Lightening Up China’s Heavy Industry

Having failed to cut the overcapacity in China’s heavy industries from the top down, Beijing is going to try to do it from the bottom up. The State Council — China’s cabinet — has approved a plan  to give more power to market-forces to reshape smokestack industries such as steel and cement making, shipbuilding, aluminum smelting and sheet glassmaking.

All have been plagued by a glut of overcapacity that has debilitated profits and left firms in those sectors dependent on government subsidies to cover their losses. A quarter to a third of capacity in the aluminum and steel industries is unused, for example. The big state-owned enterprises had been charged with consolidating those and other heavy industries. In the event it was just the bloat that got consolidated. Earlier this year the industry ministry put more than 1,400 companies in 19 industries on a hit list of those instructed to cut capacity.

Apart from encouraging the private sector to apply the profit motive, the State Council also approved environmental and quality standards as a way of eliminating smaller, inefficient and outdated plant (a stratagem used with some success in the coal, brick making and rare earth industries), tax incentives for companies to move production offshore, and a ban on new project approvals within China. It is also hoping more growth and domestic demand will absorb more of what capacity is left after all that.

One thing central government does need to do is stop growth-minded provincial and municipal officials with an eye on creating jobs and tax revenue at any cost from providing incentives to companies to set up shop locally regardless of the viability of projects. Industry and IT vice-minister Su Bo said last month that “administrative interference” in industry was one of the biggest causes of overcapacity. Su particularly pointed to the market distortions caused by preferential land allocation, an administrative measure directly in the gift of local officials.

China has another urgent need to modernize its heavy industry. Much of it is still in the middle and lower reaches of the global value chain. Yet its cost competitiveness is increasingly eroded by lower wage economies elsewhere in Asia. What is increasingly been referred to as “technology- and talent-intensive” manufacturing is what China needs. An injection of that into heavy industry is more like to come from entrepreneurial private companies than the old state-owned heavyweights. “Core technology and enterprise management must make breakthroughs to deliver growth through innovation,” said the State Council in a sentence that could have come straight out of any American business school.

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