More factories close as China’s expansion hangs in the balance
IN POCKETS of China’s industrial heartland, a government push to clean up the environment and cut excess output is starting to bite: Furnaces have gone cold, the lights have been switched off, migrant workers are drifting back home.
Liu Xiaoping, a resident of the sprawling, smoggy, steel-making hub of Jinan in the north-east is among the campaign’s collateral damage. Standing in a cul-desac where most factories were closed on a recent weekday visit, he says officials ignored his pleas for more time to comply with regulations at his 20-yearold plastic mould business. As officials threatened to cut off electricity, Liu shut down his factory before they could do so.
“It was like a knife falling,” Liu said, claiming that the chop in mid-September left him with one million yuan (RM684,000) of idle equipment and 10 unemployed staff in a city where more than 7,000 businesses labelled “messy and polluting” have been targeted for clean-up or closure. “None of us know what to do.”
While it may be little consolation to Liu, the impact from efforts to cut capacity is proving double edged – factory profits have surged and reflation has taken root across industry, giving a much needed boost to indebted companies. Thirdquarter gross domestic product numbers due Thursday are likely to show the world’s second-biggest economy remains in a sweet-spot, with a 6.8 per cent pace of growth expected, according to a Bloomberg survey of economists.
And if comments made by Zhou Xiaochuan, Governor of the People’s Bank of China are any guide, a shift in the economy to consumption and away from investment and exports may yet produce an even stronger performance. Speaking in Washington late Sunday, Zhou said he hoped that a seven per cent expansion for the second half was possible, according to a statement.
China’s reflation also continues, with producer prices rising 6.9 per cent in September from a year earlier, data released Monday showed.
Still, the drag from industrial re-structuring may intensify. Economists estimate the expansion will slow to 6.4 per cent next year and 6.1 per cent in 2019.
For China’s leadership – gathering last week at the 19th Communist Party Congress – cleaning the noxious skies and filthy rivers has become a priority. In contrast to previous leaders’ growth-at-all-costs approach, President Xi Jinping and his premier have declared war on pollution, spurred by the anger of citizens enshrouded in smog that’s sometimes more than 50 times more toxic than levels deemed safe by the World Health Organisation.
That political will overlaps with an economic need to rein in surplus production of steel, aluminium and other basic materials after years of overinvestment. How and when that capacity gets replaced will be a key factor in the economy’s performance beyond 2017.
“The last time we saw this kind of effort to cut capacity was at the end of the last century, when Premier Zhu Rongji was determined to shut down money-losing state enterprises,” said Tao Dong, vice chairman for Greater China at Credit Suisse Private Banking in Hong Kong. “There’ll be short-term consequences for growth and jobs but it’s hard to quantify at this moment, all depending on whether the capacity will remain shut after the Party Congress.”
Capacity shutdowns are rippling across the nation with officials estimating hundreds of thousands of small enterprises may be closed. State enterprises aren’t being spared the knife either, though policy makers are cushioning the impact of those cuts.
Jinan Steel, a unit of Shandong Iron and Steel Co. with about 20,000 employees, was among those shuttered in July, the furnaces falling cold. Many workers though were relocated to a group plant at the coastal town of Rizhao, about four hours’ drive away. Premier Li Keqiang visited the company in April and told workers that while the closure would take a toll, the nation would work to ensure employees are shifted to new positions rather than laid off.
Stock filings show the company planned lower production of crude iron and steel this year than last. Calls to the company for comment went unanswered and it didn’t immediately respond to emailed questions.
In Zouping county, about a two-hour drive from Jinan, privately-owned China Hongqiao Group Ltd., the nation’s biggest aluminium smelter, said in August that it would cut annual production capacity by 2.68 million metric tons, or about 29 per cent of the total.
In response to questions from Bloomberg, a Hongqiao spokesperson said there have been no redundancies, early retirements or forced holidays at the company.
More interruptions loom. Jinan’s government will close most construction sites until further notice to cut pollution in coming months, the official Xinhua News Agency reported last Monday.
In its latest report based on anecdotes on the economy gathered from more than 3,000 firms, China Beige Book found that progress on reducing debt and industrial capacity is proving elusive. Steel plants are still increasing output while they can ahead of a separate set of temporary, winter-time production curbs designed to lower pollution.
That may be because remaining furnaces are working overtime. Morgan Stanley estimates net capacity reductions of steel– accounting for new plants as well as those shuttered – will reach nearly 200 million tons in total for 2016 and 2017 combined.
That exceeds Japan’s capacity of 130.5 million tons, and isn’t far off the European Union’s 222 million tons.
The country’s last wave of mergers and closures of moribund state enterprises, in the late 1990s under then-Premier Zhu, cleaned up corporate balance sheets, improved efficiency, and paved the way for the following decade’s economic boom, says Cui Li, head of macro research at CCB International Holdings Ltd. in Hong Kong. — WP-Bloomberg
The last time we saw this kind of effort to cut capacity was at the end of the last century, when Premier Zhu Rongji was determined to shut down money-losing state enterprises. Tao Dong, vice chairman for Greater China at Credit Suisse Private Banking in Hong Kong