Tue, Aug 20, 2013 - Page 9 News List

China’s heavy industry set to face market forces

Loss-making steel firms in China produce 300 million tonnes of excess capacity and enjoy huge subsidies from debt-laden local governments, but it is unclear whether they will be allowed to go bankrupt and reform looks likely to be slow and partial

By David Stanway  /  Reuters, BEIJING

Illustration: Yusha

Momentum is growing in China to allow market forces to end a titanic capacity glut in heavy industry that a decade of state interventions has failed to resolve, according to speeches made by high-ranking officials this month at a closed-door event.

The speeches indicate that China’s reform-minded Cabinet is considering a dose of deeper structural reform to remedy bloated, inefficient and debt-laden sectors, such as steel.

China has about 300 million tonnes of surplus steel output capacity, equivalent to nearly twice the output of the EU last year.

Encouraged by easy financing and cheap energy supplies, local governments looking to meet job and growth targets have steadily built many more steel mills than the country needs.

The steel sector is likely to be the first to feel the pain of a new approach based on tighter regulation and market economics. If it works, steel may become a model for how the government deals with other sectors, such as aluminum, cement and shipbuilding.

Beijing has yet to make clear whether it would begin to allow loss-making firms to go bankrupt. Until local governments stop propping up firms, any reform will be slow and partial.

“The current methods of management do not suit the requirements of the industry,” said Miao Zhimin (苗志敏), vice head of the raw materials department at the Ministry of Industry and Information Technology (MIIT), responsible for the steel sector.

According to transcripts of speeches made to a China Iron and Steel Association (CISA) gathering the week before last, Miao said his ministry had already decided to stop micromanaging the sector and would instead try to ensure the market runs smoothly by establishing a level playing field and stronger rules.

It has started to implement a new registry to ensure steel mills operate under the same rules and standards, with the aim of making competition fairer across regions. It has also vowed to let the market, rather than government, pick which firms merge.

China’s Cabinet, the State Council, has identified overcapacity as one of its policy priorities this year, and it has been the driving force behind efforts to slash red tape and increase the role of the market in key industries.

MASS BANKRUPTCIES

Experts say a market-based approach would need a system that allows firms to exit. If Beijing is unwilling to countenance mass bankruptcies due to concerns about job losses, it should at least make it harder for new firms to enter by breaking up a support structure in which they are cosseted with subsidies and cheap credit, they say.

“We’ve got 21,000 steel companies and there are still more being created every year,” said Scott Kennedy, director of the Research Center for Chinese Politics and Business at Indiana University, who has studied China’s steel firms. “Banks shouldn’t be giving those start-ups money.”

The 30 largest listed steel firms are estimated to have racked up nearly 760 billion yuan (US$124 billion) in debt, largely as a result of rapid expansions and high costs.

A Reuters survey of 15 listed firms, including market leader Baoshan Iron and Steel (Baosteel), showed that despite receiving 3.49 billion yuan in subsidies last year, they still had losses of 5.29 billion yuan over the year.

With Beijing increasingly concerned about local government debt, there is a growing understanding that cash-strapped regions cannot bail the sector out indefinitely.

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