It’s midday Thursday in Changchun, the Detroit of China, and auto factory retiree Zhang Jinchuan is nearly three sheets to the wind. He and two friends are lunching at a hole-in-the-wall, swigging rice wine and beer and puffing on cigarettes.

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Zhang spent his whole working life at the state-run First Automotive Group, one of China’s largest carmakers. He receives a pension of about $1,000 a month, which helps keep him happy.

“Changchun has good geography; we aren’t mountainous like most of China. We’ve got farmland and factories. Here, there are no earthquakes, no typhoons,” said the gregarious Zhang, 60. “We can always bank on this being a good place.”

Auto factory retiree Zhang Jinchuan enjoys living in Changchun. “We can always bank on this being a good place,” he says. (Los Angeles Times)

But economic storm clouds are gathering in China, particularly in the northeast industrial heartland. Of particular concern are China’s 150,000 state-owned enterprises, which employ some 30 million people. In an ominous sign, China said last week it had set aside $15.3 billion to assist 1.8 million workers who may be laid off — just in the coal and steel sectors — in the next two years.

Whether the government can really cut bloated payrolls at “zombie companies” laden with debt and excess capacity, and let market forces play a bigger role, remains to be seen. Moody’s Investor Service lowered its outlook on China’s government bonds from stable to negative this week, citing concerns about rising debt and expressing pessimism about Beijing’s stomach for reforming state-owned enterprises. At the same time, the agency also cut its outlook to negative on dozens of large state-run enterprises such as China Mobile, warning that the government may curb support for them.

Chinese leaders are gathering this week in Beijing for the country’s annual legislative session, during which they are to approve a five-year economic road map for the country.

If China does have the will to order mass layoffs at state-run firms, the cuts may hit particularly hard in the northeast, home of Changchun. State-owned companies in heavy industry such as coal, steel and auto-making still account for about half of the northeast’s economic activity, while nationwide, state-backed firms contribute less than one-third of gross domestic product.

Changchun and the rest of Jilin province have been hit by plunging commodity prices and a nationwide slowdown in construction. (Los Angeles Times)

For years, Changchun and the rest of Jilin province — its name means “auspicious forest” — enjoyed success, along with China’s two other northeastern provinces, Liaoning and Heilongjiang. The region has long been China’s industrial heartland and breadbasket, and young people vied for positions in deep-pocketed state-owned heavy enterprises like First Automotive. Between 2008 and 2012, the region’s GDP grew at 12.4% a year — outpacing the national average — as the nation went on a building spree and an emerging middle class turned China into the world’s biggest auto market.

But the region, rich in coal, oil and iron ore, has been hit by plunging commodity prices and a nationwide slowdown in construction. Overcapacity in state-run steel mills and other factories has sapped growth. Last year, three of China’s four slowest-growing provinces were in the northeast — Liaoning (GDP up 3%), Heilongjiang (5.7%) and Jilin (6.5%).

“This is a painful process to restructure. A lot of people will lose their jobs,” said Jörg Wuttke, president of the European Chamber of Commerce in China, which last week issued a frank report on China’s overcapacity issues.

In addition to sucking air out of China’s economy, he said, the problem has spilled beyond the nation’s borders. With no way to sell excess production at home, China’s steelmakers are flooding Europe with cheap product and fueling protests over dumping. “The situation has gotten so dramatically bad that action has to be followed very soon,” he said. “The time of rhetoric is over.”