Beijing struggles with local governments on industrial overcapacity

Article in party mouthpiece calls progress so far ‘not satisfactory’

PUBLISHED : Friday, 05 August, 2016, 4:45pm
UPDATED : Friday, 05 August, 2016, 11:27pm

Beijing is worried about the slow progress in retiring idle and obsolete manufacturing capacity, with official reports offering a glimpse of the struggle between the central and local governments in balancing growth and reform.

In an article published on Friday, the party mouthpiece People’s Daily said that capacity reduction in the steel and coal sectors was far from satisfactory, with less than half of the goals met in the first seven months of the year.

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The battle against excess steel and coal capacity is deemed crucial to remedying an ailing economy, as well as to countering overseas criticism of China’s dumping of industrial products.

“The overall progress is not satisfactory. The progress among regions is not balanced”, the article said, citing a government meeting on addressing steel and coal overcapacity.

It noted that some regions showed reluctance to address the problem, due to worries about the impact on the local economy, and because they lacked the tools and confidence. Some regions and factories had also “wavered in determination” once they saw prices of steel and coal recovering.

Xinhua said some regions had not begun the process of retiring excess capacity until November or December, while others had just kicked off the process.

Because of these setbacks, Beijing plans to send inspection teams around the nation beginning in the middle of this month, to supervise the removal of overcapacity, according to the People’s Daily.

China aims to reduce capacity of crude steel by 45 million tonnes this year, and to cut coal capacity by at least 250 million tonnes. But after seven months, only 47 per cent of the target in steel and 38 per cent of the coal target had been met, the story said.

Meanwhile, the rebounding of steel prices in recent months stimulated the resumption of production. In June, the daily average output of crude steel hit an all-time high of 2.31 million tonnes.

But these price rebounds were not sustainable because severe overcapacity remained, said Xu Shaoshi, head of the National Development and Reform Commission, according to Xinhua.

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The meeting on overcapacity led to a call on local governments to strictly control new capacity and to handle the relocation of laid-off workers.

It also demanded market- and rule-based disposal of debts and loans, such as by restructuring or bankruptcy.

“The ongoing process of economic rebalancing is pressuring industries in China, especially sectors with overcapacity, such as steel and coal mining, thereby increasing their vulnerability to refinancing risks and [bond] defaults,” said Jenny Shi, managing director with Moody’s Investors Service.

She added that given weak commodity prices, many of these companies were struggling with weak profitability and cash flow pressures, which were undermining their repayment capacity.