From steel mills to shipbuilders, how ‘Xiconomics’ is playing out in China
Beijing’s campaign to cut capacity and rebalance the economy is a boon for some, but the task is still far from finished
As Beijing residents enjoy the cleanest air since data became available in 2012, change is also in the air in the steel producing region 300km (186 miles) east of the capital.
Tangshan – where one-tenth of the country’s steel is produced – has slashed 36 million tonnes of capacity in the past four years, with a number of plants shut down in the city. Those that remain are frequently disrupted by important events such as the Communist Party congress in October, when all of them were told to suspend production for weeks.
But the closures are a boon for the bigger plants that are still running, with rising product prices and a steady stream of trucks from downstream clients waiting to be loaded, according to the manager of a state-owned mill.
“We saw a big improvement in profits last year, and the year-end bonuses will be paid soon,” said the manager, who declined to be named as he is not authorised to talk to the media.
He added that many privately owned mills were told to close because their facilities were not up to date or they could not get the government approvals needed.
“What is most striking is the adjustment in our product mix,” he said. “We’ll be producing more high value-added products like automotive sheet rather than rebar used for construction.”
Steel was the first sector targeted in the country’s structural supply-side reform, the brainchild of President Xi Jinping’s right-hand man Liu He unveiled at the end of 2015 at the annual economic work conference. It has since become the hallmark of “Xiconomics”.
But financial figures show that the steel industry is also the biggest beneficiary of the government campaign that has forced capacity cuts and cost reductions.
Combined profits of the country’s 93 largest steel mills jumped 613 per cent to 177.3 billion yuan (US$28.1 billion) last year from 2016, according to the China Iron and Steel Association.
Some mills registered astonishing growth in that period – including Xinjiang Ba Yi Iron & Steel’s 30-fold increase, SGIS Songshan’s 24-fold rise and Inner Mongolia Baotou Steel Union’s 23-fold growth.
The top leadership is hoping that supply-side reform will address problems such as the blind expansion of highly indebted state-owned manufacturers and stubborn overcapacity in areas such as steel, coal, aluminium, plate glass and shipbuilding.
The reforms are also part of a national development strategy to regain the country’s economic vigour.
In an analysis published in party mouthpiece People’s Daily in May 2016, an “authoritative person” widely believed to be Liu claimed that high-speed growth was a thing of the past, and sustainable economic development could only be achieved through structural adjustment and innovation.
Now, at the start of Xi’s second five-year term, the leadership is pushing a shift in focus to the quality, rather than speed, of economic growth.
“Without the policies to suspend production, we might have seen China’s GDP growth accelerating to 7.5 per cent from the 6.7 per cent in 2016,” Gao Shanwen, chief economist of Essence Securities, wrote in a recent research note.
The country’s gross domestic product actually expanded 6.9 per cent last year, which although lower than Gao’s projection is still impressive since it was the first acceleration of economic growth in seven years.
Gao’s recent study comparing 11 industries subject to the supply-side reform with other sectors found that the two groups had a highly similar growth trend from 2006 to 2015 – but that changed at the start of 2016.
That year, the growth rate of those subject to reform plunged from 6.3 per cent in 2015 to about 1 per cent. The other industries saw their growth rate speed up, from 6 per cent to 8.8 per cent.
Shutdowns to reduce capacity meanwhile resulted in bigger price rebounds than those seen in the four previous cyclical recoveries over the past 17 years. China’s producer price index grew 6.3 per cent last year after reversing a four-year contraction in September 2016.
Gao said domestic demand had seen cyclical recovery from the first half of 2016, but had been largely ignored. For instance, transport, warehousing and logistics – all of which are closely associated with industrial production – rose 9.1 per cent in that period, far exceeding growth in the two previous years and reaching the high seen in 2011.
“This aspect of growth has been overlooked,” Gao added.
Many international organisations and mainstream investment banks have recently been more optimistic about the country’s economic growth, revising up their estimates – a sharp contrast to the widespread fear two years ago that China was headed towards a hard landing.
“The significance of the supply-side reform is that it helped to prevent a round of debt crisis. Without it, the Chinese economy could have been in for a heavier blow,” said Iris Pang, chief economist for Greater China at ING in Hong Kong. “The administration’s orders to reduce capacity have proved to be very effective.”
But after mergers of state-owned firms and closures of some loss-making zombie enterprises that had been propped up by government support, the job is still far from finished.
“It will be difficult for state firms to get stronger if there is no substantial improvement of corporate governance,” Pang said. “But that area of reform is well down the list on Liu’s agenda.”
At the top of the agenda for Liu – a vice-chairman of the National Development and Reform Commission – and one of three economic priorities for the next three years, is preventing financial risk, including reducing macro leverage.
However, Nicholas Lardy, a senior fellow with the Peterson Institute for International Economics in Washington, did not believe China could have a Minsky moment – a sudden asset price crisis following an extended period of growth.
“China’s debt to gross domestic product ratio for non-financial corporates has plateaued and actually come down a bit, a huge change from the pattern of earlier years,” he said.