China's north-south economic divide set to widen

Beijing

THE economic divide between China's prospering southern regions and lagging northern areas will continue to widen in coming years, with huge implications for growth, debt and policy making, said Nomura Holdings.

The gap has grown over the past decade, with southern provinces benefiting from export dependence and the Internet boom, while resource-rich northern regions were dragged down by slower fixed investment, falling commodity prices and population migration. Nomura estimates that northern China's share of the national economy shrank to 35.2 per cent last year from 42.9 per cent in 2012. The pandemic has worsened the divide and latest gross domestic product (GDP) data showed regional disparity in the recovery too. Coastal regions with exports and private firms playing a bigger role in the economy have had a firmer rebound than land-locked provinces, showed latest provincial GDP figures.

Weaker growth in the north has meant rising fiscal pressures and debt. More than 60 per cent of bond defaults in the country came from northern China in 2020, with the level rising significantly from 2019, Nomura economists wrote in a report on Tuesday. The ratio of local government fiscal revenue to fiscal expenditure in the north was 42.7 per cent in 2020, compared with 51 per cent in the south, suggesting a heavier reliance in the north on transfer payments from the central government, they said.

Low birth rates and net population outflows from the north also suggest the divide may persist in coming years. Nomura estimates the average annual population growth for the north was only 0.3 per cent from 2017 to 2019 - well below 0.8 per cent growth in the south.

Nomura divides northern and southern China by the Qin Mountains and Huai River Line, with 15 provinces and cities in the north, such as Beijing and Hebei, and 16 in the south, including Shanghai and Jiangsu. The gap is expected to worsen as China looks to reduce carbon emissions, cut economic dependence on the property sector and impose financial discipline on local governments, Nomura said, increasing the risks of systemic financial crises and social instability. The economy in the north is historically more investment-driven and relies more on heavily-polluting industries compared to the south.

"Beijing may need to walk a tightrope, balancing long-term targets against short-term stability," Nomura said. BLOOMBERG