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COVID-19 epidemic widens China's North-South economic divide

BEIJING, Jan 28 (Reuters) - China’s northern provinces were disproportionately hit by the pandemic in 2020, with the region’s heavy industries devastated by demand shocks and logistical nightmares, while the south got off comparatively lightly, cushioned by a large digital economy.

China was the only major economy in the world to have reported growth in a year ravaged by COVID-19, but its rebound from a historic first-half slump was not geographically even.

In 2020, gross domestic product by province ranged from 0.2% to 7.8% growth, with many northern provinces reporting gains of less than 3% while over two-thirds of southern provinces expanded around 4%. The economy of Hubei in the south, where the new coronavirus first emerged, was the only province that contracted, by 5%.

The north also accounted for around 34.5% of China’s GDP last year in yuan terms, according to Reuters calculations based on official data. That was the lowest in three decades or more, in an economic divide that has significantly widened in recent years.

“The epidemic exposed the fragility of the traditional industrial structure that the north has long relied on,” said Wang Jun, chief economist with Zhongyuan Bank.

“Recovery would be very slow.”

The gloom in the north was in contrast to its pre-COVID optimism.

Most provinces that had maintained or set higher GDP targets in January last year versus 2019 were in the north, confident their heavy industries were better positioned to withstand any shocks in the Sino-U.S. trade war while exporters in the south and east took the majority of the blows.

Then, COVID-19 arrived.

Plunging domestic orders, transport restrictions and labour supply crunches hit industries hard, particularly the resource-dependent and heavy manufacturing regions in the north. The property sector, the other main growth engine in the north, also lost steam.

In contrast, the south extended an over-a-decade tech boom backed by private-sector names like Huawei, Alibaba and Tencent in an internet economy that further thrived in a social-distancing era.

Unexpected strength in exports fuelled by resilient overseas demand also helped the south stage a sharper turnaround later last year.

DEEPENING IMBALANCES

In 2021, when the Communist Party is celebrating its centenary and all eyes would be on showcasing results, economists expect local governments in the north to find ways to shed their reputation of being laggards.

Many northern provinces recently unveiled grand plans to promote emerging industries from biomedicine to artificial intelligence.

But it remains unclear if tech companies are keen to set up shop in northern China, where, with the exception of Beijing, there is a weak eco-system of tech expertise.

“Rushing into certain industries without the existence of any cluster effect may lead to wasteful investment,” said Raymond Yeung, chief China economist at ANZ.

Shrinking fiscal revenues due to lower contributions from land sales, especially in the north, and obligation to cut taxes and fees will weigh on local government finances this year.

Financially-challenged companies and rising credit risks would be weak spots in the north, following surprise defaults by state firms in the region last year including a coal miner, an auto group and a chip maker.

A long-term brain drain in the north will also thwart its attempts to innovate, and will also hamper local consumption, a key driver of China’s future growth as envisioned by President Xi Jinping.

Reporting by Lusha Zhang and Ryan Woo; Editing by Raju Gopalakrishnan

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