Economic Analysis - Jing-Jin-Ji Integration Set To Benefit The Region, Though Risks Remain - MAR 2016

BMI View: The Jing-Jin-Ji integration plan, which aims to promote sustainable growth and help first tier cities climb up the value chain, will have a positive impact on economic development in the region over the coming years. Beijing, Tianjin, and Hebei will benefit from transport integration and industry upgrading. However, environmental concerns and protectionism will continue to pose risks to the progress.

The Jing-Jin-Ji Integration Plan, which is the central government initiative to integrate Beijing (Jing), Tianjin (Jin) and Hebei (Ji), has become one of the top priorities in China after the 13 th Five Year Plan. This plan aims to promote sustainable growth in the region and help first tier cities climb up the value chain. While we expect it to bolster economic growth on the back of transport integration and industry upgrading, the process may be hindered due to environmental concerns and protectionism on the part of local governments.

An Introduction To Jing-Jin-Ji And Its Significance

The Chinese government has been seeking to move away from its over-dependence on export-oriented growth by implementing various economic initiatives in different parts of the country. By doing so, the government hopes to establish various economic zones that specialise in different sectors as a way of diversifying its production base. The Jing-jin-ji is one such initiative and is particularly important in that it involves both the country's capital and one of the most prosperous municipalities. This move stands in stark contrast to the government's previous experiments, which had typically taken place far from the capital lest the experiment fail. For instance, the Special Economic Zones (SEZs) of the 1980s were all located in the country's south. The successful execution of this plan will therefore provide a boost to the government's efforts to reform the economy. However, given that the capital Beijing is involved in this experiment, the stakes are also considerably higher.

According to the State Council, the integration plan aims to build a metropolis in North China, with Beijing as the centre. For the three provincial level entities involved, the central government has set different goals for them and will require the three entities to act accordingly:

  • Beijing: Centre of politics, culture, international exchange, and technological innovation.

  • Tianjin: National high-end manufacturing and R&D base, international shipping core area in Northern China, financial innovation demonstration zone, frontier of reform and open-door policy.

  • Hebei: Important modernised logistics base, test area for industrial transformation & upgrading, demonstration zone for new urbanisation & urban-rural integration, Jing-Jin-Ji's eco-friendly zone.

The successful execution of this plan will not only promote growth in this region, but also provide valuable experience and act as a template for regional integration and development projects in other parts of China. In addition, the outcome of this project is crucial to demonstrate the capability of the central government.

Jing-Jin-Ji Will Be The Key Project In North China
China - Key Development Plans After 2013
Source: BMI
Uneven Level Of Development In The Jing-Jin-Ji Region
Jing-Jin-Ji - Per Capita Gross Regional Product (GRP) & Disposable Income, USD
Source: NBS, BMI, Year = 2014

Government Efforts Are Making Gradual Headway

Two measures have been revealed and adopted so far. The first is the integration of a transportation system, which involves building of roads and railways to connect cities within the Jing-Jin-Ji region. According to the local media, the urban transit system in Beijing has been extended to Langfang, a city in Hebei. A universal multi-service card for public transportation between the three regions was launched on December 25 2015, and we expect this to progress gradually over the coming years on the back of widespread local government support.

The second measure is shifting low value-added industries from the two municipalities to Hebei. To smooth the transition process, the central government has made provisions that allow Beijing and Tianjin to continue to collect half of the tax revenue for factories that are offloaded for three to five years, minimising the impact of lost revenue. According to Yang Chongyong, the deputy governor of Hebei, in the first ten months of 2015, 3,621 projects, worth approximately CNY274.8bn, have been offloaded from Beijing and Tianjin to Hebei. As the two municipalities continue to upgrade their industries, we expect more low-end factories to be offloaded to Hebei.

Initiatives Will Be Positive For Growth

The integration of the transportation system will benefit the economic development in Jing-Jin-Ji in various ways. First of all, it increases the mobility of labour and thus its allocation efficiency. Secondly, the better linkages within the region will help promote the formation of satellite cities around Beijing and Tianjin, as the reduction in transportation costs makes it profitable to establish offices or factories in the suburbs. Thirdly, the integration plan offers policy backing to local governments to maintain a relatively high level of infrastructure spending. We therefore expect the growth in fixed capital formation in both Tianjin and Hebei to outperform the national average from 2015 to 2024 (see chart below) on the back of upcoming infrastructure projects.

Integration Plan To Support Fixed Capital Formation In The Region
Jing-Jin-Ji - Real Growth Rates Of Fixed Capital Formation, %
Source: NBS, BMI, Data in the graph are BMI forecasts

The shifting of low-end industries from Beijing and Tianjin to Hebei will provide opportunities for industry upgrading, benefitting the economies in the Jing-Jin-Ji region. Clearly, Hebei's manufacturing sector will benefit from adopting the industries offloaded from the two municipalities. With the low value-added industries being removed, Beijing and Tianjin will have added incentive and capacity to develop high value added industries as well.

On the back of the tailwinds provided by the Jing-Jin-Ji Integration, we expect the growth outlook of these three entities to remain stable over the coming years, despite headwinds from overcapacity in the manufacturing sector and weak external demand. In particular, we forecast the growth rates in all three entities to outperform the national average after 2020, and achieve an average growth rate of 6.3% versus the national level of 5.8%.

Integration Plan To Bolster Growth Despite Headwinds
Jing-Jin-Ji - GRP Real Growth Rate, %
Source: NBS, BMI, Data in the graph are BMI forecasts

Environmental Issues And Protectionism May Derail Progress

That said, there are two factors that pose downside risks to our relatively optimistic outlook. According to The Ministry of Environmental Protection, eight out of the 10 most polluted cities were from the Jing-Jin-Ji region, with seven of them in Hebei. The severe environmental issues in the region will have a significant impact on Hebei. As the central government plans to develop Hebei into an eco-friendly zone, it faces strong political pressure to cut down pollution, which contradicts the potential increase in emissions caused by the adoption of low-end manufacturing industries. Indeed, the central government ordered Hebei to cut down steel production by 40mn tonnes by 2017 to tackle both the overcapacity and pollution caused by the production process, which may lead to a CNY300.0bn reduction of output, and impact the employment of approximately 600,000 directly or indirectly related workers.

Protectionism on the part of local governments may lead to potential conflicts and weigh on the progress as well. While Hebei may be more eager to cooperate given its significantly lower level of development and thus lower likelihood of competition with the two municipalities, the local governments from Beijing and Tianjin may diverge from the plan as both are keen to develop high-tech industries and high-end services. In addition, both cities compete for central government funding, which could see the possible overlap of investment in both places. Despite the central government's efforts to supervise the project, the two municipalities still have a lot of room to manoeuvre. For example, Beijing could restrict other Jing-Jin-Ji plated cars from entering the municipality, citing pollution laws, while the port in Tianjin could decide to give priority shipment to goods from companies based in Tianjin. As such, the refusal of both municipalities to cooperate with government dictates could potentially hinder progress and undermine the central government's best laid plans.