Xi reforms may be making their mark as China’s industrial belt starts to benefit from rising prices
Rising profits for coal and metal producers fuel debate among economists about whether country’s economy is entering a new cycle
Longmay Mining Holding Group, a coal conglomerate owned by the Chinese province of Heilongjiang, attracted global attention in March 2016 when thousands of miners in a town close to the Russian border staged a protest about their unpaid wages.
It was seen as a typical bloated, indebted and inefficient Chinese state firm struggling in an industry with excessive supply. The Heilongjiang government had to beg state banks not to cut off credit flows even though the firm had not made a profit for years.
A visit by the South China Morning Post last year found widespread anger on the streets of coal mining towns amid talks of job cuts.
A turnaround, however, is taking place. Longmay is expected to report a profit for 2017, the first since 2011, the China Business Journal reported, citing the National Development and Reform Commission.
Longmay’s workforce had been trimmed to 154,000 by the end of 2016, a third less than the 224,000 in August 2015 when it started to cut jobs.
The job cuts helped its financial position but, more importantly, it has benefited from the surge in coal prices under President Xi Jinping’s supply-side reforms.
Unlicensed mines have been closed and coal prices in China nearly doubled in the last 20 months.
A similar process is taking place in steel and aluminium.
The price of steel rebars, a product mainly used in construction sites, has rise to over 4,200 yuan (US$630) per tonne – the price was below 2,000 yuan at the end of 2015.
China’s state steel plants have become money-making machines again with combined profits of 12.6 billion yuan in the first half of 2017 – a 427 per cent increase compared with the previous year, according to the China Iron and Steel Industry Association.
The price of aluminium, which is used in vehicles, home appliances and door frames, has gained 60 per cent as well in the last 20 months, as provincial governments across the country were pushed by Beijing to close down plants without sufficient licensing from the central government.
The rally of coal, steel and other commodities, and the significant improvements in profitability for those remaining in the market, is fanning a heated debate among Chinese economists whether the world’s second biggest economy is entering a “new cycle”, a process aided by Beijing’s campaign in shutting down unlicensed facilities.
Ren Zeping, the chief economist with Founder Securities and a former economic researcher with the State Council’s Development Research Centre, is the leading advocate of the “new cycle” theory.
According to Ren, China’s supply-side restructure took place during a 54-month producer price deflation from 2012 to 2016, and Xi’s policies have accelerated the process by phasing out excessive capacity.
As such, the overall profitability of the Chinese industrial sector will improve and economic activity will expand even though there is little sign of increased demand, according to Ren’s research notes posted on Chinese financial portal Sina.com.
On the other hand, there are concerns that China’s “reflation” story will fizzle away or even backfire on economy as price gains from reduced supply lack sustainable support from demand expansion.
Deng Haiqing, the chief economist with JZ Securities, a mainland brokerage house, wrote in a research note that the hefty price rise in coal, steel and other commodities is “a trap” that “went completely against the policy intention”.
The debate matters a lot for the Chinese economy and even the global one as it is about a fundamental question of whether the hallmark economic policy of Xi, who is expected to rule China for at least another five years, will put on the world’s second biggest economy on a sustainable track.
Since he took power in 2012, Xi’s prescribed remedies to cure the illness in China’s economy can be summarised as reducing excessive capacity, lowering corporate debt, cutting the property inventory and slashing operational costs for businesses under the “supply-side reform” umbrella.
While Xi has pledged to give the market a “decisive” role in allocating resources, his administration often relies on administrative power, or government orders, to achieve economic goals on the ground. Meanwhile, Xi has been putting more emphasis on state companies and the role of the Communist Party in economic activities.
“China is in economic transition and there are many aspects of distortions in the overall economy, therefore it can’t completely adopt the Western-style market adjustment theory,” said Shen Jianguang, the chief economist with Mizuho Securities Asia who has previously worked for the International Monetary Fund and the European Central Bank.
Shen added that the Chinese government was walking a tightrope. “There are conflicts between government intervention and market adjustment. It is a challenge to policymakers,” he said.
Under Xi, who has been less tolerant of air and water pollution than his predecessors, local Chinese authorities have been forced to be more serious about curbing emissions and pollutant discharges, and the strict environment protection campaign will continue, said Lin Boqiang, head of China Institute for Studies in Energy Policy at Xiamen University.
Unauthorised or dirty facilities will not be able to benefit from the price rally.
Hongqiao Group, the country’s biggest private aluminium smelter, had been ordered by the Shandong provincial government to shut down 2.68 million tonnes of capacity, or 7 per cent of China’s total capacity.
Analysts have argued that as the wings of players like Hongqiao are clipped, China’s aluminium industry, which has been in over-supply for the last 15 years, may shift to under-supply by the end of 2017 – a situation that will lead to further price rises and will enrich the state-owned smelting plants that remain in the market.