Lessons From A Zhejiang Rebound by Ryan Rutkowski, Matthews Asia
Recently, China released its second quarter 2015 economic data showing GDP growth of only 7%. Although this points to faster growth than almost any other world economy, it also reflects a continued gradual slowdown in its pace of growth. Various local authorities also released accompanying regional data, which I found to be much more interesting. Why? China is still a country with large regional differences so the reality can be more nuanced than what is highlighted on a national level. What struck me the most from the regional data were the numbers coming out of the eastern coastal province of Zhejiang. In the first half of 2015, Zhejiang’s GDP reached a growth rate of 8.3%. This is the sixth consecutive quarter of accelerating GDP growth in contrast to the continued slowdown of the national average. Zhejiang’s growth rate is striking for a couple reasons. First, it is already one of the wealthiest provinces, ranking fifth in terms of per capita GDP. Therefore, growing above the national average is impressive considering one would expect a more developed province to be pushing down growth not pulling it up. Second, Zhejiang is one of only a few provinces in which GDP growth rates have rebounded—and the only province to recover to 2013 growth levels.
The rebound in Zhejiang’s growth is encouraging for China because it stands as an example of the success of the country’s private sector. When economic reforms began in China in the 1980s, remote towns in Zhejiang were among the first to experiment with market reforms. Today, the province is widely known for the dominant economic role of private enterprises. For example, the city of Wenzhou became famous for the “Wenzhou model,” which has become synonymous with private entrepreneurship in China. However, just a few years ago, Zhejiang had a mark against it precisely because of this dominance. It suffered a credit crisis in 2011 when the informal credit markets that fund many private enterprises in the province seized up in the real estate downturn and as it faced weakness in overseas demand for Zhejiang exports. Numerous companies teetered on the verge of bankruptcy before the local government stepped in and filled the gap left from the collapse of informal funding channels. In the aftermath of this, the private sector adapted quickly. Private companies began to move out their previous mainstay, exporting light manufactured products to developed markets toward more lucrative domestic opportunities in the services sector.
Now, the more nimble private economy in Zhejiang looks like a blessing rather than a curse. In the first half of this year, the service sector firms (i.e. retail, wholesale, real estate and finance) grew at more than double the pace of manufacturing, bringing the service sector share of Zhejiang’s GDP over 50%, just above the national average of 49.5%. This service sector growth was not only enough to support a rebound of GDP growth back to 2013 levels but it actually offset a decline in manufacturing sector output.
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Zhejiang’s private sector success stands in contrast to hard-hit provinces in the northeast. In particular, the provinces of Liaoning and Shanxi continue to suffer from weakness in manufacturing, driving down demand for heavy machinery and coal, respectively. In the first half of this year, these two provinces only managed GDP growth of approximately 3%. It is not a coincidence that these regions have an outsized presence of state-owned enterprises in the economy. Lumbering state-owned firms are often slower to adapt than their private counterparts to changing economic conditions.
Zhejiang is only one of more than two dozen provinces in China. But it is an example of the underlying strength of China’s private economy. Chinese reformers will look positively to Zhejiang as an example as they continue to push forward market reforms to bolster China’s large and growing private economy. As investors, it also reminds us of the underlying strength of Chinese private enterprises.