Contributed by John Mauldin, of Mauldin Economics:
All weekend long and this morning as I wake up in Monaco, the number of
disparate publications screaming at me about problems in China is just
overwhelming. Then I get myself up early to hear a speech by the esteemed
British economist Charles Dumas of Lombard Street fame, and I am confronted with
even more China. I have been watching China for a long time, expecting a crisis,
as I readily admit I simply do not understand a country that has defied so many
of the economic laws of gravity for so long. Some kind of return to normal
economic paradigms seems almost mandated, but the question has always been when.
Have the Chinese discovered some new control mechanism, found some different
levers to pull that they should share with the rest of the world, or will we see
them revert to something that looks more like whatever it is that passes for
"normal" these days? My bet has always been the latter.
That said, I do not expect China to slip silently away. It is here to stay,
and it will be bigger and more dynamic in the future, but the transition from an
economy driven by investment and massive debt into one more soundly based on
domestic consumption will not be easy. Today's
Outside the Box will
focus on two readings on China that came my way this weekend. The first is from
the formidable
Lyric
Hughes Hale, an expert on Japan and Asia, founder of
China Online,
who is married to the eminent economist David Hale. I have had the pleasure of
meeting with them and find them quite the economic power couple. She gives us a
tour of recent work on China. Perhaps, as she asserts, the current Chinese
economic model, based on cheap labor and cheap money, has run its course. The
challenges that face China are daunting.
Then we turn to a thought-provoking piece of analysis from the
Financial
Times that underscores Hale's central point. China is grossly inefficient,
with severe overcapacity in many industries: "The problem with subsidies
everywhere is they tend to support activity not outcomes and they become more of
a problem when they're just subsidizing inefficiencies…"
Just a few quotes from some of the other pieces I read in the last 48
hours:
China's shadow banking system is out of control
and under mounting stress as borrowers struggle to roll over short-term debts,
Fitch Ratings has warned. The agency said the scale of credit was so extreme
that the country would find it very hard to grow its way out of the excesses as
in past episodes, implying tougher times ahead. "The credit-driven growth model
is clearly falling apart. This could feed into a massive over-capacity problem,
and potentially into a Japanese-style deflation," said Charlene Chu, the
agency's senior director in Beijing." (
from Ambrose Evans-Pritchard
in the London Telegraph)
And then Stratfor writes:
A cash crunch over the past three weeks has caused
rates on loans between banks to spike to the highest levels since mid-2011,
drawing attention back to China's financial instability. Rates have since
subsided, but conditions exist for them to remain elevated over the next month
or beyond. Unlike two years ago, at least one bank has already defaulted on a
loan and there are rumors that other defaults have occurred. The emergence of
bank defaults poses a serious challenge to the central government's efforts to
clamp down on credit growth as part of its broader attempt to reform the
country's economy.
And finally, my friend Simon Hunt, who has been deeply involved in China for
decades and spends many months each year traveling throughout the country
meeting manufacturers, writes:
The credit crisis that we have been warning about
has arrived. Debt has reached such peak levels that it can no longer be put
under the carpet and rolled over for another day. The economy is having a
mini-recovery this month but will weaken again in July.
Not expecting a collapse, Simon does see that serious adjustments are needed
and believes they will be enacted:
Nor is there much of a risk that China's credit
markets will implode because banks have built up a US$3 trillion war chest which
is lodged with the PBOC and because [the] government has assets that can be
utilized. The question is how the pain will be shared out throughout the
country.
China always has my attention. I believe that Japan is forcing their hand
with its own massive quantitative easing. China may have the easiest answer of
all the major global trading countries, however. All they have to do is
gradually float their currency. As Charles Dumas noted, they have $4 trillion in
savings that will look for a home outside of China. A floating currency will
weaken the renminbi against major world currencies and help their export
businesses. It will also drive US Senators Schumer and Graham nuts, which is a
side benefit. A floating currency with no significant QE when the Fed is
printing with full abandon will be the strongest argument against the accusation
that China is manipulating its currency. Interesting times.
My speech at GAIM will be tomorrow, and then I will take a few days to
explore the south of France before heading off to Cyprus. I will speak at a
venue that is being arranged on Wednesday in Nicosia, and the event will be open
to the public. I will announce the time and place in this weekend's letter. And
then it's on to Croatia and a long weekend with David McWilliams and his family
on some idyllic little island in the middle of nowhere. Sounds divine. I hope
you are enjoying your summer, wherever you may be.
China’s Innovation
Hurdle
By Lyric Hughes Hale
At a
meeting in Chicago, the China-United States Exchange
Foundation released a report, "
U.S.-China Relations in the
Next Ten Years." Chicago Mayor Rahm Emanuel opened the meeting, chaired by
CH Tung, the former Hong Kong chief executive, as well as Henry Paulson, the
former U.S. treasury secretary. The mood was celebratory, especially after the
overnight announcement that the presidents of both countries would be meeting in
California in June, sooner than expected.
The idea of a bilateral U.S.-China free trade agreement was floated, in
effect to create a new G2. The two countries are currently so interdependent
that in some ways China and the U.S. are already one nation. I could only
imagine the reactions of Japan and the EU to a formal alliance of the world's
two largest economies.
My mind wandered back to the book I have been reading recently, Timothy
Beardson's
Stumbling Giant - The Threats to China's Future. In
particular I remembered one of the author's pithier comments. He said that when
commentators coined the new term 'Chimerica' to describe the interconnectedness
of both countries, they might have missed the allusion to the word chimerical or
fanciful.
In spite of their opposing points of view, both the conference participants
and Mr Beardson would agree on at least one point: the current Chinese economic
model, based on cheap labor and cheap money, has run its course.
The demographic challenge is the greatest of all. Here is a bracing forecast:
China's population in 2100 will shrink to 941 million, but the U.S. population
will grow to 478 million. Instead of four Chinese to every American, there will
be two. As Beardson notes:
Societies with steadily falling populations do not
normally have a sustained high rate of economic expansion. As China's population
is estimated to peak around 2026 and then to fall, there is a narrowing window
for China to continue its high economic growth rates.
Comprehensive reforms are needed in the Chinese economy. Absent government
policies that will quickly alter the longstanding behavior patterns of Chinese
consumers, the middle class and especially the poor will be incentivized to save
for retirement, for health care, and for education. Chinese leaders however have
fully subscribed to the mantra of gradualism, and what is missing is a sense of
urgency about the transition. While Mr Beardson does not completely dismiss the
possibility, he seems unconvinced that these changes, especially the transition
to an
innovation economy, can be made in time:
The model is comprehensively broken and it faces
multiple challenges. China is no longer the cheapest country in which to
manufacture. Currency movements have disadvantaged it, wages have risen, social
and environmental costs are increasing. Export margins were always thin, but
with rising costs there is a little buffer available to absorb the impact... If
the old cheap export and fixed investment model is broken, the alternative
should be a combination of the long-awaited innovation and domestic consumption.
However, the downturn showed that the country's technological and economic
competitiveness still lags behind world standards.
Being a superpower involves hard power, military might, soft power and
economic dominance. Of course, these are all related, and all are dependent upon
the ability to innovate. This, of course, has long been the strong suit of the
U.S.
Will China be able to meet the innovation challenge? One of the great
successes of Beardson's book is his chapter 'The Elusive Knowledge Economy' in
which he describes the current state of innovation in China, as well as the
historical and cultural factors that will affect its future development.
The world appears genuinely worried by China's
scientific advances. However, I will argue that the platform is lacking for
China to create an innovative economy. This is for reasons of education,
history, culture, ethics and politics.
His overall conclusion is stark:
'China is failing in innovation'
but he leaves open the possibility that this might change. He knocks down
false indicators, pointing out that China's high ranking in terms of R&D
spending has been falsely adjusted to reflect local living standards (PPP) while
the costs of laboratory equipment, for example, are really based on global
standards. These are the fine distinctions that explain a lot.
Based upon Beardson's long and successful history in Asia, unsurprisingly
Chinese culture is not neglected. Here he touches on a subject near to my heart,
which is the absolute necessity of freedom of information as the basis for
innovation. This is also the Achilles heel of Chinese soft power, which suffers
when freedom of expression in China is visibly repressed. According to the
South China Morning Post, recently university professors in China were
given a directive not to discuss the following seven topics: freedom of the
press, civil society, civic rights, historical mistakes by the Communist Party,
elite cronyism, and an independent judiciary. If universities are the cradle of
innovation, this is not the atmosphere in which critical and independent thought
can possibly thrive.
In other words, China may accumulate the funding,
build the laboratories and staff them, but it might not possess a
'non-hierarchical scientific culture, fertile institutional framework and
critical thinking' -- the necessary soft skills... If critical thinking and
social stability are seen as opposites in a zero-sum game, China will be the
loser. However, China can achieve much if it wills it.
Essentially, Beardson's argument is that China's heretofore-successful model
is about to run out of steam, and it will not be able to innovate its way out of
this corner without essential political reforms. Some would disagree and cite
China's economic success. They note that Haier has become a global company and
brand, and that the Internet in China in particular has created many innovations
and changed the lives of hundreds of millions of Chinese. Steve Blank, of the
Haas School of Business at Berkeley, recently visited web companies in both
China and Japan. He sees China at a turning point, rather than reaching a hard
limit, as he describes innovation with Chinese characteristics:
For the last 10 years China essentially closed its
search, media and social network software market to foreign companies with the
result that Google, Facebook, Twitter, YouTube, Dropbox, and 30,000 other
websites were not accessible from China. This left an open playing field for
Chinese software startups as they 'copy to China' existing U.S. business models.
Of course 'copy' is too strong a word. Adapt, adopt and extend is probably a
better description. But for the last decade 'innovation' in Chinese software
meant something different than it did in Silicon Valley. China Startups-The Gold
Rush & the Fire Extinguishers
Dan Harris, an intellectual property attorney and author at China Law Blog,
looks at another aspect of innovation that is often cited as evidence that China
is pulling ahead of the U.S. – the number of patent applications filed by
Chinese companies. In a recent article he cites the $18B China now pays for
licensing foreign technologies.
Those who say China is innovating often cite the massive numbers of IP
filings being made by Chinese companies in China. I use those numbers to counter
those who allege that filing trademarks, copyrights and patents in China is a
waste of time, but I do not think they show much regarding innovation.
But the new (to me anyway) numbers that I found
most salient are those relating to patent licensing. In 2012 (according to the
Financial Times) 'China had a record deficit in royalties and license fees of
nearly $17bn – compared with an $82bn surplus for the US'. China's $17bn deficit
is a result of China paying out $18bn in royalties and license fees and
collecting only $1bn in such fees. I see these numbers as extremely meaningful
and what they say is that China is having to pay huge sums to other countries
for innovations created outside of China and substantially less is being paid to
China for innovations created there. Indeed, it is quite possible that a large
chunk of the $1bn going into China for licensing and royalty payments is for
innovations created by foreign subsidiaries doing research and development work
within China.
Is China Really Innovating? The China Licensing Numbers Say
No.
Innovation can be negative as well as positive. China's cyber security and
hacking activities are front-page news. The Chinese are investing in U.S.
telecommunications companies, and it is a good bet, according to an official at
Google, that they have visited you already. According to Beardson however, a
good offense doesn't necessarily mean that you can play great defense.
Surprisingly, an American security researcher,
Dillon Beresford, claims to have successfully hacked into many highly classified
Chinese military facilities: aggressive behavior is not always matched by
proficient cyber security Indeed, he states that China has 'an almost total lack
of basic cyber defense'.
China is also behind on some key metrics in defense technology. To give just
one example, the traditional blue water navy paradigm leaves China far behind.
The U.S. has 19 aircraft carriers, including ten Nimitz class super carriers
that are powered by nuclear reactors. China has one aircraft carrier, the
Liaoning, which is actually a rebuilt Soviet-era ship, and it is not
nuclear-powered.
Health care is another area where the U.S. leads the world in innovation,
even if our own citizens pay a high price. China has more pressing concerns
however. Lack of access to basic care has erupted into violence against health
care workers in China, as illustrated in Yanzhong Huang's seminal article "The
Sick Man of Asia." In spite of the high density of mobile technology, which
could be an ideal platform for telemedicine, there are simply not enough trained
health care workers to make this a feasible alternative to bricks and mortar
hospitals, and can never replace long term care for China's rapidly growing
population of over 65's. Beardson muses that the aforementioned aircraft carrier
might have to be scrapped in order to pay for housing for 150 million elderly
Chinese with no place to go.
Worries that China will fizzle out are not new. Back in 2011 I wrote an
article … entitled
China's 99%: Why China Will Not Surpass the United States.
Books on China and its relationship to the rest of the world abound. A quick
look at Amazon for titles by country returned the following results:
U.S. 1,631,884
Great Britain 502,241
China 398,784
France
298,075
India 220,043
Canada 201,182
Japan 199,255
Mexico
195,511
Germany 130,885
Russia 74,433
Iran 22,866
Iraq
24,475
Afghanistan 13,956
China is certainly top of mind in the U.S. However, if you are going to read
one book on China this year,
Stumbling
Giant should be it, because of its depth and scope and the even-handedness
of its author. I have focused on the subject of innovation, which is a constant
throughout the book, but other vital topics are covered as well, such as the
environment, military power, and China's relationship with the rest of the
world. Beardson recounts vital history that is largely unknown to Westerners. I
particularly liked the section on China's relationship with Russia, which was
disconcerting – I now feel that Russia has more to fear from Chinese border
disputes than Japan.
I would have liked to have seen maps, given the geographically challenged
nature of most Americans, and more graphs, given my economic propensities. The
addition of photographs might have turned the book into an encyclopaedia, but
they would have added to the narrative as well.
Ever since we gained the top spot, Americans have been obsessed with the
possibility that other countries might upset our global dominance. After World
War II we actively feared the Soviet Union. Then in the 70's we worried that
Japan would be Number One, until it suddenly wasn't. Now we look to the Chinese
to fill the competitive void.
In spite of a spate of reports from the OECD about China's economic
dominance, and breathless media coverage declaring that China will overtake the
United States any moment, a sense of reality is returning. China faces a myriad
of huge challenges. Their traditional markets have slowed down, and their GDP is
falling. A real estate bubble, civic unrest, and massive corporate and local
government debt are worrying signs.
While the size of China's economy in absolute terms could be larger than that
of the U.S., it certainly isn't on a per capita basis, and that's what counts in
terms of satisfaction of a country's citizenry and the stability of its
government. China's income inequality is now greater than in the US. Which might
be all right if income opportunity were the same, but corruption blocks equal
access.
Stumbling Giant should convince you in a highly nuanced way
that China is far from unassailable, but we should all hope, very fervently,
that she keeps her balance.
Lyric Hughes Hale is the author of What's
Next and a contributor to a range of publications, including the
Financial Times, Los Angeles Times, USA Today, Current History,
and
Institutional Investor. China Takes Off,
published in 2003 and written
jointly with her husband David Hale, is one of the most oft-cited surveys of
China's economic ascendency. Ms. Hale studied Japanese at Northwestern
University and graduated from the University of Chicago with a degree in Near
Eastern Languages and Civilizations. She has lived and studied in Europe, Asia,
and the Middle East.
Chinese industry: Ambitions in
excess
By Jamil Anderlini
Overcapacity fuelled by subsidies threatens the world's second-biggest
economy
Shi Zhengrong became known as the "sun king" around the time he was named
China's fifth-richest man in 2006. Barely three years later,
Suntech, his New
York-listed company, was the world's largest solar panel-maker, producing enough
solar cells each year to power 1m energy-guzzling US homes.
To struggling manufacturers in the US and Germany, Suntech was part of an
unstoppable juggernaut that
undercut markets, flooded the world with ultra-cheap products and put
competitors out of business. Indeed, the European Commission is
threatening to raise import
tariffs on Chinese producers for allegedly selling solar panels in Europe
for less than they cost to make.
But China's business model is far from unassailable. In March,
Suntech filed for bankruptcy
protection. From a market value of $16bn at its peak, the company is now
worth about $180m. The
sun king has been dethroned
as chairman.
In fact, the solar industry is only the most pronounced example of broader
overcapacity in China. Its rise and fall has followed a pattern that is becoming
familiar across the world's second-biggest economy.
The problems stem from China's industrial policies and a vast array of
subsidies that allow whole sectors to spring up overnight.
Ambitious local officials
are keen to lavish government money on what they hope will be success
stories that can further their careers.
"When you have administrative measures you get huge overcapacity and this
country has created overcapacity in a whole lot of areas," says Hank Paulson,
former US Treasury secretary, who often visits China. "It's not just clean
technologies; steel, shipbuilding we can name all the areas."
From chemicals and cement to earthmovers and flatscreen televisions, Chinese
industry is awash with excess capacity that is driving down profits inside and
outside the country and threatens to further destabilise China's already shaky
growth.
It is not a new problem; it was exacerbated by Beijing's response to the
financial crisis in 2008 and continues to worsen despite years of government
efforts to curtail it. China produces nearly half of the
world's aluminium and
steel and about 60 per cent of the world's cement but new production is
being added rapidly, even as the economy cools.
China's output expanded 7.8 per cent last year – its slowest pace in 13 years
– and after a brief rebound in the fourth quarter, growth has slumped further in
the first half of this year.
Aluminium prices have
dropped precipitously in
recent years and more than half of China's aluminium producers operate at a
loss. Despite this, smelters are being built nationwide, even though producing
the metal requires huge amounts of energy, water and bauxite, all of which are
scarce in China. Foreign producers are also being forced to close because of the
excess supply spilling out of China.
Only about two-thirds of cement capacity was used last year, according to a
survey from the China Enterprise Confederation.
For global manufacturers, the China effect over the past decade has been
fearsome. It has destroyed jobs and capacity all over the world, shuttering
factories in competitor nations.
But in almost every sector where China's low-cost goods have come to
dominate, something strange has happened. Once the bulk of global manufacturing
in a given industry has moved to China, overcapacity quickly follows and these
sectors begin to cannibalise themselves. Suntech was a prime example.
Li Junfeng, a senior energy policy adviser at China's state planning agency,
likens the country's solar sector to a patient on life support and says at least
half of global solar capacity needs to be shut. "Overcapacity results in
low-price competition; all industries experiencing overcapacity have this
problem," Mr Li says.
An older example is the mobile handset market, which the Chinese government
set out to dominate a decade ago with national champions sporting names such as
Panda, Konka and Ningbo Bird.
Even in China not one of these companies is a household name today. But many
analysts had once predicted these low-cost producers would rise to become the
Chinese equivalents of Nokia, Ericsson and Motorola.
The Chinese government, particularly local authorities, poured vast subsidies
into these companies in the hope of turning them into global forces but they all
eventually lost the race to develop new technology.
"There was a lot of talk back then about how these companies would become
great new Chinese technology giants and they certainly threatened their
international competitors by eating away at the low end of the value chain,"
says Anne Stevenson-Yang, research director at J Capital Research. "But over
time Chinese companies tend to remain factories that manufacture huge amounts of
low-end, undifferentiated stuff."
Several studies have found that the ability of Chinese industry to dominate
global manufacturing in certain sectors is largely due to subsidies, most of
which are provided by local and provincial governments.
In a recent study, Usha and George Haley, US-based academics, studied how
Chinese steel, glass, paper and auto parts producers turned from bit players and
net importers to the world's largest manufacturers and exporters in just a
couple of years.
In each of these highly fragmented, capital-intensive industries, labour
accounted for between 2 and 7 per cent of costs and the vast majority of
companies enjoyed no economies of scope or scale.
"Our findings contradict the widespread belief that China's enormous success
as an exporting nation derives primarily from low labour costs and deliberate
currency undervaluation," says Usha Haley. "There is enormous overcapacity and
no gauging of supply and demand and we found that subsidies account for about 30
per cent of industrial output. Most of the companies we looked at would probably
be bankrupt without subsidies."
Besides direct cash infusions, many local governments in China provide very
cheap land, cheap credit, discounted utilities and tax breaks to state-owned and
private companies that set up in their backyards.
In a research report on government subsidies to non-state owned Chinese
companies, Matthew Forney and Laila Khawaja from the research consultancy Fathom
China found that most companies surveyed received some form of direct
subsidy.
"The bottom line is that officials who climb the [Communist] party ladder
fastest are usually those who oversee the most flashy investment projects and
the fastest growth," Mr Forney and Ms Khawaja say. "Offering subsidies to
private companies looking to expand can help localities clinch an investment
deal that brings jobs and tax revenue."
. . .
Some of the
most heavily subsidised
companies in China are automakers, such as Chery, BYD and Geely. Some
analysts predict they will ultimately meet the same fate as the handset
makers.
Overcapacity in the auto industry is rampant and in the case of Geely, which
bought Volvo in 2010, more than half of its net profits came directly from
subsidies in 2011. In fact, subsidy income for Geely that year was more than 15
times greater than the next biggest source of net profits – "sales of scrap
metal" – according to analysis from Fathom China.
In the case of Mr Shi the sun king, subsidies and grants from a local
government were crucial in convincing him to return to China from Sydney, where
he lived in the suburbs and drove a Toyota Camry to his job as an executive in a
solar start-up company. Mr Shi and Suntech both declined to comment. In 2000,
the government of Wuxi, near Mr Shi's birthplace in eastern China's Jiangsu
province, was eager to establish a solar industry so officials set out to lure
him back with promises of support.
"Suntech is a seed sown by the Communist party committee of the Wuxi
government," Mr Shi said in a speech in March 2011 to welcome Yang Weize, the
former Wuxi party secretary, to Suntech's new headquarters in the city. "During
Suntech's start-up phase we experienced intense pressure but Wuxi continuously
watered and nurtured this seed."
Thanks partly to his success in fostering Wuxi's solar industry, Mr Yang was
promoted in 2010 to become the party secretary of Nanjing, one of China's
largest cities. Throughout the country, party officials take note of this kind
of meteoric rise and arrive at the conclusion that they too can reach great
heights by subsidising businesses.
This drives intense inter-regional competition and a race to the bottom
between local governments, which often decide not to enforce environmental,
safety and labour laws in order to keep jobs and taxes (and kickbacks) in their
jurisdictions.
Another big problem for almost every industry is that companies' investment
and growth plans have been predicated on the belief that the government would
never allow growth to drop below 8 or 9 per cent.
This perception was encouraged by Beijing's response to the 2008 crisis, when
it launched a Rmb4tn ($650bn) stimulus, unleashing a construction boom to prop
up stumbling growth.
. . .
Today, as growth slips towards 7.5 per cent and lower, China's new leaders do
appear more determined than their predecessors to tackle overcapacity.
"We intend to accelerate the transformation of the economic development model
and vigorously adjust and optimise the economic structure," said Zhang Gaoli,
the executive vice-premier in charge of the economy and a member of the
all-powerful Standing Committee of the politburo, in a speech this month. "We
will strictly ban approvals for new projects in industries experiencing
overcapacity and resolutely halt construction of projects that violate
regulations."
However, Beijing has tried for years to tackle this problem but meets fierce
resistance from local governments trying to protect their local "seeds".
Analysts and officials say bankruptcies such as that of Suntech are still
unusual and tend to happen only when a company is beyond rescue or local
officials want to seize ownership. But the scale of overcapacity and the
slowdown in Chinese growth suggest many more people will suffer the fate of the
sun king.
Mr Shi remains in Wuxi and is still the largest single shareholder in Suntech
but, according to Chinese media, he is the subject of an investigation into his
role in the company's fall.
"The problem with subsidies everywhere is they tend to support activity not
outcomes and they become more of a problem when they're just subsidising
inefficiencies," says John Rice, vice-chairman of General Electric, who heads
GE's global operations from Hong Kong.
"If you do that in perpetuity it just increases the size of the anchor that
drags down growth."
Additional reporting by Leslie Hook
Steelmakers struggle to shut down capacity
When economic growth in the west evaporated during the global financial
crisis, China rode to the rescue with a colossal stimulus package that helped
the global economy out of the downturn,
writes Leslie Hook.
Powered by a binge in government spending on infrastructure and construction,
as well as an injection of cheap credit into industrial sectors, China's economy
steamed along, growing 8.7 per cent and 10.3 per cent in 2009 and 2010.
But today the price of that stimulus is becoming more apparent. Five years
on, many of the industries that were beneficiaries of the stimulus – from steel
to shipbuilding to metals smelting – are bloated with overcapacity.
For these sectors, the recent slowdown in China's economic growth spells
serious losses and a painful process of elimination.
"Five years ago, steel was an industry of huge profits," explains Zhang
Xiaogang, who heads Anshan Iron and Steel, China's fourth-largest
steelmaker.
"Precisely because it was so lucrative, there was a lot of repetitive
construction and a huge amount of assets pouring into the field, causing the
overproduction nowadays."
Those boom days derailed the long-planned consolidation and reorganisation of
China's steel sector, which has for decades been an illusive goal for Beijing's
policy makers.
Today, even though China's steel production is running at record levels, only
about 80 per cent of the country's production capacity is being used. Industry
chiefs and government officials say more excess capacity needs to be shut down
in order for the sector to come back into balance.
But this is easier said than done. Previous efforts to consolidate the steel
sector have been sidelined repeatedly.
Regardless of their profitability, steel mills have proved to be almost
impossible to close down because of their role in providing employment and
providing tax revenues to cash-strapped local governments.
"It is very difficult to find an effective remedy for China's production
overcapacity problem," says Mr Zhang.
"Which company are you going to tell to shut down? Do you choose the ones
that are losing money, or are heavily polluting, or are violating industry
standards, and make them close? This part is quite hard."
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