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Manufacturing & Industry

China factories kept open to give illusion of prosperity


An employee works at a steel factory that exports to Europe and America in Jiaxing, Zhejiang province, in this February 28, 2013 file photo. China appears to have been routinely underestimating output from its sprawling steel sector, with official figures for last year alone 40 million tonnes below a key industry estimate - an amount equivalent to Germany's entire annual production. REUTERS/William Hong/Files

An employee works at a steel factory that exports to Europe and America in Jiaxing, Zhejiang province, in this February 28, 2013 file photo. China appears to have been routinely underestimating output from its sprawling steel sector, with official figures for last year alone 40 million tonnes below a key industry estimate – an amount equivalent to Germany’s entire annual production. REUTERS/William Hong/Files

In the shadow of a group of giant smokestacks and deserted foundries, a peeling sign welcomes visitors to the Wenxi Steel Industrial Park.

But in the nearby village, the working-age men and many of the women have gone, leaving only the elderly and the very young.

“If you cut down the big tree, all the small trees around it will die,” says 69-year-old Wang Peiqing, referring to the collapse of Highsee Iron and Steel Group, which operated the foundries before its recent closure devastated the economy of a once-prosperous corner of Shanxi province in central China. “The entire region relied on the steel mill; now the young people have to go and look for work across China.”

Highsee stopped paying its 10,000 employees six months ago. Local officials estimate the plant indirectly supported the livelihood of about a quarter of Wenxi county’s population of 400,000. Highsee was the biggest privately owned steel mill in Shanxi, accounting for 60 percent of Wenxi’s tax revenues. For those reasons, the local government was reluctant to allow the firm to go out of business, even though it had been in serious financial difficulties for several years.

“By 2011 Highsee was already like a dead centipede that hadn’t yet frozen stiff with rigor mortis,” says one official who declined to be identified. “More than half the plant shut down, but it was still producing steel even though its suppliers wouldn’t deliver anything without cash up front and it was drowning in debt.”

Across the vast expanses of China, similar experiences are playing out, with thousands of companies in heavy industrial sectors plagued by chronic overcapacity that should be going bust instead being propped up by local governments.

With enormous power over courts, state-owned banks and local administrative departments, Communist party officials across China are prepared to go to great lengths to support the biggest failing employers in their jurisdictions.

It was only last month, four years after Highsee began to flounder, that the company was finally allowed by the government to initiate bankruptcy proceedings.

In the past month alone, Chinese media have reported on at least nine large steel mills that appeared to be suspended in limbo after halting production but which are forbidden from going formally bankrupt.

“There are large numbers of companies across China that should go bankrupt but haven’t done so,” says Han Chuanhua, a bankruptcy lawyer at Zhongzi Law Office, a Beijing legal practice. “The government doesn’t want to see bankruptcy because as soon as companies go bust, unemployment spikes and tax revenues disappear. By stopping companies from going bankrupt, officials are able to maintain the illusion of local prosperity, economic growth and stable taxes.”

The outstanding volume of non-performing loans in the Chinese banking sector has increased 50 per cent since the beginning of 2013, according to estimates from ANZ, the Australian bank, but the sector-wide NPL ratio remains extremely low, at just over 1.2 per cent.

In private, however, senior Chinese financial officials admit the real ratio is almost certainly much higher, obscured by local governments trying to prop up companies.

China is on track for its slowest annual growth this year since 1990, when it was still under international sanctions in the wake of the Tiananmen Square massacre. After years of frenetic growth and construction, the slump in China’s real estate sector has created severe problems for upstream industries such as steel, glass and cement that are already suffering from chronic overcapacity.

In the case of steel, Chinese production trebled between 2006 and 2013. The country produced about a third of the world’s steel output in 2006; by 2012 it had risen to about 50 percent. Such overproduction, combined with slower Chinese demand, meant the price of iron ore, the crucial ingredient to making steel, slumped 46 percent between July 2011 and July 2014, according to the World Bank. On current trends, China is likely this year to experience its first full-year outright contraction in steel consumption since 1995.

Source: The Daily Star (Lebanon) – China factories kept open to give illusion of prosperity

 

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