China’s Still Struggling with Steel Overcapacity

By Matthew McMullan
Aug 09 2016 |
Inside the hot strip mill pulpit at U.S. Steel Great Lakes Works in Michigan. | Photo courtesy U.S. Steel

All of the state subsidies it has supplied to its mills haven’t helped matters.

China has made a lot of promises to cut back on its big steel capacity problem. These promises came only after other countries started complaining and raising trade barriers (America included). But making good on them has proven to be a hard row to hoe, as there are competing priorities in China’s big, fractious steel industry, which claims approximately half of the world’s total steel output.

For some provincial governments in China, the burgeoning local industry is a point of pride. For others, it’s an important source of jobs; people in China can’t vote, so it behooves their rulers to keep them gainfully employed.

But whatever the reasoning may be, a big chunk of the Chinese steel industry is also heavily subsidized. 

You’ll notice this either dismissed in critiques of the many trade cases that American steelmakers have filed against dumped Chinese imports, or glossed over in straight news stories. But it’s true: China’s steel industry is massively subsidized by the state. Many of its largest steelmakers, which are among the largest in the world, are state-owned enterprises.

That means they don’t play by the same rules that companies in free markets do. If times get tough, a Chinese steelmaker can lean on the Chinese government to ease its financial pain.

You didn’t think China’s steel industry just willed its way to being the largest in the world by grit and moxie alone, did you?

so how is leaning on the Chinese government done? Let us count the ways:

Cash grants; equity infusions; government-mandated mergers and acquisitions; preferential loans and directed credit; land use subsidies; subsidies for utilities; raw material price controls; tax policies and benefits; currency policies; and lax environmental regulation.

In fact, there’s a whole report on this stuff, commissioned by a number of American steel industry groups (the Alliance for American Manufacturing is not among them). It’s full of illuminating examples, like this one, from its section on China’s environmental regulation:

In 2013, an investigative journalist wrote an exposé about two polluting steel mills in Zouping county, Shandong province. The journalist interviewed the director of a local Environmental Production Bureau, who claimed that he was unfamiliar with the small steel mills. When the journalist presented evidence that two local steel mills were polluting counter to standards, the official evaded responsibility by saying that this was not his concern. Checks with the Zouping Development and Reform Bureau found no record that the steel mills even existed; therefore, the bureau said they were unable to monitor production. A government official in the country claimed that the town is economically dependent on the two steel mills and that was why local officials turned a blind eye to the problem.

You can peruse (or download) the report here. Keep it in mind should you ever hear some jabroni claim that China deserves market economy status.