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Zhou Xin

The economic battle is on. Over the next year and beyond, China must fight the battle of annihilation to eradicate obsolete factories and overcapacity, which are stifling the country’s economic growth.
That was the message from the agenda-setting Communist Party Politburo meeting on Monday.
The meeting, headed by President Xi Jinping, was called to set the tone for a bigger gathering of communist cadres – expected to be held at the end of this week – to map out key policies for next year.
The Politburo has named its targets: useless production capacity, empty residential buildings, excessive charges and taxes on businesses, and dangerous financial schemes.
Yao Wei, China economist with Societe Generale in Paris, said the campaign reflected a big change in the mindset of the central government.
“It finally realised the root problems and is ready to act,” Yao said. “China had tried to keep redundant plants afloat, and now it’s proved that won’t work – by using the language of war, it showed its determination to do something different.”
The eliminating excess capacity and the property oversupply could be “very costly” for the government.
READ MORE: Chinese Communist Party’s Politburo pledges to cut costs for business in 2016
“Fiscal authorities may have to give real money to migrant workers who want to buy homes in urban areas, and they may have to bail out some bad assets resulting from factory closures.”
Local governments have been reluctant to let companies in their midst go bust, especially state firms under their control, for fear of social instability and a run of further closures.
The result has been a legion of “zombie companies” that create little value but are kept afloat with state funding and bank loans. The steel industry, for instance, is flooded with overcapacity but many steelmakers, in a desperate fight to keep market share, have kept their furnaces running, even at a loss, according to the China Iron and Steel Association.
“Zombie companies should die, but there may be too many of them, and you can’t let all of them go down overnight,” Fudan University economics professor Li Weisen said. “What social security coverage do we have for migrant workers? Can we drive millions of migrant workers back to their rural villages?”
While the Politburo had mouthed its intention to cut tax on business, it remained to be seen if there would be true broad-based tax cuts in the budget report, Li said.
READ MORE: The new normal: China’s holistic development of its economy moves beyond long-time focus on GDP
On the property policy side, the government could address oversupply by using public funds to buy existing vacant flats and selling them on to migrant workers at a discount, said Tao Dong, Credit Suisse chief economist for Asia excluding Japan.
“There would be political considerations as well as financial considerations,” Tao said.
According to Jonathan Fenby, managing director of the China team at Trusted Sources in London, more subsidised housing was essential to efforts to turn migrant workers into urban consumers.
“Before they can be a major motor for the property market, restrictions on them in cities have to be relaxed” such as permanent residency and pension, Fenby said.
JPMorgan chief China economist Zhu Haibin said: “The problem is not at policymaking, but the implementation of policies.”
“My biggest hope is that China will make a breakthrough in addressing overcapacity” in 2016.


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China economy

China’s zombie war: can Xi Jinping win the battle to eradicate industrial overcapacity?

A worker operates a furnace at a steel plant in Hefei, Anhui province August 18, 2013. 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. REUTERS/Stringer (CHINA - Tags: BUSINESS POLITICS TPX IMAGES OF THE DAY)

China’s steel industry is flooded with overcapacity but many steelmakers have kept their furnaces running, even at a loss. Photo: Reuters

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China Economy

The Communist Party’s Politburo has taken aim at the property glut and industrial excess, targeting them for elimination 


Xi Jinping