Blame China’s steel glut on meddling by local governments
Winston Mok says Beijing must rein in local officials’ economic adventurism and destructive competition, as a root cure to the problems of excess capacity
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China now produces half the world’s steel. The expansion has been accelerated by the 400 billion yuan (HK$480 billion) fiscal stimulus following the 2008 financial crisis. China’s excess capacity now exceeds the total production of Japan, the US and Korea combined. With such a glut, prices have plummeted, leaving many steelmakers worldwide in an untenable position.
How did this happen, especially when so many of China’s leading steel companies are state-owned? While a few are directly under Beijing’s control, most are owned by regional governments. China’s steel industry is highly fragmented. Whereas Japan and Korea only have a few integrated steel companies, China has dozens – among its thousands of steel mills.
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Hence, the industry is very difficult to coordinate. Despite Beijing imposing limits on expansion, most regional governments turned a blind eye to unauthorised development of steel mills under their watch. Rule-abiding regions feared losing market share, thus creating incentives to push beyond the limits imposed by Beijing. Whatever the longer-term ramifications, new investments in steel plants provided immediate economic growth, giving a boost to local cadres whose performance is measured by short-term results. The destructive race among regional clusters spiralled out of control.
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To prevent a recurrence of such aggressive expansion, market liberals advocate privatisation. Managers of state-owned enterprises may not feel the direct effects of economic losses and are thus easily tempted by irrational exuberance to pursue reckless expansion. Bosses of private companies should be more circumspect, given that they risk destruction of their own wealth. However, a similar pattern of overexpansion has happened in the solar industry, which is mostly privately owned.