Li Keqiang has clearly never watched many zombie movies. Earlier this month the Chinese premier suggested “zombie firms” should take the courageous step of slitting their wrists. Yet as every zombie flick aficionado knows the only sure fire way to kill a walking dead is to destroy its brain.
Li was actually calling for local governments and state firms to be ruthless and shut down or sell off units that have been suffering from long-term overcapacity and losses.
At its Central Economic Work Conference last month, the government made overcapacity cuts its number one priority in 2016 as it seeks to complete the difficult transition of moving China away from an investment-led economy to a consumer-oriented one. This means past policies aimed at managing demand through increased investment have been replaced by structural supply side reforms.
The statistics released by the National Statistics Bureau earlier this week demonstrate the impact of this new strategic direction. The headline figures reveal that the country’s GDP growth rate dropped to 6.9% in 2015, its slowest pace in a quarter of a century.
Services now account for more than 50% of the economy for the first time ever, with fixed asset investment growth falling to 10% in 2015, its weakest level since the turn of the century. Particularly striking were the industrial production figures, which showed growth falling to 5.9% in December compared to 6.2% in November.
Economists have now reduced their 2016 GDP forecasts to between 6.4% and 6.5%.
Some brokerages meanwhile are advocating a replay of old style stimulus to ease the transition. Local investment bank CICC, for example, argues that equity market volatility and unanchored exchange rate expectations will quickly raise the investment risk premium and worsen the country’s short-term growth trajectory unless the government intervenes. “Structural reforms can only be conducted in a stable cyclical environment,” CICC warns.
Others disagree. They believe the government not only has plenty of room to manoeuvre, but is also facing a far more benign downturn than in the late 1990s, when the last big industrial upheaval occurred.
On that occasion the reform of the country’s inefficient state-owned industries led to job losses of roughly 21 million, although about 13 million are thought to have been reabsorbed into the workforce. This time round, the job losses are expected to be far lower. CICC estimates that three million workers could be laid off if the five industries suffering the worst overcapacity cut back production by 30% (these are steel, coal, cement, aluminium and flat glass manufacturing).
Economists believe workers facing redundancy will find it far easier to get new work in a market where a number of industries are suffering structural shortages and there is no longer an unlimited supply of migrant labour from inland provinces. Financial Times columnist Henny Sender shares this view, noting this week that China “has continued to create jobs at an impressive rate”, generating 7.2 million of them between January and June last year. She offered the example of private sector success story JD.com which has increased its workforce in two years by almost four times to 150,000. This e-commerce company has created fresh job opportunities by employing hordes of workers to deliver its parcels on motorbikes to online shoppers across China.
Sender is upbeat on another statistic too, saying it points to the rebalancing underway in the Chinese economy: “Many jobs are paying more, too. Except in the perennially depressed northeast of the country, incomes have been rising between 10% and 15% a year. In India, and most developed markets, by contrast, incomes have barely risen at all. Better-paid workers should also mean China can rely more on domestic consumption, instead of pouring yet more concrete in a country that has already built too many steel mills and cement plants.”
Still, the government also feels it has a role to play in helping redundant labour change career path. Earlier this month, Premier Li also told a symposium in hard hit Shanxi province that the central government is setting up a special fund to retrain workers and subsidise local government efforts to reduce overcapacity.
One netizen reflects on the hardships many endured after the so-called “iron rice bowl” system ended in the late 1990s, and state-owned firms began firing staff for the first time. “Most of the workers affected were over 40 and were unable to find new jobs. They suffered huge mental stress trying to support their children and elders. It was a very bitter time.”
Most economists agree that while the structural downturn may be less painful than 1998 it is likely to be far more prolonged because it is harder to restructure upstream industries. As recent global stock market volatility has shown, China’s increased economic power also means it is having a far wider impact on demand elsewhere – meaning exports to overseas markets could also suffer, and in turn, make matters still worse at home.
As to the overcapacity itself, Premier Li pointed to one of its more absurd aspects when he commented: “We have huge overcapacity in steel [an estimated 300 million tonnes] yet we have to import metal for the tips of ballpoint pens.”
Crude steel output fell 2.3% in 2015 (its first drop in 30 years), but Li’s real point is that much of China’s industrial overcapacity is heavily concentrated at the lower quality end of the value curve.
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