SHENYANG - With the implementation of a policy to create more sustainable economic growth as set by the Chinese central government, the country's three northeast provinces, where the old industrial bases are located, may encounter multiple challenges during this economic shift.
China's top auditing authority has released a report on local governments' debts which warns that some local governments have taken on dangerous loans that they cannot repay based upon their incoming fiscal revenues.
According to statistics from the National Development and Reform Commission in the first quarter of this year, northeast Liaoning, Jilin and Heilongjiang provinces had reached a total of 685.85 billion yuan ($100.86 billion) in their regional gross domestic product (GDP), a 15.4 percent increase year-on-year.
The general budgetary revenue of the three provinces in the first quarter had also reached 44.9 billion, 14.24 billion and 25.32 billion yuan. However, the three provinces spent a total of 134.61 billion yuan in the same period investing in their fixed assets, an expenditure that required borrowing money from financial institutions.
The central government allows local governments to establish financing platform companies with their fiscal funds, land and other assets to supplement capital revenues for economic and social development.
However, local governments are prohibited from using their revenues and assets to guarantee loans from banks and other financial institutions.
But analysts say that illegal practices to guarantee local governments' loans by using revenues are common and even frequent, especially in some regions of the three provinces.
"Local governments' debts are a huge risk under the situation that China has no system for bankruptcy of government," said Lin Muxi, Dean of the School of Economy, Liaoning University.
Also, a lack of innovative ability will be another challenge for the three provinces.
The three northeast provinces have, perhaps, the best infrastructure around the country for heavy industries thanks to the central government's industrial distribution and arrangement after the founding of the People's Republic of China in 1949.
The First Automobile Works and other flagship state-run enterprises in energy, ship and equipment manufacturing have realized more than 95 percent for a percentage of their product's home-made components.
But just for the remaining 5 percent of their product's components, and also the key components that contain core technologies, they did not master these skills and needed to import them.
The three provinces are rich in land, energy and other natural resources. However, they brought in too many manufacturing industries that had been abandoned by foreign countries due to their high-energy consumption and high pollution risks.
Some local governments in the northeast provinces sacrificed their environment for attracting foreign investment to pursue GDP growth, which would not only hinder industrial upgrades and economic shifts, but also bring new risks and difficulties, Lin said.
The professor said one more challenge for the three provinces is that the governments need to further break the influence and constraint of their old planned economic systems.
"The government officials in the three provinces have not fully realized the significance of innovation in their institutions and policies for economic development, and that may become the biggest challenge for them," Lin said.
