricity, steel, agricultural products and water to the two municipalities. On the surface there is strong precedent and rationale for policies that bring Beijing, Tianjin and Hebei closer together.
It is somewhat surprising, then, that progress on the North China zone has been so slow. First discussed in the late 1990s and early 2000s, the concept received official approval in 2004, when the State Council called for the formation of a working group to draft a proposal. Two years later, the Chinese Academy of Social Sciences released a paper that recommended combining Beijing, Tianjin and six cities in Hebei (including Tangshan, the country’s steel capital, and Qinhuangdao, China’s largest coal port) into a unified trade and investment zone. However, a number of factors have since stalled plans for the zone. To an extent, provincial politics have constrained the plan. For example, authorities in Tianjin are concerned that tethering themselves to a Beijing-centric economic region could undermine the coastal city’s efforts to brand itself as the high-tech and financial services hub of northern China.
By far the most important constraints, however, relate to the vast differences between Beijing and Tianjin, two of China’s most economically advanced cities, and Hebei, a primarily rural province whose economy relies heavily on extractive industries (from coal and oil to water), agricultural production and crude steelmaking. Hebei benefits from the two cities insofar as Beijing and Tianjin provide ready markets for its key products, especially agricultural produce and steel. Likewise, a great deal of the most pollution-heavy industry that has left the two municipalities in recent years — particularly steelmaking — has migrated to nearby cities in Hebei, providing important sources of provincial government revenue and employment.
But Hebei’s significance as a crude steel and raw materials provider, as well as a transit point for these goods on their way to other parts of China, creates challenges of its own. The province’s reliance on industries like steel, oil and coal has constrained its efforts to develop equipment-manufacturing industries, particularly the kind of parts processing and supply chain networks that would make it a viable supplier to high-end manufacturing (from high-tech to auto making) in Beijing and Tianjin. Today, Hebei processes very little of the crude steel it produces into manufacturing equipment. Instead, the vast majority of its steel, except that which goes to nearby provinces for use in property construction, is shipped to the Yangtze River Delta for manufacture into equipment. This equipment is then shipped back north for use in factories.
This is not a promising starting point for building an integrated North China region capable of competing directly with the Yangtze and Pearl River deltas. First, such a plan presumes that Beijing and Tianjin will succeed in shifting up the value chain toward high-end services, high-tech manufacturing and, in Tianjin’s case, logistics. Second, this would also require Tianjin to accept a subordinate position to the capital city — a tough sell, considering Tianjin’s efforts in recent years to brand itself as China’s Manhattan regarding financial services. Finally, it will require significant investment into upgrading Hebei’s industrial structure and improving its human capital in order to develop equipment manufacturing and supply systems on par with those that have emerged in provinces like Jiangsu, Anhui and Guangdong. There are signs that Hebei intends to move in this direction. Efforts to consolidate the steel and cement sectors — of questionable effectiveness so far — likely will gain momentum in the coming years, freeing provincial resources and labor for manufacturing industries. But the process will be costly, slow and uneven. To expect Hebei to significantly reduce its reliance on extractive industries and basic building materials production in the next five years is unrealistic.
The proposed North China economic region illustrates the difficulties of building integrated economic zones across provinces that, whatever their historical or geographic ties, currently display wildly different levels of development and divergent industrial structures. Moreover, in many cases, these provinces lack the basic physical and human infrastructure necessary to build economies of scale with efficient and flexible supply chain networks. These factors will constrain the central government’s efforts to reverse the broad economic imbalances caused by decades of provincially oriented political and economic planning. In some cases, they could undermine the effectiveness of new regional economic zones altogether.
Nonetheless, it is important to note that the process is in its infancy. Just as the Yangtze and Pearl River delta regions were not built overnight, their northern and inland successors will take time to develop. For now, it is simply worth noting that the central government’s approach to regional economic development appears to be shifting, with potentially significant implications for economic growth, social and political stability, and investment opportunities in the coming years.
Courtesy of Stratfor