Reluctant local gov'ts fear debt, job cuts
The European Union's top business group in China said Monday industries in the country have been suffering from overcapacity since 2009, and are causing far-reaching damage to Chinese and global economy.
While China's steel exports still account for a small percentage of its total production, its sheer size - more than 1.5 times the U.S.' total production - means that it still has a significant influence on world markets, the chamber said in a report on China's overcapacity released Monday in Beijing.
"The European Chamber appreciates the Chinese government's positive attempts to deal with the issue of overcapacity. At the same time, much remains to be done to bring the problem under control and to ensure that it does not subsequently re-emerge," chamber president Joerg Wuttke said in a statement.
Trade tensions and anti-dumping cases can also emerge in the U.S., India and member states of the Association of Southeast Asian Nations, the report said.
Preemptive warning
"The chamber's report shows that the EU wants to reduce the chance of a potential increase of Chinese exports as China's overcapacity becomes more serious," Tian Yun, editor-in-chief of the Beijing-based Macro China Information Network, told the Global Times Monday.
A better structured Chinese economy will benefit both China and the EU, which itself has been facing slower growth and shrinking demand, as well as job cuts.
The chamber said a number of factors affected overcapacity in industries such as steel, electrolytic aluminum, cement, flat glass, shipbuilding and refining include local protectionism and the fragmentation of industries driven by regionalism, weak regulation enforcement and low input prices due to government policies.
Experts said potential trade tensions may rise even if much of the goods suffering a glut are considered low-end goods.
"Many EU member economies also produce low-value products, and these countries are on a collision course with Chinese exports should the overcapacity issue remain unresolved," Tian told the Global Times.
"In terms of middle-end goods, Chinese companies have advanced remarkably in recent years, increasing the chance of a clash with European firms," he said.
In February, Brussels launched new anti-dumping probes into Chinese steel imports.
"Overcapacity is a worldwide issue, and the Chinese government and enterprises have stepped up efforts to restructure the steel industry and cut excess capacity," Shen Danyang, spokesperson for the Ministry of Commerce, said at a briefing in Beijing on February 17.
China's central government has listed overcapacity and the closure of debt-ridden "zombie" firms as one of its key policy priorities for 2016, and it has unveiled plans to cut crude steel production capacity by 100 million to 150 million tons in January.
Tough choices
However, local governments have been slow to respond, because they fear debt and unemployment problems, experts said.
Calculations made by the Economic Observer in January show that a cut in steel production would lead to a loss of about 500,000 jobs.
"I believe zombie firms will continue to exist because they provide stability to families, the bedrock of society," a January report in the Beijing-based China Economic Weekly cited an executive at a company at one overcapacity-stricken industry as saying.
The executive said one-third of his county's residents are directly or indirectly employed by the company.
Wuttke said local protectionism - which plays a significant role in allowing inefficient companies to avoid being closed - is causing an overcapacity. "Everyone wants to wait it out, but you cannot change solve overcapacity without causing unemployment," Wuttke told the Global Times.
It is misleading to believe that allowing zombie firms to operate will cost less money than removing people. Provide them training so they can move on to the services sector, Wuttke added.
