Category / Translations

by Andrew

Zhao Lingmin on the roots of Chinese elite support for Trump

A definitive overview of this question is over at Ma Tianjie’s Chublic Opinion, but one of the sources in that piece I thought was worth digging into a bit more. It’s a column by Zhao Lingmin, originally published on the FT Chinese site back in October, that focuses on what the enthusiasm for Trump says about Chinese society. My translation follows:

Compared to his American supporters, Trump’s Chinese supporters have two notable differences. One, they have “true love” for Trump. Even though some Americans do not like Trump personally, or even despise him, they have still decided to vote for Trump because of their anger at the status quo. Trump’s supporters in China are not deciding who to vote for, and there are no real interests at stake; many of them simply like Trump himself. Second, it is widely recognized that some of Trump’s supporters in the US are not of high social status and belong to the lower middle class, so Hillary Clinton could say that half of them are “deplorables,” or “people who feel that the government has let them down, the economy has let them down.”

But among Trump supporters in China, there are some successful people and members of the elite: they are well-educated, rational, with high social status. On this point, you only have to look at WeChat or Zhihu; in those places public criticism of Trump’s remarks is rare, and there are a lot of people who excuse them or give them a positive spin.

Why is the Chinese elite not like the American elite in opposing Trump? There are different national conditions, there are differences of opinion, but in my opinion the most important difference between the two countries’ elites is the different environments they have grown up in. This has led some Chinese elites to endorse Trump’s views on political correctness, terrorism, Islam, and other issues.

Trump has been most criticized for his undisguised degradation and humiliation of immigrants, Muslims, and women, which for many American elites, whose awareness of equal rights comes from their baptism in the civil rights movement, is completely unacceptable. The recent revelation of the recording in which Trump insults women touched the bottom line of American society, and made some of the rest of the elite draw the line. By contrast, some of China’s elite, having risen up in an atmosphere of social Darwinism, do not find Trump’s statements so offensive as to cause anger and condemnation—although they do not quite endorse them either.

The past 30 years of China’s economic growth and social development began after a period of chaos [i.e., the Cultural Revolution], and there was no Enlightenment-like intellectual movement. Government officials, in order to mobilize reform, exaggerated the evils of the old benefit system as “everyone eating from one big pot,” which, with the assistance of some scholars, led to an almost complete social consensus that a market economy means completely free competition. With no restraint from ethics or rules, the “law of the jungle” that the weak are prey to the strong became nearly universal in society. Amid all the worship of the strong and disdain for the weak, an atmosphere of care and equal treatment of disadvantaged groups has not formed. Therefore “political correctness,” which is for the protection of vulnerable groups, basically does not exist in Chinese society, and the language of discrimination, objectification of women, and mockery of disabled people is everywhere.

This way of thinking is further reinforced among some Chinese elites: they succeed because they are better able to adapt to and dominate this kind of environment. In this process, they are hurt by others, they hurt others, and gradually they develop a heart of stone and a feeling of superiority—that their success is due to their own efforts and natural abilities, and the losers in competition must be those who don’t work hard because they are lazy or have some other problems. Therefore, they believe in free competition and personal striving even more than ordinary people, and also feel more strongly that poor people deserve their low position, are more wary of the abuse of welfare by lazy people, and are more supportive of Trump’s attacks on political correctness.

Many Chinese elites feel that the Democratic Party and the left represented by Hillary Clinton has turned a blind eye to the many problems of the black community, such as single mothers and the high crime rate, and put the blame on society rather than black people’s own issues. In order to protect the rights of transgender people, they have gone so far as to ignore public safety and allow them to freely choose whether to use male or female toilers. In the face of this obsession with political correctness, Trump has the courage to face reality and is willing to risk offending people in order to tell the truth—this is honest and admirable.

As for Trump’s insulting remarks about women, the Chinese elite also thinks that this is not such a big deal. You could say that many male members of the Chinese elite are the biggest beneficiaries of the current imbalance between men and women in China. The deformed marriage market has made them insufferably arrogant, and in terms of objectifying and demeaning women they are much worse than ordinary people. In the case of a male journalist who raped a female intern, most of the male colleagues supported him, and maintained that the woman was taking revenge on him for refusing her. In the case of a male professor who was suspended for molesting female students, many colleagues and students argued that the punishment was excessive, and some even doubted the female students’ mental state. In fact, a not inconsiderable number of men do not think there was anything fundamentally wrong with the actions of the journalist and the professor. People who have grown up in this kind of social atmosphere naturally cannot understand why Trump has been universally condemned for some dirty talk.

In addition, the vigilance against Islamic extremism displayed in Trump’s speeches is quite similar to the worldview of many of China’s elite. Since 9/11, “Islamophobia” has become a worldwide phenomenon, and China is no exception. Chinese Islamophobia has domestic causes, but it also cannot be separated from the impact of international events, particularly the refugee crisis and frequent terrorist attacks in Europe over the last couple of years. This has made many people shake their head at the European left, and think that Muslims are just using their high birth rate to occupy Europe and destroy the foundations of European civilization. European intellectuals and elites are so burdened by multicultural policies and political correctness that they cannot reject any plea from the refugees, do not dare to point out any of the issues with refugees, and even downplay crimes committed by refugees. Such naivety and wishful thinking in the end is nothing but nourishing a snake in one’s own bosom. Because of these views, Trump’s talk about banning Muslims and attacking terrorists is more welcomed by Chinese people than Hillary Clinton’s rhetoric about inclusiveness and cooperation.

Looking at the personal style of the two candidates, American elites do not like the fact that Trump’s speech is often illogical, vulgar and extreme. But in China’s imperfect market system, many elites come from rough backgrounds. Furthermore, decades of revolutionary ideology have made the whole society valorize coarseness, slovenliness, and lack of hygiene. This makes many people see Trump’s vulgarity and inconsistency as amusing, straightforward and honest. Hillary Clinton’s image as an orthodox politician, by contrast, leaves many people cold.

by Andrew

China’s Northeastern Rust Belt is headed for demographic crisis

We’ve been hearing a lot about the economic and political problems of America’s Rust Belt lately, so perhaps this is a good time to take a closer look at the slow-motion crisis that is unfolding in China’s northeastern Rust Belt. The Chinese newspaper Diyi Caijing (aka Yicai Media or China Business News) has over the past two months run a four-part series about the emerging demographic problems in the Northeast, and I think it pulls together what is known about the issue quite well.

This is harder than it might sound: a number of Northeastern cities have stopped publishing population figures in recent years, and data from the 2015 mid-cycle census update has not yet been published. But it seems more likely than not that the severe economic slowdown in the Northeast over the past couple of years has worsened the demographic trends that were already underway. When more data becomes available, which is likely to happen in 2017, the extent of the problem should become quite obvious. (For previous coverage of related issues, see: my maps of six decades of population flows in China; some history of the mass migration into the Northeast in the early 20th century; and portraits of industrial decay outside the Northeast)

Below I translate excerpts from all four articles, which I’ve reorganized a bit by topic (the original reports are here: Part 1, Part 2, Part 3, Part 4).

The first big problem is a dramatic decline in the birthrate:

The Northeast has a low birthrate, and population growth is stagnating. As early as 1982, the the total fertility rate in the three provinces of Liaoning, Jilin and Heilongjiang had fallen below the global replacement rate [of 2.33], to 1.773, 1.842 and 2.062 respectively, noticeably below the national average of 2.584. Afterward, as the one-child policy was implemented, the total fertility rate of the Northeast fell below 1.0, and in 2010, the the sixth population census showed that it was only 0.75.

What’s behind this fertility situation? There are a lot of state-owned enterprises in the Northeast, and they strictly implemented the one-child policy, so there were not many excess births.

As the “first born” of the People’s Republic, industrialization was earlier and more extensive in the Northeast than in other places. Large state-owned enterprises across the three northeastern provinces provided people with an enviable “iron rice bowl,” but also more stringent birth control. A 58-year-old Harbin taxi driver, Mr. Zhu, told this reporter that in those years, when he used to work at a state enterprise, the pay was high, the benefits were pretty good; he had a lot of face and more confidence in finding a partner. Everyone valued those state-enterprise jobs, so very few people were willing to lose the iron rice bowl in order to have more children than allowed. Even in the countryside, because of the large numbers of state farms and state forests, people needed to keep their iron rice bowls, so very few dared to violate the family-planning rules.

“All these years, among my colleagues, relatives, friends, there is not one who violated the family planning policy. Doing that would mean unemployment, so who would dare?” Mr. Zhu said.

Aside from the family-planning policy, a high urbanization rate is another important factor depressing the fertility rate in the Northeast. Research shows that the fertility rate is inversely related to the urbanization rate–the higher the urbanization rate, the lower the fertility rate. Urbanization in the Northeast preceded rest of the nation by decades. Statistics show that in 1975 the national urbanization rate was 17%, but in the Northeast it was already 35%; in 1990 the national rate was 26% and the Northeast was 48%; in 2010, the national rate reached 50%, but the Northeast was already 58%.

The second big problem is an exodus of people to other provinces:

The Northeast was once a place that attracted a major inflow of people–the “Chuang Guandong” [the massive migration of Han Chinese to Manchuria from the late 19th century through the 1940s] has even today left a deep impression in many people’s memories. But a net inflow of population is now history. According to the Liaoning Blue Book published by the Liaoning Academy of Social Sciences, the fifth population census of 2000 showed there had been a net inflow of 360,000 people into the three northeastern provinces over the previous ten years, but the sixth population census ten years later showed there had been a net outflow of 2 million people.

Luo Dandan, a researcher at the Heilongjiang Academy of Social Sciences, has spent years following up those survey results, and says that the outflow of people from the three northeastern provinces has sped up in recent years. Looking at individual cities, the trend of population outflow is also very obvious. Figures from the municipal statistics bureau of Qiqihar [in Heilongjiang province] show that city had net outmigration of 37,779 people in 2014; the figure was 25,381 people in 2013, so the the outflow is accelerating.

Luo says that in peacetime most population movements are for economic reasons, and that it is uneven economic development in different regions that drives workers to move to places with better job opportunities and higher wages. According to the National Bureau of Statistics, the average urban wage in the Northeast was 57,319 yuan in 2015, below the national average of 62,029 yuan.

Such an obvious gap in income levels drives many young people and technical personnel to choose to “migrate to the southeast like the peacock.” According to a cadre in the Heilongjiang province human resources and social security system, the outflow of university graduates is a major concern for him. Every year in the graduation period of May and June, the hotels near the Harbin Institute of Technology are fully booked with recruiters from Zhejiang and other coastal provinces.

The combined result of these two trends is a population that is aging rapidly:

Because the birthrate is low, the aging of the population in the Northeast is quite serious. According to Liu Kegu, a former vice-governor of China Development Bank, the median age of China’s population was 38 in 2015; but in the Northeast, it was 43, a level that the whole country is not expected to reach until 2027. One direct impact of an aging population is the burden of pensions. The dependency ratio of corporate pensions (the ratio of the number of workers in the pension program to the number receiving a pension) is 1.55 in the Northeast, far below the national average of 2.88. Liaoning is 1.79, Jilin is 1.53, and Heilongjiang at 1.33 is the lowest in the nation.

The low fertility rate has created a serious problem of fewer young people. Demographic statistics show that the Northeast’s share of youthful workers aged 20-39 has fallen from 10% in 1982 to 8.1% in 2010. And in 2010 the Northeast’s share of the population aged 0-19 was 6%, which means that in 2030 the Northeast’s share of the 20-39 youthful workforce will be 6% of the national total.

Zhou Tianyong of the Central Party School argues that this age group is the main economic force in the population, so the decline in the numbers of this group will have a great impact on the economy through labor supply, consumption, investment and other factors.

Another manifestation is the aging of the workforce. In terms of absolute numbers, the working-age population in the Northeast is still quite substantial, but one-third of this population is aged 45-64, so the aging of the workforce is indeed serious.

Population movement also further exacerbates the aging of the population in the Northeast. The Northeast has experienced a net out-migration of population for 20 years, and more than 60% of Northeasterners who leave do so for economic or business reasons. An official report has warned that, because of the fertility level and migration trends in the Northeast, the region is already locked into a trajectory of rapid population loss.

Is there anything to be done? The recent economic troubles have in fact gotten a lot of official attention, and the central government is backing a new version of the “Revitalize the Northeast” campaign. But it does not seem like the demographic aspects are being discussed much:

This reporter has attended many meetings on “Revitalizing the Northeast,” and heard many Northeastern governors and mayors discuss the road to revitalization, but unfortunately not one mentioned that the Northeast is facing a population crisis.

population-shift-2010-14

by Andrew

Is there are an ideological divide over China’s regional divide?

Headlines in the Chinese official media over the last couple of days have been dominated by Xi Jinping’s tour of Yinchuan, in the western province of Ningxia. The visit was the occasion for some stirring rhetoric about helping poorer regions like Ningxia; on his first day, Xi declared that

No region or ethnic group can be left behind in the drive to build a moderately prosperous society by 2020 (到2020年全面建成小康社会，任何一个地区、任何一个民族都不能落下)

He also made a speech at a conference on poverty alleviation that emphasized the duty of the prosperous eastern provinces to aid the inland. In a no-doubt-deliberate echo of Deng Xiaoping’s famous formulation that “we permit some people and some regions to become prosperous first,” Xi said that

The first to prosper should help the latecomers, to achieve the final goal of common prosperity (实现先富帮后富、最终实现共同富裕目标)

The conference was about a system where wealthier cities and counties in the east are “paired” with poorer counterparts in the west, which Xi praised because

a gradual reversal of the trend of widening regional gaps in development has been achieved, and poverty alleviation in impoverished western regions and old revolutionary areas has made great progress (区域发展差距扩大的趋势得到逐步扭转，西部贫困地区、革命老区扶贫开发取得重大进展)

(For the sources, here are links the first round of official reports in Chinese and English, and the ones on the poverty alleviation conference in Chinese and English)

Of course, it’s stretching the truth a bit to say that China’s regional gaps have been narrowing; the widening regional gaps in the current slowdown have been a huge subject of huge public debate. But I’m more interested in what Xi’s comments show what he thinks should be done: of course, regional gaps should narrow; of course, funds must flow from wealthier provinces to poorer ones. So this latest propaganda push seems like a very clear example of the egalitarian-Maoist strain of thought that is still very powerful in Chinese economic thinking.

Which is interesting, because some people who are close to Xi seem to have have been pushing back quite strongly against this line of thought. In early May, the People’s Daily carried a now-famous interview with an unnamed “authoritative personage,” who is widely assumed to represent the views of Xi’s top economic advisors (Barry Naughton’s recent piece in the China Leadership Monitor is the best overview of the debate). The piece got headlines for the way that it directly attacked stimulus policies and openly expressed worries about debt and slowing growth, all in a rather harsh tone unprecedented in recent official discourse. But the “authoritative personage” also attacked the notion that widening regional gaps are inherently bad, and must be aggressively tackled by the government. Here is the passage, in my translation:

Question: At the same time that the economy is slowing, we have also noticed that the trend of divergence has become more pronounced: the stabilizing and improving trend in the economy of the eastern coastal region has strengthened, but some resource-dependent provinces in the northeast and the west are still experiencing economic difficulties. Some foreign media call this “two worlds.” What signal does this trend of divergence send?

Authoritative Personage: Divergence is a necessity of economic development. …

In the “new normal,” we need to optimize the allocation of resources, develop new growth drivers, and form a new industrial structure. Therefore the faster divergence happens, the better. Whether we are talking about regions, sectors or companies, one part of them will, following the “80-20 rule,” obtain 80% of the benefits, and stand out from the rest as having a bright future. And there is another part that will experience hardship, but will also learn a lesson and will know what to do next. To me this is not a bad thing.

Since China began reform and opening up, the divergence in the economy has accelerated, and in this process there has emerged a group of vibrant regions and competitive sectors and companies with famous brands. After the global financial crisis, divergence in the world economy accelerated, our country entered the new normal, and domestic economic divergence further intensified. Last year, in analyzing the first quarter’s economic trends the Party Central pointed out that as long we actively adapt to the new normal, and focus on innovation and qualitative efficiency, then the trend of development will be relatively good; if not, the pressure will be very great. This year this trend has continued and even intensified, so while some are happy others are worried.

In the foreseeable future, amid economic divergence, vibrant regions and internationally competitive sectors and companies will continue to arise, but some regions, sectors and companies will encounter more and more difficulties. … The people in these regions, sectors and companies have now shed their illusions, are relying on themselves, are taking the initiative to promote reform and innovation, and are striving to catch up.

The “authoritative personage” is presenting a more classically laissez-faire view, where regional gaps reflect the workings of market forces, and the failures in the backward regions are in fact necessary for them to develop further. Xi himself on the other hand seems to be more comfortable in a more paternalistic and interventionist mode. This of course is not the first time that different parts of the leadership have sent conflicting messages about the economy, and is another indication that the economic strategy at the moment is rather confused.

by Andrew

What Xi Jinping really said about Deng Xiaoping and Mao Zedong

It’s been hard to escape the Xi-is-the-new-Mao meme of late, especially with the anniversary of the Cultural Revolution offering an occasion for historical reflection. Andy Browne’s piece in the WSJ is one of the better overviews of the question, noting high up the many important ways in which Xi is not the new Mao; Andrew Nathan’s article in the New York Review of Books is also very much worth reading. Both authors point out an important statement by Xi on the legacies of Mao Zedong and Deng Xiaoping; here is Browne, whose shocked reaction was probably shared by many:

He has declared that it is just as unacceptable to negate Mao’s 30 years in power as it is to speak critically of the 30 years that followed under Deng. He has set side-by-side, on equal footing, a period marked by spasms of mass killing and destruction and an overwhelmingly peaceful era that saw the greatest economic progress in human history.

This naturally piqued my curiosity, so I looked up the original remarks by Xi, which he made on January 5, 2013 in a speech entitled “Some Questions on Maintaining and Developing Socialism with Chinese Characteristics.” The speech is indeed very interesting for how Xi positions himself relative to the legacies of Deng and Mao. There is an official summary from Xinhua which covers the main points, including the statement that Browne and Nathan focus on: “we cannot use the historical period after reform and opening to deny the historical period before reform and opening, nor can we use the historical period before reform and opening to deny the historical period after reform and opening” (不能用改革开放后的历史时期否定改革开放前的历史时期，也不能用改革开放前的历史时期否定改革开放后的历史时期). But I also dug up the full text of the speech, which though not online is in an official book of Party documents (十八大以来重要文献选编), and this has more context and some very direct language, which makes it easier to understand what Xi is getting at. Here is my translation of the most relevant section of the speech:

For our Party leading the people in building socialism, there are two historical periods: before “reform and opening” and after “reform and opening.” These are two interrelated periods that also have major differences, but the essence of both periods is that our Party was leading the people in the exploration and practice of building socialism. “Socialism with Chinese characteristics” was created in the new historical period of “reform and opening,” but it was created on the basis of New China having already established the basic socialist system and carried out more than twenty years of work. A correct understanding of this problem requires grasping three points.

First, if our Party had not taken the decision in 1978 to carry out “reform and opening,” and to unswervingly push forward “reform and opening,” socialist China would not be in the good situation it is today–it is even possible it could have faced a serious crisis like the Soviet Union and Eastern Europe. At the same time, if in 1949 New China had not been established in a socialist revolution, and accumulated important ideas, materials and institutional conditions, gaining both positive and negative experiences, it would have been very difficult for reform and opening to proceed smoothly.

Second, although the ideological direction, policies and practice of building socialism in these two historical periods were very different, these two periods are not separate from each other, and are not at all fundamentally opposed. Our Party has in the process of building socialism proposed many correct positions, but at the time they were not properly implemented; they were only fully implemented only after “reform and opening,” and we will continue to adhere to them and develop them in the future. Marx said long ago: “Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past.”

Third, there must be a correct evaluation of the historical period before “reform and opening.” We cannot use the historical period after “reform and opening” to deny the historical period before “reform and opening,” nor can we use the historical period before “reform and opening” to deny the historical period after “reform and opening.” The practice and exploration of socialism before “reform and opening” built up the conditions for the practice and exploration of socialism after “reform and opening;” the practice and exploration of socialism after “reform and opening” is to maintain, reform and develop the previous period. …

The reason I emphasize this question is because this is a major political issue that, if not handled properly, will have serious political consequences. The ancients said: “To destroy the people of a country, first go at their history.” Hostile forces at home and abroad often write articles about the history of the Chinese revolution and the history of New China–they stop at nothing in attacking, vilifying and slandering, but their ultimate purpose is to confuse people and to incite the overthrow of the Chinese Communist Party and our country’s socialist system. Why did the Soviet Union disintegrate? Why the Soviet Communist Party fall from power? One important reason is that in the field of ideology the struggle was very intense–fully negating the history of the Soviet Union and the Communist Party, negating Lenin, negating Stalin, promoting historical nihilism and confused thinking. Party organizations at all levels hardly did anything, and the army was not under the leadership of the Party. In the end, the Soviet Communist Party, this great Party, was scattered, and the Soviet Union, this great socialist country, fell to pieces. This is a cautionary tale!

Comrade Deng Xiaoping pointed out:  “On no account can we discard the banner of Mao Zedong Thought. To do so would, in fact, be to negate the glorious history of our Party. On the whole, the Party’s history is glorious. Our Party has also made big mistakes in the course of its history, including some in the three decades since the founding of New China, not least, so gross a mistake as the ‘Cultural Revolution’. But after all, we did triumph in the revolution. It is since the birth of the People’s Republic that China’s status in the world has been so greatly enhanced. It is since the founding of the People’s Republic that our great country, with nearly a quarter of the world’s population, has stood up — and stood firm — in the community of nations.” He also stressed: “The appraisal of Comrade Mao Zedong and the exposition of Mao Zedong Thought relate not only to Comrade Mao personally but also to the entire history of our Party and our country. We must keep this overall judgement in mind.”

This is the vision and thinking of a great Marxist statesman. Think for a moment: if at that time we had fully negated Comrade Mao Zedong, could our Party still stand firm? Could our country’s socialist system stand firm? If it does not stand firm, then the result is chaos. Therefore, correctly handling the relationship between socialism before and after “reform and opening” is not just a historical issue, in fact it is mainly a political issue. I suggest that everyone take out the “Resolution on Certain Questions in the History of Our Party Since the Founding of the People’s Republic of China” and read it again.

I think it is not quite right to read this as Xi glorifying everything about Mao, and saying China made just as much progress during the Great Leap Forward as it did after 1978. What Xi is saying is that the legitimacy of the Communist Party China rests on the whole history of its rule, and that if the legitimacy of Party rule is questioned for one historical period, then it can be questioned for other historical periods. Deng felt the same way, and what Xi is doing in this speech is forcefully repeating Deng’s own evaluation of Mao. The 1981 resolution on Party history that Xi cites is best known for how it assigned primary blame for the Cultural Revolution to Mao personally. But the resolution’s overall assessment of Mao is rather balanced, and Deng himself insisted on this. The quotes from Deng that Xi mentions are remarks Deng made during the drafting of the resolution, and some other Deng comments from the same source make the point very clear:

Comrade Mao Zedong was not an isolated individual, he was the leader of our Party until the moment of his death. When we write about his mistakes, we should not exaggerate, for otherwise we shall be discrediting Comrade Mao Zedong, and this would mean discrediting our Party and state. … What we have achieved cannot be separated from the leadership of the Chinese Communist Party and Comrade Mao Zedong. It is precisely this point that many of our young people don’t sufficiently appreciate.

The parallel that both Deng and Xi very clearly had in mind is the Soviet Union, and the backlash against Stalin that began with Khrushchev’s famous “secret speech” acknowledging Stalin’s crimes. Chinese leaders clearly view the “negation” of Stalin that Khrushchev began as fatally undermining the legitimacy of the Soviet Party, and leading inevitably to its collapse in subsequent decades. And they are not alone in this judgment. Here is the historian Orlando Figes on the impact of Khrushchev’s 1956 speech, from his excellent Revolutionary Russia, 1891-1991: A History:

The speech changed everything. It was the moment when the Party lost authority, unity and self-belief. It was the beginning of the end. The Soviet system never really recovered from the crisis of confidence created by the speech. How could people continue to believe in a revolution that had killed so many in the people’s name? In leaders who had told so many lies? For the first time the Party was admitting that it had been wrong— not wrong in a minor way but catastrophically. How could it rebuild its credibility?

Exactly. I do not see much daylight between Xi Jinping and Deng Xiaoping in terms of their positions on Mao Zedong and Communist Party history. Xi is very much following in Deng’s footsteps here, though he may be departing from Deng’s legacy in other ways.

by Andrew

Winter has come: the state of steel in China

It’s hard to understand the Chinese economy without understanding what’s going on in the steel sector. I found the following short interview with Cai Rang, chairman of the China Iron & Steel Research Institute Group, to be one of the better recent summaries of the situation I’ve come across in domestic sources, and also useful as an indicator of what some insiders are thinking. Here’s my translation:

Interviewer: How is the current round of excess capacity in steel different from those that came before?

Cai Rang: During the past few years, China did not clearly recognize the historical stage of development that the steel industry had reached. Therefore when steel prices would rise and fall, everyone would think: winter has come, so spring cannot be far off. Because of this kind of thinking, during the previous rounds of capacity reduction there was no consensus on whether the steel industry was really in winter or in spring, and some companies were still pursuing economies of scale [by continuing to expand].

Now, however, the macro environment has changed, and most people believe that the steel industry will not enter another springtime, and the previous glorious phase of rapid development must end. In short, the steel industry has already entered the post-industrial era. Because of this, the effects of the restructuring, mergers, acquisitions and capacity reduction going on now may be different from before. But we must still avoid the old problem of a capacity rebound [after capacity reduction], and steel companies cannot have a “land grab” mentality [i.e., expanding output while others cut output in order to gain market share, because if every company pursues this strategy then output will not fall]. Reducing excess capacity will mean large numbers of firms closing their doors, and this requires both companies and society to shoulder responsibility.

Interviewer: On the one hand China’s steel industry has excess capacity, but on the other hand there is still a need to import steel, so how should we understand this issue?

Cai Rang: China’s current excess capacity in steel products is a sectoral excess: there is a lot of low-end steel, but the supply of high-end steel is insufficient. The ordinary steel products that China manufactures are not that different from those made abroad, and there are even some technological advantages over foreign companies. But for particular types of steel products there are still about 20 million tons of imports, among which there are about 200 tons of low-volume, high-tech sophisticated steel products that must be imported, such as steel used in airplanes.

In the future steel companies will have to transform their development model, and through product upgrading and replacement move in an energy-saving and environmentally friendly direction. Steel companies will need to put a lot of effort into those high-end products that China lacks and cannot yet produce, but they will also need to avoid creating a second round of excess capacity in high-end steel products that leads to a race to the bottom as they vie to drive down prices.

Judging from China’s current level of industrialization, there are not many steel products that need large amounts of investment and concentrated development. Those that remain are are all high-end specialized products, and investing in these products is much more demanding in terms of equipment, personnel and operating costs.

Interviewer: In order to digest excess capacity, China is exporting a large amount of steel products, and this has led to antidumping cases. What changes do you expect in the steel industry?

Cai Rang: China’s current steel production capacity is 1.2 billion tons, but domestic demand cannot completely absorb this capacity. In 2015 China exported about 100 million tons of steel products; this was a relief for domestic capacity but a shock to the international market. Already nine European countries have made antidumping complaints, and Japan, Korea and India have also complained. This shows that our country’s current steel production capacity is not sustainable, and must be genuinely reduced.

Now the relevant departments are drafting the 13th five-year plan for the iron and steel industry, and the preliminary plan is to first cut 200 million tons, and eventually stabilize steel capacity around 700 million tons. This will require many companies to exit the market, and those steel companies that remain will experience great changes both internally and externally. For instance externally, the integration of the internet and intelligent manufacturing could cause great changes in steel procurement and sales methods. Internally, the entire production process, the technology configuration, the quality of equipment and the efficiency of production all need to be improved, costs reduced, and energy use and raw material consumption optimized. There are historical reasons for the excess capacity in the iron and steel industry—in the past everyone was desperate to add supply—and today there is still some new capacity awaiting approval from the government. So capacity must be reduced.

Interviewer: Can China draw lessons from any international experience in dealing with the excess capacity problem?

Cai Rang: During America’s industrialization process, steel was one of its three pillar industries. Then came a wave of bankruptcies, and the whole process was very painful. But now output has come down, and there has been a big adjustment in social attitudes. Gradually funds and labor moved to space technology and aerospace, and now investment is in information technology and the internet. Iron and steel production moved to Asia, and Japan’s steel industry rose rapidly—Baosteel and other Chinese steelmakers were all set up to study Japan’s model at that time. The American city of Pittsburgh used to be the steel capital of the US, but today it has already become a city of education, of culture, of science. They got rid of three big steel plants, and in their place built the biggest shopping mall in the region. The whole city has been completely transformed. We can learn from this kind of experience.

by Andrew

Manchuria rediscovers the resource curse

The unwinding of the boom in China’s resource-dependent provinces is leading to some introspection as to what went wrong. In a way, the explanation is not that complicated. The troubled provinces tend to be big producers of energy (mainly coal) and metals (mainly steel); prices for these goods are collapsing and demand is falling as China’s housing boom peters out. Therefore the slowdown is much, much worse in the northern and northeastern provinces that specialize in these industries.

The China Economic Times, one of the wonkier Chinese newspapers, has lately been running a nice series of in-depth reports on these economically troubled provinces. I particularly enjoyed this piece by reporter Zhang Yiming, which focuses less on the immediate troubles of the coal and steel sectors and more on the longer-term question of why the Northeast in particular is so vulnerable to these troubles. I like that the author seems to have rediscovered the concept of the “resource curse,” much debated in the economic literature, by just talking to a lot of people in the former Manchuria. The piece is short enough to translate and share:

The Northeast is a vast territory rich in resources, whether we are talking about grain, forests or various kinds of minerals, but these resources have not been effectively developed.

The Northeast produces much grain, but large quantities of its grain are shipped to the south where they are processed into finer products, such as Cantonese moon cakes, that are then sold back to the Northeast. Another example is the Northeast’s timber, much of which is shipped to the south and made into high-end furniture, which then returns to the Northeast to be sold. The Northeast also produces a lot of animal fur, and Northeastern people have a tradition of wearing mink coats. But most of the mink coats Northeasterners buy are made in the south, such as Guangdong, Zhejiang and other coastal areas.

There are many similar cases. Although the resources are located in the Northeast, they are not effectively converted [into finished goods], but are sold at a low price to the resource-poor south. After extensive processing by southern factories and transformation into high value-added products, they are bought back by Northeast people at a high price. In this way the Northeast is stuck at the low end of the industrial chain, while the most profitable and most efficient parts of the chain stay in the south. Local people say that “those shrewd southerners have taken all the money.” From the perspective of a southern businessperson who lacks resources, all of the Northeast’s resources are very valuable in the south, as they can yield all kinds of products and form a complete industrial chain.

The China Economic Times‘ research group in its local surveys found that there are many reasons for this situation in the Northeast. One issue is the lack of appropriate local conditions, while another issue is the lack of local spending power, and these issues are closely related. For example, processing mink pelts into mink coats requires sophisticated technology and skills, and there is a lack of local personnel with the right skills. Some local mineral resources and chemical raw materials, due to the lack of a local downstream industry, can only be sold to companies in the south.

Local people know that if they can process these resources it will bring profits and create much more value, but there are few people doing this kind of work and most people lack the drive to change the status quo. Locals generally agreed that that they can earn considerable amounts of money by selling resources, so there is no need to spend a lot of time and energy in an effort to change the status quo. This issue is clearly shown in the development of the local private sector.

State-owned enterprises make up a large share of the Northeast’s old industrial base. In recent years, the private sector has vigorously developed, and the share of state-owned enterprises has gradually declined. But the growth of the private sector is not as fast as locals imagine. We observed that most private-sector companies are closely related to the exploitation of natural resources. Few are in the higher-value-added parts of the industrial chain, even in high-tech industries.

Given that currently the Northeast lacks the capacity for doing high-end processing, studying and introducing skills from the south is a viable option. But the China Economic Times research group found that southerners who come to the Northeast often do not fit in. The majority who do stay work closely with the leading local state-owned enterprises, and those tend to be in the upstream part of their sectors.

It is an obvious fact is that the reasons why businesspeople from the south do not stay in the Northeast is closely related to the business environment, as it is difficult for outsiders to get accustomed to the bureaucratic environment in a short time. Also, Northeast people are relatively lacking in market knowledge, especially in comparison with people from the south. Because the Northeast has so many resources, people are easily contented with what they have, and are unwilling  to spend lots of time on improving and extending the industrial value chain.

To change this status quo of low-efficiency resource development requires a lot of time and effort to change people’s thinking, and these kind of changes obviously cannot happen overnight.

A failure to invest in manufacturing and other industries during resource booms is indeed one of the mechanisms by which the resource curse is thought to operate, and there is certainly anecdotal evidence that this is part of what has been going in the China’s Northeast. The consensus in the economics literature seems to be that resource curse effects exist, but are highly dependent on institutions: Norway and the United States have lots of natural resources but have turned out pretty well. On the other hand, there is some evidence that resource-curse effects operate at the regional level even within economies that, as a whole, have escaped its worst effects (for instance, here is a paper on the Appalachian region of the US).

China usually tends to feature in this literature as one of the resource-poor Asian economies that was forced to become competitive in manufacturing because it could not rely on natural resources. This view obviously needs to be nuanced, and a regional perspective is helpful. China is in fact a huge producer of energy and other natural resources; it just happens to consume virtually all of its production domestically, and import a lot more besides. The main reason that a major resource endowment did not end up dominating the domestic economy is probably that China is just too darn big, and those resources are so unevenly spread across the country. China’s southern coast is indeed largely a resource-poor region forced to rely on its own manufacturing skills, but some other parts of the country do look like they are suffering from a variety of the resource curse.

by Andrew

What will China do about its zombie companies?

One of the more interesting developments in official Chinese discussions about the economy has been the appearance of the term “zombie companies”; Premier Li Keqiang himself has repeatedly used the term. It’s a loose shorthand for a problem that everyone knows about but is difficult to precisely define: money-losing companies that seem to stay alive far longer than economic fundamentals warrant. This problem is particularly acute in the commodity sectors: a global supply glut has driven down prices of iron ore and coal to multi-year lows, levels where China’s relatively low-quality and high-cost mines have difficulty being competitive. And yet they continue operating despite losing money, because it is easier to keep producing than to completely shut down. An excellent story this week in the China Economic Times on the woes of the coal heartland of Shanxi quoted one executive saying, “If we produce a ton of coal, we lose a hundred yuan. If we don’t produce, we lose even more.”

The incentive problem is very clear. If many companies shut down, output would fall and prices would rise, and the remaining companies would be more profitable. However every company wants to be one of the companies that is left standing rather than one of the companies that shuts down, and so they do everything they can to continue operating. They can also usually count on help from banks and local governments, who want to avoid the financial and social impact of a large employer closing. This is why there are increasing calls for the central government to break the logjam and organize the closure of excess capacity that market mechanisms should be producing. Indeed, I translated on this blog a very interesting proposal from the State Council’s Development Research Center on how to do exactly that.

The fact that top leaders are now talking openly about zombie companies could indicate some progress on this issue. So here’s another relevant translation: a recent interview with Feng Fei, a senior industrial official. Feng is also one of China’s top scholars of industrial policy, and in fact spent many years at the DRC. In October he was elevated to one of the vice-minister jobs at the Ministry of Industry and Information Technology, which has bureaucratic responsibility for most of the sectors with lots of zombie companies. His interview with Caijing magazine is short but to the point. He diagnoses the problem and its consequences very clearly, but hedges a bit when asked what the government is going to do. However he seems to indicate that the current preference is to deal with zombie companies by encouraging stronger companies to take them over–which I think is not as good a solution as the one the DRC has already proposed.

Reporter: Why is the exit of “zombie companies” being discussed now? What is the background to this question?

Feng Fei: There is not yet a consensus view about “zombie companies.” My understanding is that “zombie companies” refer to companies that have been losing money for a long time, and which have no hope of turning around or smoothly exiting the market. Currently the problem of “zombie companies” is very prominent, and this is related to three major issues in the economy.

First, China’s economic growth has entered a “new normal.” Downward pressure on the economy has increased, and the external environment for business is getting tougher. There are some companies whose technology, management and so forth are relatively poor, and who are finding it difficult to adapt to the new situation and to market changes, and as a result have fallen into serious trouble.

Second, there is serious excess capacity in some industries, resulting in a continuous decline in product prices and a fall in corporate profits. There are some sectors in which all companies are losing money, and operations are very difficult. For instance, in the third quarter of this year, the steel industry’s profit margin on sales was only 0.05%, and the sector’s total profits declined 97.5%; nearly half of the companies in the sector are loss-making.

Third, the market system is not robust: there are still some institutional obstacles that result in “zombie companies” finding it difficult to exit according to market rules.

Reporter: In more specific terms, what harm do “zombie companies” bring to China’s economy?

Feng Fei: The existence of a large number of “zombie companies” hinders China’s economic transformation and the upgrading of its industrial structure, and also increases macroeconomic risks.

First, these companies are holding on to a lot of resources, hindering the effective resolution of excess capacity. “Zombie companies” have low profitability, but take up a lot of land, capital, energy, labor and other resources, and prevent these resources from flowing to more profitable sectors, resulting in a serious waste of resources. You could even say that if “zombie companies” do not exit the market, the problem of excess capacity cannot be fundamentally solved, and it will be very difficult to achieve structural adjustment and industrial upgrading. Only if enough companies exit will there be enough companies entering.

Second, it undermines the market principle of survival of the fittest. Because of social stability considerations and other issues, there are efforts to preserve “zombie companies” and give them blood transfusions. This results in unfair competition, and could even cause a Gresham’s Law phenomenon [in which the bad drives out the good].

Third, it may lead to financial risks. “Zombie companies” have a lot of debt, which if not dealt with in a timely manner will result in an increase in banks’ non-performing loans. When you add in the complex chain of inter-enterprise debt, the problem becomes serious, and could lead to systemic risk. Therefore the State Council is paying great attention to this issue, and has required [us] to handle the “zombie companies” issue.

Reporter: If it is so urgent for “zombie companies” to exit the market, why has this been a difficult issue for so long? Why is it hard to establish a mechanism for market exit?

Feng Fei: “Zombie companies” can be dealt with in two ways, through market-oriented mergers and restructuring, or bankruptcy according to law. The handling of “zombie companies” will be more through restructuring, and less through bankruptcy, and will also ensure social stability. In terms of these methods, China has considered the design of the system, but has faced some difficulties and problems in terms of actual operation, and a complete system for market exit has not yet been formed.

First, in the restructuring and bankruptcy processes, there are difficulties with the placement of workers, the debt burden, and historical issues, which increase the cost of restructurings and bankruptcies. This is an obstacle to “zombie companies” exiting the market.

Second, some local governments interfere in the normal process of bankruptcy and market exit because of considerations related to preserving jobs, maintaining social stability, or the worries of banks and other creditors about bad debts.

Third, China’s “Bankruptcy Law” needs to be further clarified and refined. Although it has already been revised several times to adapt to the market economy, there are still some regulations that are more like general principles.

Fourth, in the context of increasing downward pressure on the economy, many sectors do not have a clear outlook, and firms face financing difficulties, which means they have little interest in pursuing mergers and corporate restructuring.

Finally, the current economic situation increases the risk and the consequences of corporate bankruptcies, which means that many parts of society are very wary toward bankruptcies and restructuring.

…

Reporter: According to the State Council, the Ministry of Industry and Information Technology is in charge of researching and promulgating policies on “zombie companies.” What is your plan for this work?

Feng Fei: MIIT will step up its research and survey work, find out the true situation, and figure out the major difficulties and problems in “zombie companies” exiting the market. In conjunction with relevant departments, we will research policy measures to handle “zombie companies,” improve the market, legal and policy environment, and improve the exit mechanisms for “zombie companies.”

The exit of “zombie companies” requires a proper relationship between the government and the market. The role of government is mainly to provide the necessary support for displaced workers, not to rescue companies, and to make the exit as smooth and quick as possible. At the same time, we will adhere to the policy of “more mergers, fewer bankrutpcies,” so that more exits of “zombie companies” happen through mergers and restructuring. This will result in appropriate placement of workers, reduce the impact on society, reduce the economic risk, and raise the quality and efficiency of economic development.

by Andrew

Unirule’s caustic take on state-owned enterprise reform

Most liberal-leaning thinkers in China seem to be disappointed with the long-awaited plan on state-owned enterprise reform that was published in September, a reaction I share. But if you would like to read a thoroughgoing rant on why the SOE reform plan is not just disappointing but completely missing the point, I recommend reading the interview below.

The speaker is Sheng Hong of the Unirule Institute, an independent and very liberal think tank. They are also unapologetically out of the mainstream of the Chinese discussion on SOEs, so you won’t see these kind of opinions represented in most reporting. I probably wouldn’t frame the issues the same way they do, but I still appreciate their views, which are a bracing corrective to most of what is written about SOEs in China.

The interview was also quite fun to translate, since it is so plain-spoken and polemical; hat tip to the folks at China Policy for the pointer. (Note: I have translated most but not all of the interview, leaving out some repetitions and some of the harder-to-follow bits; the original is here).

Interviewer: Why do you not support the new round of SOE reform?

Sheng Hong: Reform is about solving problems, and this reform basically does not address the problems I am talking about. For instance, the issue of state enterprise monopolies, the issue of state enterprises using national resources for free or for a low price, the issue of not sharing their profits, the issue of unlimited allocation [of resources] within state enterprises–these are the real problems.

What I think is the most serious problem is that state enterprises even exist. State enterprises make it impossible for the government to treat both non-state and state enterprises fairly, damaging the impartiality of government. Officials move back and forth between state enterprise jobs and civil service positions, which means that government officials and SOE executives are the same group of people. The existence of state enterprises makes it very difficult for us to expect the government will treat state and non-state firms equally, which damages the basic reason for government to exist: that it is impartial. We give state enterprises so many favorable policies and monopoly rights, how can private companies compete with them? They are not equal competitors in the market, which damages the basic principles of the market economy.

The fact that these monopolistic state enterprises exist, and occupy a large share of our national resources, creates an enormous loss of resources–many trillions of yuan a year. The slowdown in our country’s economy is to a large degree a result of the existence of monopolistic state enterprises and protected monopolies. This is a pressing issue, every day it is not fixed we lose billions. If it is not going to solve this problem, then what is reform for?

Interviewer: The reform document mentions that we should make state enterprises “stronger, better and bigger.”

Sheng Hong: To make state enterprises “stronger, better and bigger” is a mistake. Why do state enterprises need to be bigger and stronger? State enterprises are not normal companies, they should not be competing with private companies in profit-oriented sectors. If profit-making companies can do something, then state enterprises should not do it. Add to that the fact state enterprises can use their political capital to obtain monopoly rights, they can use their political strength to obtain free resources–this harms the Chinese people. …

What we say are problems, they [government officials] do not think are problems, what we think are not problems, they think are problems. What can this reform plan for state enterprises really mean? They have completely ignored different opinions and critical voices in society, and are hell-bent on making state enterprises bigger and stronger. Can this be called reform? Under the flag of reform they are doing anti-reform things, this is just deceiving the public.

Interviewer: Aside from the problem of monopolies, there are also internal governance problems with state enterprises. You have mentioned the fact that insiders control the award of bonuses, and this reform document also calls for separating state enterprise managers into two categories, [political] appointees and those recruited [from the market]. Can this have any effect on the vested interests of state-enterprise executives?

Sheng Hong: It cannot. Say you split the executives into two categories, one category is commercial, the other category is public interest. Let’s just talk about the commercial ones. I want to evaluate you according to your performance, but how to assess your performance? The performance is not real. Where does your profit come from? Because you have a monopoly, because you don’t pay rent for your land, because the interest rate on your loan is low, you only pay 30 yuan a ton for oil exploration rights while everyone else pays 400 yuan, it is completely unequal. So how am I supposed to judge your real performance?

Take finance as another example: banks make a lot of profit, but you have to know where their profit comes from. The central bank determines the gap between deposit and lending rates, and though it has been adjusted some in the last couple of years, for more than 10 years the margin was unchanged at 3%. This margin is equivalent to a monopoly price, and it is also a regulated price: the government determines your 3% margin. In most countries this is 1.5%-2%; in countries with a market economy the margin is decided by competition. But this 3% is decided by administrative departments, how can it be a true indicator? How are you supposed to judge whether these people are really working hard? If you give an idiot the right to a monopoly won’t he still make money? …

Interviewer: The reform document also covers the management of state assets, and drawing on the Temasek model, it proposes a change from the management of state assets to the management of state capital. … What do you make of the Temasek model?

Sheng Hong: Discussion of the Temasek model is superfluous. All you need to know is that some people in China want to keep state enterprises, so they are always bringing up Temasek. Why do we need to talk about the Temasek model? Temasek is called “state capital” rather than a state-owned enterprise, this means it is a company operated according to civil law but its capital is owned by the state. The problem is why do you want this state-owned capital, there is no need for it. The state capital can be given to the Singaporean people. The basic principle is that a state or a government gets its income from taxes, so why do you need to do this stuff? There is no value in having a deep discussion of this [Temasek model]. …

Interviwer: You have previously proposed dismembering state enterprises, for instance splitting PetroChina and Sinopec into many small companies. But instead we see that after the merger of the two railcar makers, there is now a wave of mergers among the central SOEs. What effects will this have?

Sheng Hong: After the mergers and acquisitions the power of the monopolies will only get bigger, which means nothing good for society, for consumers or for private companies. The logic is very simple: as monopoly power gets stronger there is less and less you can do to constrain it. After the merger of central SOEs, it will be even harder for the central government to manage them, because there will be more conflicts. Take PetroChina and Sinopec–the NDRC and NEA cannot control them, you cannot say no to these monsters. If you merge the three oil companies into one oil company, then it would be even worse. If Premier Li Keqiang goes up against China’s one and only oil company, then his negotiating position is not at all the same as if there were three companies or five companies.

Another example is that when there was just one telecom company, China Telecom, the cost for the central government to negotiate with it was very high. Later when China Unicom entered the market, the change was very rapid. So if the central government really wants to reform, it should not do mergers, but the exact opposite: breakups. …

It’s just like Jia Yi said during the Han dynasty: the more dukes there are, the less power they have. In the early Han, there were many dukes who were too powerful, and the central government could not control them, so it used its power to grant titles to increase their number. For instance if one duke had three sons, after the duke died all three sons were given a title, so each one got a third of the land. In this way after a few generations each duke became very small, and this was beneficial to the central government. For monopolistic state enterprises it’s the same: if you think that merging them together will make them easier to manage, that is a very foolish idea. …

Interviewer: There’s one thing I really don’t understand. After the late 1990s, when China Telecom, China Unicom, PetroChina, Sinopec and all these central SOEs were set up, why has market reform of state enterprises slowly ground to a halt?

Sheng Hong: Because the interest groups figured things out. In the beginning, no one really understood the market economy, but later the state enterprises and government departments figured it out: if you get rid of competitors you can make more profit. There is also some historical background. In the late 1990s, state enterprises were all in deep trouble, so there was discussion of how to bail out state enterprises, Zhu Rongji was also trying to solve the triangular debt problem, and so on. Around 2000, resource prices were fairly low, including the price of oil, coal and land, so the resource-based state enterprises had very serious difficulties. At that time the state enterprise executives understood the benefits of monopoly, and Zhu Rongji thought this was a good way to bail them out. Especially at the beginning no one really noticed. The monopoly of the three national oil companies was established in 1999 with a series of mergers. At that time the oil price was pretty low, so they wanted a monopoly. The justification at the time was to save the SOEs, so there was not much political opposition. That’s the historical background. No one paid much attention, and didn’t think much of the three national oil companies; it was only later that they started thinking the three oil companies were so great. As the oil price gradually rose, it made them aware of their own interests, so they reinforced their monopoly rights. That was the process.

by Andrew

Does this plan for tackling China’s excess capacity have a chance?

What is to be done about the excess capacity in China’s heavy industry? As the decade-long housing boom has topped out in recent years, companies that had bet on ever-rising demand for construction and building materials are finding themselves with idle factory capacity. The excess is probably most serious in steel, but is also evident in related sectors like coal mining (the fuel for the power plants that drive steel smelters). This idle capacity weighs on the economy by depressing prices and margins in the affected industries, and holding back corporate investment and hiring plans. The debate over how to respond to this issue pits those who advocate letting the troubled companies collapse and markets right themselves, against those who fear too much dislocation and argue for extending more subsidies and bank credit to help troubled companies through a rough patch.

Neither of these options is particularly attractive, and the choice to some extent is a false one. Yet discussion of the excess capacity problem seems to mostly swing between an extreme Andrew Mellon-style “liquidationist” position, and the “extend and pretend” school of hoping the problem will go away eventually if troubled enterprises get enough support. The government of late has seemed to lean toward the latter position: the central bank’s lowering of interest rates makes it easier for indebted companies to stay current on their interest payments. A May decision to lower industrial electricity rates and give iron ore mines a tax break was also clearly aimed at reducing operating costs for excess-capacity sectors. Recently Liu Shijin, an economist and senior official at the Development Research Center, a government think tank, stepped in with a proposal cleverly designed to appeal to both sides.

Because I think his proposal is both interesting and realistic in the Chinese context, I have translated here the relevant section of interview in which it appears. The key point is that he proposes using government debt to fund a restructuring plan to shut down excess capacity–which, because it will have real money behind it, will be more effective than previous such plans. I think he is right that direct government funding will be more effective than indirect measures like subsidies, and that there is a public interest in getting the market to clear sooner rather than later. But his plan does require the government to accept a higher level of official debt–something it has historically been reluctant to do, though recent plans for restructuring local-government debt have shown some acceptance of the principle. On the other hand, the sum of 300 billion renminbi that he quotes is hardly a prohibitive figure, given the size of China’s economy and government revenues. Overall this proposal seems like an advance on the current confused strategy, but I do not know how to handicap its chances of actually becoming policy.

China Economic Times: In recent years, China has been restructuring industries with serious excess capacity, but the speed of adjustment is not satisfactory. What are the underlying causes, and how can the situation be improved?

Liu Shijin: I think that the slow pace of restructuring in industries with serious excess capacity in recent years is due to two reasons. First is the effect of the “acceleration principle” that is inherent to the heavy and chemical industries. Due to the increasing specialization of the modern market economy, the production chain for final goods including infrastructure and real estate has lengthened. When demand for these final goods enters into a long-term phase of rapid growth, intermediate inputs will experience a self-reinforcing “acceleration effect.” So the extent of excess capacity in these industries, and the scale of the required reduction, could be greater than originally expected.

Second is the fact that local governments’ attitude toward industrial restructuring is not very proactive, or even passive. Although everyone has recognized that overcapacity is serious and that restructuring is inevitable, often they hope that others will restructure first so they do not have to. In addition to trying to avoid the conflicts caused by shuttering businesses and dealing with debts and re-employment, there is also a lot of selfish thinking by local governments: maintaining the existing businesses means you have a chunk of GDP, from which you can also get tax revenue. The result of these actions is that businesses are losing lots of money; bad companies want to exit the market but cannot, and good companies are also worn down. This is not sustainable.

To cope with this difficult situation, we must have determination to make progress, within a specific time period, in the exit and restructuring of this serious excess capacity. We can consider implementing an action plan for reducing capacity and raising efficiency in industries with serious excess capacity.

China Economic Times: Can you tell us about the specific ideas and measures you envision being part of this action plan?

Liu Shijin: I think this plan should include the following six parts:

First, select the industries to be included in the scope of the action plan, such as steel, coal, petroleum, petrochemicals, iron ore and other industries.

Second, draft a capacity reduction plan. As a preliminary calculation, the plan can be drafted to cover 10% of nationwide production in 2015, with the affected provinces’ plans made according to their share. State macro management departments can sign capacity reduction commitments or agreements with the affected provinces.

Third, establish a “capacity reduction and restructuring fund,” funded largely through the issuance of long-term (10 years or more) dedicated bonds. The amount of the bond issue will be determined by the scale of the capacity reduction in each province. The bonds will be issued and repaid by provincial governments, but the central government will subsidize the interest. The fund will be mainly used to subsidize corporate closures, restructuring and capacity reduction, as well as the placement and re-employment of affected workers. The size of the fund will be approved on the basis of these costs.

Fourth, the affected provinces will use this fund as a lever to promote implementation of the capacity reduction and restructuring plan. When designating production capacity for exit, we should not use the phrase “backward production capacity,” as this terminology is very characteristic of the planned economy. In practice it often means using the size or age of the equipment as a benchmark, rather than its efficiency or compliance with regulations. We recommend using the categories of “illegal capacity” and “inefficient capacity;” the former meaning that which does not national regulations on environmental, energy saving, safety, etc., and the latter meaning capacity with low efficiency that does not have a strong position in market competition. Local governments should follow open and transparent criteria to make a list of companies with “illegal capacity” and “inefficient capacity,” and guide these companies to take the initiative to participate in the capacity reduction and restructuring action plan. Companies that go through closure, restructuring and other capacity reduction measures can receive corresponding subsidies for capacity reduction, staff placement and re-employment. Regions with a large number of competitive enterprises can try using an auction technique, in which the company that bids the lowest [restructuring] cost will have preference in obtaining the subsidy. In short, the idea is to reduce the barriers and conflicts in the process by giving some compensation and some choice to companies that reduce their capacity.

Fifth, give local governments a relatively large amount of autonomy and scope for innovation in the use of the fund and the techniques for cutting capacity. [trimmed for space reasons] …

Sixth, there should be appropriate preventive and punitive measures to prevent a situation where companies think “other people are cutting capacity so I don’t have cut to cut capacity.” National statistics and auditing agencies can do checks in the affected regions, and we can also introduce mechanisms for public supervision. If they find that capacity reductions have been reduced or falsified, there can be a public report and criticism, and a corresponding reduction in the central government’s subsidy. There can also be a request for political discipline of those areas that have committed to reduce capacity. We can use administrative methods in combination with market mechanisms to ensure the desired effect.

China Economic Times: What do you think will happen if such an action plan is implemented?

Liu Shijin: If you implement this action plan for reducing capacity, restructuring industry and raising efficiency, it will send an important signal to society, which is that there will be important changes in the relationship of supply and demand in the affected industries. This signal may drive a rebound in prices. Coal and steel account for a large share of the industries with severe overcapacity. According to preliminary estimates, the funds required for these two sectors are 80-100 billion yuan and 200 billion yuan respectively. If the term of the bonds is over 10 years, and there is an interest subsidy from the central government, it will not create great pressure for local governments. In the short term, there may be some impact on the growth of local GDP and tax revenue from cutting capacity, but once prices rise, these losses will be more than made up for. This is a process of “trading quantity for price,” and is overall beneficial to the locality. Therefore this should be considered a supportive policy for areas with a high concentration of excess capacity, particularly the old industrial bases that have a high proportion of heavy and chemical industries.