By Caijing Chief Economist Shen Minggao

From Caijing Online

All of China is feeling the effects of the economic slowdown, but it’s affecting each region differently. The east has already undergone a significant adjustment, according Caijing’s research, and may be the first to bottom out, while China’s central and western regions are likely to continue their slide downward for some time. With export demand down, regional economies will become more dependent on investment in the next two years.

As tough times set in during the latter half of 2008, the hardest hit have been provinces that rely on an export economy. Of the 11 eastern provinces and cities in which exports accounted for over 44 percent of GDP, industrial growth has been tracking single-digit rates since September, ending a long period of double-digit expansion.

This phenomenon spread inward two months later. In November, China’s central region – where exports make up roughly 20 percent of the GDP – recorded industrial growth of 9.4 percent. That same month the western region saw its first single-digit industrial growth in years, at 8.6 percent.

Looking at the data, it seems like a disparity in investment was responsible for that two-month lag. China’s central and western regions depend much more on outside funds than the east. In 2007, fixed investment accounted for over 48 percent of GDP in the central region and 55 percent in the west. In the east it was less than 39 percent. These outside funds propped up industrial growth in these two regions.

Provinces with the highest industrial growth all had an investment-to-GDP ratio of more than 40 percent, allowing them to maintain strong growth in both investment and export. In contrast, investment in China’s slower growing regions trailed behind the national average. These areas saw export growth halt and in some instances even contract.

One additional point worth noting is that even the regions with developed service sectors are not immune from the slowdown. Beijing and Shanghai, whose service sectors are the biggest in the country, followed the national trend with negative industrial growth in November.