Slow Recovery in China Rust Belt

DALIAN, China -- The chilly streets of Dalian lie deathly quiet most winter nights, but strollers in this northeastern Chinese city sometimes spot a light burning in the offices of mayor Xia Deren.

"I was a little uncertain in 2003, but now I'm more confident," a tired-looking Xia, who has spent the past five years struggling to inject economic life into his city, said at his offices in Liaoning province's richest city.

"We're embarking on a new era, and the pressures remain enormous," the 52-year-old cadre said late one February evening before heading off to entertain official visitors.

China's northeast, once the crown jewel of a centrally planned economy, but now its rust belt, fell on hard times at the turn of the century as its monolithic state companies adapted slowly to a rapidly opening economy.

Now, years of painful reforms and an industrial overhaul have allowed the region to regain some of its former glory.

Unemployment has dipped to manageable levels. State firms like Bank of Dalian pursue stock listings. The region is vying with Shanghai to become a global shipbuilding nexus, led by the country's largest shipyard, Dalian Shipbuilding.

Not a moment too soon. In 2003, economists and Beijing cadres warned that the region might be headed for a meltdown. Party leaders feared that job losses could trigger social unrest, threatening a decade of breakneck growth and even the Chinese state itself.

A Dalian native, Xia, who assumed his post in 2003, remembers well the hardships his people have endured. From 10 million to 30 million lost their jobs from 1998 to 2003. Graft scandals made the situation worse, igniting some of the country's largest protests.

The industrial output of Liaoning, Jilin and Heilongjiang, three provinces comprising northeastern China -- an area once known as Manchuria -- shrank to 9 percent of the national total from 17 percent in 1978 and 30 percent in the 1940s, officials say.

When China opened its door to foreign investment in 1978, Liaoning province's gross domestic product was about double that of Guangdong. In 2003, it dropped to less than half.

"It's been painful, but the worst is over," Tang said.

Dalian, a city once run by ex-commerce minister Bo Xilai, has become a poster child for the revival campaign launched in 2003.

The city has been at the forefront of an effort to attract investment, local and foreign. Dalian won the country's single largest investment project by a multinational corporation, a $2.5 billion chipmaking plant, from Intel Corp in 2007.

"The Intel project is an unprecedented one. We spent a lot of effort to win them over," said the mayor, an ex-college dean.

Top U.S. tire maker Goodyear is in talks to invest $1 billion in a manufacturing plant and Volkswagen AG is building a gearbox plant there.

"We have to build showcases to display the benefits of a market economy," Tang said.

Even appearances have improved somewhat. The hulks of closed factories, once a common sight in Liaoning, are now fewer and farther between. Dalian, a city sporting remnants of Russian architecture, boasts sweeping boulevards and ocean vistas that would not be out of place in California.

Now, Beijing has plans to make the city a shipping and logistics center for Northeast Asia by 2020.

"That's a golden opportunity for Dalian," Xia argued.

Dalian, China's No. 2 oil port, plans to invest 8 billion yuan ($1.1 billion) this year in port infrastructure, including 9 berths with capacity of 15.52 million tons. It plans to move 10 percent more cargo in 2008 and 18 percent more containers.

As part of that plan, Dalian Port joined up with A.P. Moeller-Maersk, Singapore's PSA International, Japan's Nippon Yusen Kabushiki Kaisha and COSCO Pacific to invest in container terminals in newly developed Dayao Bay.

It also has a stake in a "ro-ro" terminal -- one designed to handle vehicle shipments -- that can handle 1 million vehicles a year, and a 300,000-ton oil terminal to complement the city's demand for 30 million tons a year in oil processing capacity, operated mainly by PetroChina.

Some economists criticize the pace of reform as being still too slow and job creation still insufficient to absorb laid-off workers and offset an exodus of rural population to cities.

But Beijing will keep an eye on a region that still punches above its weight. Liaoning's GDP jumped 14.5 percent last year to 1.102 trillion yuan ($155.1 billion), versus 11.4 percent nationwide. Combined with Heilongjiang and Jilin, the region's economy would surpass Denmark and Saudi Arabia.

"We've jobs to support our lives," said a night-shift taxi driver who drives for a factory in the day. "That's all we want."