Factory workers go about their jobs at a Shenyang machine tool company. (Adam Dean/For The Washington Post)

Giant skyscrapers tower unfinished and abandoned around a lake that forms the centerpiece of this new town. The wind blows through the empty hulk of what was supposed to be a multistory hotel and restaurant complex. A salesman insists that people have moved into one of the few housing complexes to be completed around the shore, but as dusk falls, only a handful of lights blink on. He offers to throw in a free car with every apartment purchased.

This is Shenfu New Town in the northeastern province of Liao­ning, built to handle the overflow from the once-booming industrial cities of Shenyang and Fushun.

“Build it and they will come,” the saying goes. But here, in China’s industrial heartland, people are leaving instead of coming.

For much of the past decade, this was China’s fastest-growing region, the home of the heavy industry that powered the nation’s rise and rode on the coattails of a construction boom unparalleled in history.

Today, China’s economy is undergoing a painful transition that has left heavy industry reeling and set investors’ nerves jangling. The stock market is crashing, and fears of an economic slowdown are spreading. In the real economy, nowhere is the brunt of that slowdown and the pain of that transition being felt as sharply as here in the northeast.

After uncertainty surrounding China's economy sparked a global sell-off, U.S. markets had a roller-coaster day before closing down sharply. Here's what you need to know to help your portfolio make it through the ups and downs of the stock market. (Jason Aldag/The Washington Post)

“Everyone knows what the problem is. It is structural,” said an official dealing with economic policy in the Liaoning government who spoke on the condition of anonymity because he was not authorized to talk to the press.

“Everybody knows what to do. You need to change the economic structure. But what concrete steps to take? Nobody knows,” he said. “What can we do? Financial sector? You can’t compete with cities like Shanghai. High-tech industries? Those won’t flourish overnight.”

Nicknamed the Rust Belt, the three provinces of northeastern China have survived tough times before, just as their famously tough inhabitants survive the region’s brutally cold winters.

The challenges they face today reflect many of the challenges that China faces as a nation: Curtailing the power of state-owned enterprises and allowing market forces to play a greater role. Finding new drivers of growth now that the export-, infrastructure- and housing-led boom is playing out. And reforming the economy without causing more pain and upheaval.

But here the problems seem even more deep-rooted, and attitudes more entrenched. This is a region where factory workers still look back fondly on the good old days of the Soviet-style planned economy and the industrialization drive that Mao Zedong undertook in the 1950s. This is a region, as the government official acknowledged, without the culture of entrepreneurship you find on China’s southern and eastern coasts.

“Here it is not encouraged to start up your own business,” he said. “Everyone just wants a stable job with a big state-owned enterprise.”

The Shanghai Composite Index ended trading on Monday down 8.49 percent, after all of the yearly gains were wiped out of the market.The fall comes as investors were disappointed that policymakers announced no support for the markets over the weekend. (Reuters)

Liaoning’s economy grew by a staggering average of 12.8 percent a year between 2003 and 2012, even faster than the 10.7 percent recorded by the nation as whole. Now, official figures show the national economy growing at 7 percent, but growth in Liaoning tumbled to 2.6 percent in the first half of this year, the lowest of the country’s 31 provinces. Industrial production in the province contracted more than 5 percent in the first seven months of this year after growing more than 8 percent the year before, says Shen Minggao, Citi’s chief economist for Greater China, a deterioration he calls “astonishing.”

Factories faltering

The Tiexi district of Shenyang is nicknamed the “Ruhr of the East,” after the German district that forms the backbone of that nation’s industrial might. Yet here, the backbone of China’s economy appears to be wilting.

At state-owned companies, workers say fewer shifts mean their monthly pay has fallen from up to 5,000 yuan ($780) two years ago to more like 2,000 now.

At private factories such as
the Shenyang Heavy Machinery Huayang Mechanical Co., the situation is bleaker. Here, just 30 workers man old-fashioned lathes making machinery for the coal industry in a factory that once employed 400.

Abandoned parts and tools lie strewn on the factory floor amid cigarette butts and metal shavings, a thick film of oil coats every surface, and the sense of decay is palpable. Yao Guanghe, 22, started working here in May after his previous employer went bankrupt, but he fears for his future.

“It’s very difficult to find jobs in this industry,” he said amid the hum of machinery, the sound of hammering and the blue flash of welding. “You consider yourself lucky just to be working at all.”

Many people leave the region to look for work elsewhere. That relieves some of the social pressure but is draining some of the best talent from the northeast and leaving behind a rapidly aging population, experts say.

Reflecting their concern, President Xi Jinping and Premier Li Keqiang both made “inspection tours” of the northeast in the past four months. Both have stressed the need to foster innovation,­encourage small and medium-size businesses, reform state-owned companies and find new engines for growth.

But both have also signaled a reluctance to turn their backs on the old ways entirely. In April, Li called for the government to launch major infrastructure projects — even though revenue is down 23 percent in the first half of this year. In July, Xi said state-owned enterprises are the backbone of the economy and warned that the government must avoid “the blindness of the market” even as it pursues reform, state media reported.

Those mixed messages may represent an effort to manage the economic transition, but they also may reflect the haphazard nature of changes that have taken place since Xi and Li came to power in 2013. There have been some financial reforms — most notably this month’s decision to make the currency more responsive to market forces — but a reluctance to administer the kind of harsh medicine the domestic economy needs, economists say.

“There is a general aspiration to do good things in a very vague sense, but there isn’t a top-down vision — or if there is a vision, there is no plan about how to actually execute it,” said Andrew Batson, director of research at Gavekal Dragonomics. “What actually happens is dependent on domestic politics and maneuvering within the bureaucracy.”

Andrew Polk, senior economist at the Conference Board China Center for Economics and Business, said the problems are mounting as the economy slows — efforts to curb state-owned enterprises could result in still slower growth, for example, and it is far from clear that the leadership is ready to take that leap.

“I see them as being on a ledge,” Polk said. “They have great intentions, and they keep coming up to the edge. But then they think about it, they don’t jump, and they back off.”

Echoes of 2008

Many of China’s problems date to the 2008 global financial crisis, which crushed export growth. A major government stimulus program delayed the day of reckoning but led to a rapid rise in debt that now needs to be contained. But it is the end of the construction boom that may have hit heavy industries such as steel and cement the hardest.

“It may take a 10 to 20 percent capacity cut before these sectors become profitable again,” said Citi’s Shen. “If they do cut capacity, the economy will get worse, but if they don’t, the problem will drag on for a few more years.”

In Shenyang, the signals remain as mixed as they are nationally.

Zhou Dewen, who runs a business association in Wenzhou, scouts out investment possibilities throughout China. He has led 20 small-business delegations to the northeast, but he has not been able to work up much enthusiasm for the region.

“The northeast still thinks of itself as the big brother, because they were the first to get rich after the new China was founded,” he said. “They are sitting on their glories and not advancing with time. Their mind-set is still the old planned-economy stuff. They don’t see that small businesses can do big things.”

Nevertheless, it would be wrong to write China’s economy off, or to conclude that the northeast has no hope of recovery.

At the gleaming new factory complex run by the Shenyang Machine Tool Group (SYMG), fully automated lathes and milling machines work with a precision and speed that was previously unimaginable, and company chairman Xiyou Guan talks enthusiastically about joining the next global revolution in smart machines.

SYMG rose from being the 36th-largest machine tool company in the world in 2002 to the largest in 2011. Times are much tougher now — revenue has since dropped sharply, and the company is projecting a net loss in the first half of this year. It has fallen back to third place globally. Nevertheless, Xiyou, who is also a senior Communist Party official, remains upbeat — about his company and for the region as a whole.

“In my opinion, the fact that we are in an economic downturn is not a bad thing: When something old dies, something new will be born,” he said, turning to his colleagues to cite a line from Russian writer Maxim Gorky. “ ‘Let the tempest come strike harder!’ — because this will give birth to new things much faster.”

Xu Yangjingjing contributed to this report.