China: What Chongqing's Declining Growth Rate Tells Us About China's Slowdown

Last Updated: 10 April 2019
Article by Zoey Zhang

Chongqing's declining growth rate has seen it drop to the bottom of the list of China's fastest growing regions. China Briefing puts a spotlight on the city and examines how despite its recent economic performance (which may also explain China's overall slowdown) foreign investors won't be leaving yet.

In 2018, Chongqing became China's fifth city to generate over RMB 2 trillion (US$295 billion) in GDP – after Beijing, Shanghai, Guangzhou, and Shenzhen. A large manufacturing base located by the Yangtze river in the midwest of China, Chongqing's economy posted 15 consecutive years of double-digit growth beginning in 2002, reaching a high of 17.1 percent in 2010.

Last year, however, Chongqing's GDP growth rate slumped to six percent – far below its target of 8.5 percent and behind the national average of 6.6 percent. This dramatically brought down Chongqing's rank in the list of China's 31 fastest growing regions – from being first in 2016 to 24th in 2018.

What explains this sudden dip in Chongqing's growth?

There are many reasons. But in short, the decline in GDP growth is mainly attributed to two factors: one, Chongqing's economy slowed to receive massive state investments and, two, its traditional pillar industries performed poorly.

In fact, examining the sudden changes in Chongqing's economic growth story sheds light on the limitations of China's model of development. Aggressive state investments may have thrust the country's manufacturing cities to the top but has also made them acutely vulnerable to the shifts in government priorities as well as global economic headwinds.

State investments behind Chongqing's rapid growth

As a municipality, Chongqing has benefited more from government policies than many other cities in mainland China. From 2013 to 2015, Chongqing's government spending on infrastructure and fixed assets amounted to RMB 4 trillion (US$600 billion), accounting for 94 percent of its total GDP in the same period. In previous years, Chongqing's fixed asset investment maintained a growth rate of 20 percent, reaching a peak of 31.5 percent in 2011.

Chongqing is thus a prime example of how China's state investment-driven economic growth is not a sustainable model. Ultimately, years of big-sticker investment projects funded by regional governments have resulted in a mountain of provincial debt, threatening China's overall debt sustainability and financial stability.

This partially explains why the national government has begun stressing the need to shift China's economy from being overwhelmingly invested in manufacturing and infrastructure to a more sustainable model of growth, such as promoting the services/tertiary sector and boosting domestic consumption.

Since 2016, Chinese authorities have initiated a "deleveraging campaign" to pare the massive debt levels of the banking and corporate sector. Possibly affected by this, fixed investment growth in Chongqing slowed to 9.5 percent in 2017 and slumped to only seven percent last year.

Decline of Chongqing's traditional pillar industries

Chongqing's economy is dominated by the manufacturing sector – with the secondary industry accounting for more than 40 percent of its GDP. And it has two major pillar industries – automotive manufacturing and electronic manufacturing. These two industries account for more than 40 percent of its industrial sector GDP.

Unfortunately for Chongqing, the growth of car manufacturing collapsed in 2018 – to negative 17.3 percent from 6.2 percent the year before – because of a saturated market and the fact that mostly lower-end car models were manufactured in Chongqing.

Chongqing's economic woes were compounded by the fact that the growth of its electronic manufacturing industry also slowed to 13.6 percent from 27.7 percent in 2017. Five out of seven key industries saw much slower growth in 2018 in Chongqing as shown in the table below.

In total, the overall growth of Chongqing's secondary industries slowed to three percent from 9.5 percent in 2017. And the growth of industrial production (mainly manufacturing) dropped to 0.5 percent from 9.6 percent in 2017.

These factors combined to force a slowdown in Chongqing's economy growth speed – resulting in an all-time low since it became a provincial-level city in 1997.

Why Chongqing needs to update its industrial capability

Chongqing's sudden decline in growth is not the most dramatic case in China. There are precedents as in the case of other industrial and manufacturing regions, such as Liaoning, Jilin, Heilongjiang, and Tianjin. Behind the sharp drops in the GDP growth of these cities lies the difficulty of upgrading existing industrial capabilities.

Chongqing's car manufacturing industry, for example, occupies the low-end of the industry chain, leaving it most exposed to market pressures. Chongqing mainly manufactures middle and low-end car models due to the relatively lower consumption power in China's midwestern regions.

For instance, the cancellation of preferential tax policies for vehicles with lower displacement of 1.6 liters or below in 2017 and the declining auto market in 2018 resulted in the sales of Chang 'an, a major state-owned automobile manufacturer in Chongqing, dropping sharply by 59.3 percent last year.

Chongqing was once the largest auto manufacturing base in China with the production of cars over three million units. In order to revitalize the car manufacturing industry, Chongqing's government recently released policies to promote the development of new energy and intelligent network vehicles.

The policies include accelerating the construction of infrastructure for new energy vehicles, encouraging joint ventures to introduce high-end brands and high-end car models, supporting a number of enterprises in establishing municipal R&D centers, introducing well-known domestic and foreign institutions to set up R&D bases in Chongqing, among others.

In 2017, 40,418 new energy vehicles were produced in Chongqing, accounting for 5.1 percent of the national production, up 403.5 percent year-on-year. By the end of April 2018, 8,503 charging piles had been built in the city.

Chongqing's appeal to foreign investors: Development zones, technology, tax breaks

Thanks to the comparatively low operational costs, well-established infrastructure, and a pool of skilled labor, Chongqing is still one of the most appealing regions among China's central and western provinces for foreign investors.

Chongqing's government has put efforts into promoting the city's economic transformation and upgrading, like actively developing industrial parks and promoting the electronic manufacturing industry as well as other emerging industries, such as high-end equipment manufacturing, new materials manufacturing, and the new energy industry.

As of 2017, 16 bonded zones, five national high-tech zones, and 41 municipal development zones were set up in Chongqing. In 2018, official data showed that the added value of high-tech industries in Chongqing increased by 13.7 percent year-on-year, contributing 411.7 percent to the growth of overall industrial production.

The added value of the other emerging manufacturing sector, such as the new-generation information technology industry, biological industry, new materials industry, and high-end equipment manufacturing industry, grew by 13.1 percent, contributing 495.2 percent to the growth of overall industrial production.

With the rapid growth in electronic and high-tech manufacturing, leading multinational companies from the electronic industries, including Hewlett-Packard, Foxconn, Inventec, Acer, IBM, Honeywell, CISCO, and HP have established a presence in Chongqing.

By the end of 2018, 287 of the world top 500 companies set up operations in Chongqing. The actual use of foreign investment in Chongqing has exceeded US$10 billion for eight consecutive years. This popularity is no doubt aided by preferential policies from the central government to develop inland regions.

In early 2017, the State Council released a guideline aiming to increase FDI into the central and western provinces and provided a catalogue of prioritized industries. Similarly, the format of the 2019 Draft Encouraged Catalogue has also changed to encourage specific regional investments, including the central, western, and northeastern regions.

Notably, a majority of the industrial sub-sectors added are under high-tech manufacturing, artificial intelligence, and other intelligent technology for health advancement, recycling or environmentally friendly practices, or new agricultural practices.

In response to the central policy to attract foreign business and develop the high-tech sector, in August 2018, Chongqing authorities released updated preferential policies, which include tax incentives, land and real estate benefits, foreign exchange management and credit, import and export assistance, and visa advantages. The details can be found here.

Chongqing's high-tech zones, such as Liangjiang New Area and Xiyong Micro-Electronics Industrial Park with electronics, information technology, integrated circuits, and software as target industries, offer preferential land policy, subsidy, and credit support. These zones also have bonded facilities to attract export-oriented production activities.

In 2018, the total value of Chongqing's foreign trade reached RMB 522.26 billion (US$77 billion) – up 15.9 percent year-on-year, crossing the RMB 500 billion (US$74.50 billion) mark after a four-year gap, within which the exports of laptops in Chongqing increased by 85.6 percent.

China's economy is slowing down, but opportunities can still be found in provinces and cities where the focus is economic transformation and upgrading industrial capabilities. Chongqing, as the western logistics hub in the middle reaches of the Yangtze river and an established manufacturing base in China, remains an ideal destination for foreign investors despite hiccups in its recent economic performance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions