BEIJING — Eliminating manufacturing overcapacity in China will be painful, but won’t cause significant unemployment, according to Yang Weimin, deputy director of the Office of the Central Leading Group on Finance and Economic Affairs.
Xinhua, the country’s official press agency, quoted Yang as saying, “Structural reform, especially cutting overcapacity, will inevitably affect the employment status and income of some people, but that’s a step we have to take.”
Xinhua reported that Yang said a mature support mechanism must be in place to ensure social stability, and as a result, there won’t be mass unemployment.
The comments were made on Saturday at a meeting on China’s economy for the 2015 to 2016 period, which was attended by government officials, think tanks, and entrepreneurs.
The meeting comes after the annual Central Economic Work Conference, which was held earlier this month and was attended by Chinese President Xi Jinping, where cutting industrial overcapacity was listed as one of the five major economic work tasks.
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At the meeting, the future emphasis for the economy was placed on pushing up structural reform on the supply side. Previously, China’s economic stimulus has focused on the demand side of the economy. However, many factories are now experiencing a supply glut due to weaker demand and falling prices combined with outdated production ability, which has been dragging down the overall economy and inhibiting growth. State-owned steel and coal companies are reported to be among the worst hit.
Officials now appear to want to tackle the problem directly, rather than continue to bail out underperforming firms. According to a statement released after the four-day Central Economic Work Conference, China will create conditions for execution of bankruptcy procedures based on market rules, and speed up trials of bankruptcy liquidation cases. The statement added that businesses should seek more mergers and acquisitions to solve the problem and that the capital market needs to facilitate the process, allowing the market to play a bigger role in allocating resources and push underperforming businesses to exit. Xinhua also reported that the country would strictly control adding production capacity to avoid a new round of gluts.
A few days after the release of the Central Economic Work Conference statement, Caixin, one of China’s most respected financial magazines, reported that local governments are still giving steel producers hundreds of millions of yuan, noting that Lingyuan Iron & Steel Co. Ltd., a state-owned manufacturer in Chaoyang, recently received 790 million yuan, or $121.8 million at current exchange, from the city government. The magazine referenced a person familiar with the industry as saying that there are more than 100 more state-backed steel companies such as Lingyuan in China. “If local governments subsidize all these companies, it will influence the market’s decisive role in resource allocation,” the source said.
Saturday’s meeting, however, reaffirmed Beijing’s official stance, with Feng Fei, vice minister of the Ministry of Industry and Information Technology, reportedly saying that restructuring rather than bankruptcy will be the major way for “zombie companies” to exit and minimize their negative impact.