Editor's Note:  

The severe industrial overcapacity situation in China has attracted a lot of attention around the world. Chinese policymakers have stated on various occasions that they are determined to curb overcapacity in industries such as steel, cement and coal, but the question is whether such an effort will result in massive job cuts and undermine social stability in China.

The issue of curbing overcapacity has been one of the hottest topics during the ongoing two sessions. Li Yizhong, former head of the Ministry of Industry and Information Technology (MIIT) and Li Yining, a renowned economist, shared their views on the subject on the sidelines of the two sessions.

Li Yizhong

Some people said in previous years that overcapacity in China's steel sector was only a passing issue and that the difficulties would prove temporary, but now few people think like that.

The steel, coal and cement industries face clear overcapacity problems, which has been exacerbated by the temporary overcapacity problems in the sheet glass, electrolytic aluminum, and shipbuilding sectors.

China's steel output has begun to drop back from peak levels and this is expected to continue in the future even if China's economic slowdown continues, suggesting the problems faced by the sector are not just temporary.

Easing overcapacity in the steel industry is no longer just an administrative requirement - it's a necessity for steel enterprises, and one they need to comply with voluntarily. Given the sharp drop in steel prices and the losses that are being suffered by most Chinese steel companies, the China Iron and Steel Association (CISA) has conceded that the industry has an overcapacity problem, even though the CISA was unwilling to admit that previously. The CISA's steel products price index is now at nearly half the benchmark level it was at 21 years ago and almost all the large and medium-sized enterprises among CISA members have seen their primary business mired in losses for several years.

Meanwhile, approvals for new steel projects have been halted. A policy adopted by the MIIT in the past was a replacement plan: setting up new large-size steel projects but closing several small-size factories with high energy consumption at the same time, making sure that total steel capacity would decline or at least remain unchanged. However, the implementation of the policy was not smooth, with some large-size steel projects having been launched but small-size factories not necessarily having been closed.

The government is expected to adopt a market-oriented and more comprehensive approach to curbing overcapacity in the future. For instance, the MIIT issued a policy in the past to eliminate all blast furnaces with a capacity of below 400 cubic meters to curb overcapacity, but steel enterprises can improve existing blast furnaces to meet the standard and easily evade this policy restriction. The new round of capacity cuts is expected to adopt a comprehensive standard including indexes like energy consumption, material consumption, product quality and environmental protection.

So how can the goal of curbing overcapacity be achieved? Each provincial government should set up a target for capacity cuts and a timetable for certain enterprises to reduce overcapacity. The plan could be submitted to the MIIT and the National Development and Reform Commission, and the two ministries could coordinate with relevant departments to meet the overall national goal.

Li Yining

China will inevitably have to deal with the problem of finding new jobs for laid-off workers as the country closes factories and cuts production capacity. However, offering subsidies to laid-off workers might make more sense than offering subsidies to enterprises that are burdened with overcapacity and suffering losses.

Local governments in regions with serious overcapacity problems are likely to face great financial pressure during this process, but such difficulties must be addressed. The central government can seek to make overall funding arrangements among different regions but the country's efforts to curb overcapacity should not be stopped due to financial pressure. Besides relocating laid-off workers, the country also needs to promote training for them, as well as technological innovation. This would be a good way to improve the quality of Chinese laborers.

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