China struggles to revive its troubled industrial cities

Startup firms, modern methods are part of plan.

The hulking, brown-brick industrial plants lining the roads were once the backbone of this gritty city. Today, they are outdated and unwanted, and the region is one of the Chinese economy’s most troubled.

A short drive away, however, a newly minted industrial park offers reasons for optimism. Liu Qi, chairman of PQI Industrial Technology Group, opened an $18 million factory there last year, equipped with whir- ring robots that pound out car parts for the German automaker BMW.

The factory, and the more than 200 jobs it has created, is just one small part of a grand plan led by China’s government to rejuvenate Shenyang, a city of 8 mil- lion, by replacing stumbling state industries with modern manufacturing and startup companies.

“When things hit bottom, there is an opportunity for things to go up,” Liu, 46, said.

Whether the rejuvenation happens will shape not just the future of Shenyang, but also, potentially, the entire Chinese economy.

The city’s woes represent a broader problem: There are too many unproductive, debt-laden factories that are losing business as China’s growth slows.

If Beijing fails to overhaul those crumbling industries and revive the communities that rely on them, Shenyang and the surrounding area — and other similar regions — could weigh heavily on the country’s economic progress.

The story of Shenyang will probably sound familiar in places like Midwestern towns in the United States that have seen important industries decline or depart. During Chi- na’s go-go years, when facto- ries, roads and housing were constructed with wild aban- don, the city’s heavy indus- trial companies, many of them owned by the state, boomed.

A rush of wealth was plowed into new apartment towers and shopping malls in Shenyang. The city still has an industrial air, with central office blocks designed in a near-uniform drab brown, matching its factory complexes.

But as China’s investment binge fizzled, Shenyang and its factories sputtered. Last year, the economy of the northeastern province of Liaoning, of which Shenyang is the capital, shrank 2.5 per- cent — a shocking figure in a country accustomed to seem- ingly endless expansion.

Other major cities have sped ahead of Shenyang in the development of the hightech and service companies expected to propel China’s future growth.

The entire northeast of the country, where much heavy industry has been concentrated, runs the risk of being left badly behind. The decay of this factory zone has left Beijing with a sim- ilar knotty problem to the one that has plagued Wash- ington for decades: how to resurrect down-on-their- luck areas.

In the United States, Pres- ident Donald Trump plans to streamline regulation, cut corporate taxes and rene- gotiate trade pacts to bring factory jobs back to trou- bled towns.

Around the world, state intervention to attempt to stimulate a domestic economy is not unusual. But offi- cials in China, as is often the case, have adopted a much more hands-on approach. With lavish incentives and initiatives, they are trying to attract investment to the region and to upgrade its industries.

Shenyang is a crucial test case. The city has set up a $7 million fund to support high-tech industries, prom- ised a $30,000 bonus for some technology firms, and offered to pare the corpo- rate tax rate for companies in favored sectors.

Liu’s factory opened inside the China-Germany Equipment Manufacturing Industrial Park, introduced in late 2015 to try to attract advanced production in robotics, automotive components and other indus- trial sectors.

The government offers a 30 percent discount on land, streamlined regulations and other perks for companies that set up in the facility. PQI is now negotiating for rent breaks and cheap land for his current factory, as well as for future investments.

Zhang Yanzan, the park’s deputy director, said that, since its opening, more than 140 factories have been com- pleted or are underway, haul- ing in a total investment of nearly $6 billion.

“We hope this park can be an example for other areas,” he said.

The city authorities are also striving to persuade local college graduates to start companies in Shenyang by offering subsidies. The effort is focused on a shopping arcade of fast-food restau- rants and computer outlets that had Start-Up and Inno- vation Street added to its name in 2015.

On the top floor of one office tower in the area is an incubator called Phoenix Valley, founded by two Shenyang-born busi- nessmen. One room is a cafe, where budding entre- preneurs swap tips over cappuccinos and browse shelves of books on business building. Next door, desks can be rented in a communal office for about $45 a month.

The incubator has more than 100 members and will soon open a second office in the city.

“The deve l opment in Shenyang is not as fast as in Beijing and Shenzhen, but if startups are really good at what they do, they will have more potential to grow,” said Hong Qifan, who founded Phoenix Valley with his business partner, Ma Ke, citing China’s capital and one of its southern boom towns.

Shenyang’s taxpayers are contributing to the effort. Some entrepreneurs are eligible for subsidized housing, with rent costing the equivalent of $30 a month.

This year, Phoenix Valley received a cash handout from the central and municipal governments worth more than $70,000. Local officials also helped the incubator’s founders negotiate a below-market rent for its headquarters.

Still, Innovation Street pales in comparison to the efforts in hot spots like Beijing and Hangzhou, a city in the east, which have not only higher salaries, but also entire neighborhoods of startup centers.

And the residents of Phoenix Valley complain that venture capital and talent are scarce in Shenyang.

Other initiatives in the city seem to be generating more buzz than business.

In April, Shenyang opened a branch of the provincial free-trade zone, in which companies can benefit from reduced red tape, discounted land and other advantages. At its offices, in the corner of a gargantuan, columned hall worthy of a Star Trek set, dozens of businesspeople and their agents lined up to register companies.

But the zone’s rules do not require these businesspeople to start any actual operations there.

Tian Jiawei, a manager at an agricultural company based near Shenyang, registered an export-import firm, but has no plans to open an office or hire workers.

“I’m not sure what kind of tax break I might enjoy, but I didn’t want to miss the opportunity,” he said.

More problematic: Shenyang’s incentive programs are not unique.