Weekend Long Read: How Liaoning’s Economy Crumbled
The northern province ranked among the country’s top eight provinces in terms of GDP at the start of the century, but has since slipped to 17th place
Ranked among the country’s top eight provinces in terms of GDP at the start of the century, China’s northern Liaoning province has since slipped to 17th place, prompting much unease over its current economic state. Securing financing and investment has become challenging, with both private domestic and foreign enterprises hesitant to enter the local market.
Furthermore, the risk exposure of local banks has become particularly pronounced.
So, how did Liaoning arrive at this sorry state of affairs? There are a few theories:
First, some argue that the Liaoning economy inherently lacks vitality. Its old industrial structure hasn’t adapted to new dynamics, leading many financial institutions to head for the exits.
Second, others posit that Liaoning’s economy was initially robust, but a poorly managed local financial ecosystem later impacted financing from institutions. As a result, both private domestic enterprises and foreign investors were reluctant to enter the market, setting the economy on a downward trajectory.
Beyond this “chicken-or-the-egg” debate, there’s a third perspective: the economy and financial systems are intertwined, leading to a spiral of decline. But within this view, two questions emerge: what was the initial trigger — the financials or the economy?; and why did the financial sector fail to act as a brake during this downward spiral and instead exacerbate the situation?
The challenges facing Liaoning’s economy warrant discussion, as it might offer lessons for the rest of the nation.
A securities storm
Many are zeroing in on the initial degradation of the financial ecosystem in Liaoning. Between 2000 and 2004, while addressing problematic securities firms and local investment banks, Liaoning’s approach harmed the interests of financial institutions. As a result, local securities companies struggled to grow, leading to a dearth of listed companies and the stunting of emerging industries.
In the late 1980s and 1990s, Liaoning was among the pioneers in China’s financial reform, emerging as one of the birthplaces of China’s capital market. For example, Anshan Securities, at that time, operated the largest single sales branch in Asia, while Liaoning Oriental Securities dominated national bond trading for an extended period.
The mutual funds sector also grew rapidly, with Shenyang launching six investment funds in just two months between April and June 1992. This boom in securities and mutual funds gave rise to Liaoning’s earliest batch of publicly-traded companies, propelling the province’s GDP to rank among China’s top eight by around 2000.
But it wasn’t to last. The turning point came in the period between 2000 and 2004.
Firms like Anshan Securities, Dalian Securities, and Liaoning Securities encountered challenges, but the local government’s handling of the storm was perceived as inadequate or unjust.
Market insiders noted that the fate of the troubled securities firms — whether they were shut down, restructured, or retained — largely depended on the attitude of the local government. Additionally, during the resolution process, the interests of local businesses and residents were prioritized, often at the expense of protecting the legal rights of financial institutions.
The damage to the financial ecosystem between 2000 and 2004 hampered the development of Liaoning’s finance circle — securities, mutual funds, futures, and trust companies — for the next two decades. The number of listed companies from Liaoning did not increase, and emerging industries were not cultivated locally.
Nationally, the number of securities firms dropped from 128 in 2004 to 99 in 2005, before recovering and expanding to 140 currently. In contrast, Liaoning’s local securities companies dwindled from seven in 2004 to just three by 2007, a number which remained unchanged thereafter.
Futures and trust firms in the region experienced a similar fate. For instance, while there were 10 futures firms in Liaoning (out of 183 nationally) in 2006, by 2022, the number was zero (out of 150 nationally).
Securities and mutual funds firms play a pivotal role in nurturing public companies. From 2004 to 2009, the number of listed companies in Liaoning scarcely grew. Between 2004 and 2022, Liaoning’s share of nationally listed companies shrunk from 4% to just under 2%.
Publicly-traded firms are instrumental in steering regional economic growth, often signaling technological and economic shifts, potentially spawning emerging industries vital for sustainable local development.
The transformative impact of firms like Tencent in Shenzhen or Alibaba in Hangzhou on their local economies is testament to this. Industry experts believe that Liaoning’s sparse number of listed companies is a reason for its failure to develop significant emerging industries over the past two decades.
Bond default shocks
Since 2016, Liaoning has been grappling with several local corporate bond defaults. Market insiders have raised concerns over what they deem as the province’s inappropriate interventions and aiding of companies in “malicious debt evasion,” which infringes upon the rights and interests of financial institutions.
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