Chinese Steel Industry: How Did the World’s Largest Steel Producer Protect Itself from Global Slowdown and a Trade War?

The US-China trade war and rising environmental concerns have led to a slowdown in global infrastructural projects in 2018. The objective of this short piece is to understand the impact of these global phenomena on the Chinese steel industry.

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Vidushi R Singh, Research Intern, Institute of Chinese Studies

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How Did the World’s Largest Steel Producer Protect Itself from Global Slowdown and a Trade War?

China has been the world leader in steel production since 2008, with about half of the total world steel exports originating in China. The US-China trade war and rising environmental concerns have led to a slowdown in global infrastructural projects in 2018. The objective of this short piece is to understand the impact of these global phenomena on the Chinese steel industry.

Economic logic follows that excess supply and reduced demand, as have been observed in recent times, would lead to falling prices. The inelasticity of supply should have meant low prices for the Chinese steel market. As can be observed in the following graph, prices dipped following the first steel tariff announcement from the United States Trade Representative’s (USTR) office on 1 March 2018. However, while prices did fall, they also rebounded much sooner than initially predicted. This trend can also be observed in the graph, with prices rising back up April 2018 onwards. However, the prices crashed again in November 2018, due to falling demand in downstream sectors, such as infrastructure and manufacturing industries, as a speculative response to rising tariffs between the US and China. Chinese steel manufacturers also registered losses for the first time in the last three years, in November 2018. Despite this, the Chinese steel economy remained largely immune to economic shocks.

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Source: Trading Economics

The Chinese conduit to coming out unscathed lies in the supply side reforms, initiated by the government in 2015. The end of the Chinese construction boom in 2014 had instigated the government to carry out reforms to cut down on steel production. As the growth rate of the construction industry fell from 10% in 2014 to just 2% in 2015, steel production was reigned in, with the growth rate actually falling to a negative value in 2015 (National Bureau of Statistics of China). The government decided to intervene at this point so as to ensure the survival of the steel industry and avoid mass layoffs that would have resulted from a slowdown in the industry. The goal decided in 2015 was to reduce capacity by 45 million tonnes, a target that was attained by the latter half of 2017, much before the set deadline of 2020.

Thus, when the demand growth rate fell, the Chinese steel industry had already moved on to capacity optimization and did not face grave overutilization. This allowed for the industry to shift supply rapidly, and safeguard itself from future tariffs as well. This success of the Chinese steel industry is evident in the fact that since 1 January 2019, Chinese steel prices have increased consistently. The shift from high-grade iron ore to lower grades has also allowed manufacturers to increase margins by cutting costs.

One interesting factor in this situation is the ability of the Chinese steel manufacturers to divert inventory to Chinese infrastructural projects under the ‘Made in China 2025’ initiative and the Belt and Road initiative. While it is hard to ascertain the exact amount of steel inventory being fed into these initiatives, they do provide the steel industry with a reliable sink to use up inventory, while cutting down on any overutilization, thus stabilizing prices in the short run. The government’s plans to expand on infrastructure development in the coming years also provides support to investor speculations and have played a role in stabilizing the Chinese steel economy.

The 25 per cent tariffs imposed on steel imports by President Trump, thus, fall short of having a real impact on the Chinese steel industry, in part due to China’s relatively unimportant position in US steel imports (China is the 25th largest exporter of steel to the USA), and in part because of the foresight of the Chinese government.

So while the Chinese steel industry did face multiple shocks over the course of the 2018 trade war and global infrastructural slowdown, the government’s preemptive measures of securing a strategic sector allowed it to come out of the tussle relatively unharmed. While the opacity of government and industrial operations make it tough to analyze the situation in greater depth, one can say that the Chinese steel industry has been able to cope with the changing world geopolitical scenario with ease.

Hanoi Summit: Limitation of ‘All for None’ Approach

The Hanoi Summit between the leaders of the US and North Korea on 27 and 28
February 2019 ended without any deal or joint declaration.

Sandip Kumar Mishra, Associate Professor, Centre for East Asian Studies, School of International Studies, Jawaharlal Nehru University
Adjunct Fellow, Institute of Chinese Studies

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The Hanoi Summit between the leaders of the US and North Korea on 27 and 28 February 2019 ended without any deal or joint declaration. This is unfortunate given that the US President Donald Trump and the North Korean leader Kim Jong-un had managed to at least bring out a joint declaration during their Singapore summit in June 2018. Although Trump left Hanoi after making many positive statements about Kim Jong-un and North Korea, North Korean official statement, which was released on late night of 28 February was sharper.

While Donald Trump’s press conference that was held in the immediate aftermath of the summit, attempted to convey that everything is not lost and there is still hope, North Korean statement was more accusatory and uncompromising. According to Trump, the US wanted North Korea ‘to do more’ but North Korea ‘was unprepared to do that’. In his interpretation of the North Korean position, Trump shared that North Korea wanted full reversal of the sanctions, which the US considered premature. However, he was still ‘optimistic’ and added that the US and North Korean visions were ‘a lot closer than it was a year back’. He announced the two countries would keep their relationship and especially since Kim Jong-un had assured him that regardless of anything, North Korea would not have rocket and nuclear tests. For Trump, the time was not appropriate for signing a deal currently, though he expressed that signing of a ‘deal is a process and it’s moving along’.

North Korea’s initial statement said that it had asked for only partial lifting of sanctions (only five which were brought in 2016 and 2017 out of overall 11 sanctions), which contradicted with the US claim that North Korea asked for the removal of all sanctions. Actually, North Korea had demanded for a step-by-step approach given the limited trust between the two countries and for the same reason had not put out its full list of demands at the Hanoi summit. North Korea considers removal of all sanctions and non-aggression guarantee as encompassing its full set of demands to the US. Hence, it stated that that even if only partial concession would have been agreed by the US, it was ready to ‘permanently and completely dismantle all of the nuclear production facilities in the Yongbyon area… in the presence of US experts’. It further agreed to commit to ‘permanent halt of nuclear testing and long-range rocket launch testing’ in return for the partial lifting of sanctions.

The US Special Representative for North Korea Stephen Biegun had stated in a conference on 11 March 2019 that the US was ‘not going to do (North Korea’s) denuclearization incrementally’. According to him, North Korea offered to eliminate part of its nuclear programme and in exchange asked for the lifting of ‘basically all’ of the international sanctions and it was not possible for the US to accept such a deal. North Korean version says that when the US demanded to ‘take one more step beside(s) the dismantlement of nuclear facilities in Yongbyon, it realized that the ‘US was not ready to accept our (its) proposal’.

A careful reading of various statements of the US and North Korea suggests that both the parties were asking for more and ready to give less to each other. Moreover, the US considered that even partial lifting of the sanctions might dilute the pressure from North Korea and thus, until full denuclearization of North Korea is not on the table, the easing of sanctions could be a bad strategy. Thus, the US was ready to compensate North Korea’s Yongbyon plus alpha offer by establishing liaison offices in each other’s capitals and having a peace declaration but not to ease sanctions.

For North Korea, without lifting some sanctions, all other American officers are insignificant and useless at this point. North Korea felt that at ‘the existing level of trust between the US and North Korea, there could not be a better agreement proposal’ which is incremental in nature.

Overall, it seems that there is some serious gap between the US and North Korea’s approach towards the denuclearization issue and in the last two weeks, loose statements from both the sides may have widened the gap further. Both the countries need to review their approaches and modify them to accommodate each other’s concerns, otherwise, the prophecy of North Korea might become true in which it said that ‘opportunity like Hanoi Summit might be difficult to come again in future’.

 

What will China do if there is an India-Pakistan War?

In a hypothetical scenario of a new India-Pakistan war, what would China, the ‘deeper than deepest sea and sweeter than honey’ friend of Pakistan, do?

Muhammed Kunhi, Research Associate, Institute of Chinese Studies, Delhi

As a total shift from its conventional approach towards Pakistan sponsored terrorist attacks, days after Jaish-e-Muhammed (JeM) attack on Central Reserve Police Force (CRPF) convoy in Pulwama which killed over 40 paramilitary personnel, India responded with airstrikes on biggest terrorist camp in Balakot in the Khyber-Pakhtunkhwa province of Pakistan.

Indian media reports stated that the retaliatory action for Pulwama, carefully planned with credible intelligence, occurred in the early hours of 26 February and killed more than 350 terrorists by dropping 1000 kg Israeli Precision Guided Munitions (PGM). Some of them claimed that India destroyed at least six terrorist camps inside Pakistani territory and Pakistan Occupied Kashmir (PoK) by employing 12 Mirage 2000 jets, made by Dassault Aviation of France.

In an official statement, government of India declared that Pakistan’s persistent denial of existence of terrorist training camps inside its territory had forced India to take a “non-military preemptive action” against JeM camps in the light of a credible intelligence on JeM’s plan for conducting “another suicide terror attack in various parts of the country”.

Though Pakistan rejected India’s claim of heavy casualties as its “self-serving, reckless and fictitious claim” in the context of its upcoming general election, Pakistan accepted that the Indian military aircrafts violated the Line of Control (LoC) and dropped some amount of payload inside its territory. The director general of Pakistani Inter-Service Public Relations (ISPR), Major General Asif Ghafoor, tweeted that the “Indian aircrafts’ intrusion across LoC in Muzafarabad Sector was 3-4 miles. Under forced hasty withdrawal aircrafts released payload which had free fall in open area. No infrastructure got hit, no casualties.

India’s use of air power – unconventional

Whatever was the casualty and damage to Pakistani military, Indian Air Force’s breaching of LoC to attack a terrorist camp inside Pakistan is a total diversion from India’s conventional approach towards employing air power against terrorist threats from Pakistani territory. It is for the first time since 1971 war that the Indian Air Force has crossed the LoC to attack a target inside Pakistan. In the past, even during the Kargil War in 1999 and when Pakistan sponsored terrorists attacked Indian parliament in 2001, India exercised restraint in employing air power against Pakistan.

Many observers are arguing that India’s airstrike in Balakot will send a clear message to Pakistan that the continuation of proxy war against India would come at a price. Whether Pakistan is willing to learn that lesson is a major question. Definitely, Indian Air Force’s crossing of LoC is a declaration that there will be serious repercussions if Pakistan is planning to continue its proxy war against India.

Challenges dominant discourse

Interestingly, India’s new airstrike on Pakistan, which is theoretically a ‘military action’, though India claims it is a ‘non-military action’ as it is not carried out against any military. The latest developments directly challenge the dominant discourse that India and Pakistan must refrain from challenging each other militarily given the imminent threat of escalation and nuclear war.

Former Pakistan President Pervez Musharraf’s recent statement that “if we would attack India with one atomic bomb, then the neighboring country could finish us by attacking with 20 bombs” clearly shows that the nuclear-war against India is not a popular option within Pakistani strategic thinking as many in India assume. They (Pakistanis) are well aware of India’s military capability and, now, also its willingness to take any risky military action.

Setting aside the nuclear conundrum, the important question is what would a humiliated Pakistan respond? Assessing the current mood of the nation and approach of the present government, it can be said that if Pakistan chooses any retaliatory military action for Indian airstrike on Balakot it would escalate the situation in the subcontinent. At the same time, India will not consider nuclear war as an option until there is a survival threat to it. Hence, we need not expect more than a conventional war, or perhaps a limited border war.

What would China do?

In a hypothetical scenario of a new India-Pakistan war, what would China, the ‘deeper than deepest sea and sweeter than honey’ friend of Pakistan, do? Expressing concern over growing tension in the subcontinent, various countries, including China and the United States, urged both India and Pakistan to “exercise restraint”. In his regular press conference, responding to a question of Chinese response to Indian airstrike on Pakistan, Chinese Foreign Ministry spokesperson Lu Kang said “we hope the two sides will exercise restraint and take actions that will help stabilize situation in the region and improve bilateral relations instead of doing the opposite”. He added that “terrorism is a global challenge that calls for cooperation between countries so as to create enabling conditions and a favorable atmosphere for necessary international cooperation”.

Past experiences tell us that unless there is a credible challenge to its core interests, China will not militarily intervene in another country’s war. In the past, even in 1965, when the tension between India and China was at its maximum, China’s military involvement in India-Pakistan war was limited to creating some disturbances in India’s Himalayan frontier. This time, China has enormous economic and strategic interest in Pakistan, which includes multi-billion dollar China-Pakistan Economic Corridor and Gwadar Port. Additionally, in terms of numbers, China’s trade with India is many times larger than its trade with Pakistan. Since India is not a grave threat to China, it would not consider harming a well-developed trade relationship with India by getting embroiled in the Indian subcontinent’s conflicts.

Considering the depth of Sino-Pakistan friendship and its strategic value for China, it may be assumed that China will not totally abandon Pakistan if the new tension in the subcontinent leads to a war, especially when a growing proximity between the United States and India is quite evident. It will not be a direct military involvement either. The Chinese help to Pakistan will be in the form of weapon-supply and in various other forms of non-military assistance. China will use the opportunity to increase its arms exports to Pakistan without risking its trade relationship with India.

Unlimited Xi Presidency in China: Implications for India

Jabin T. Jacob, PhD, Fellow, Institute of Chinese Studies

What does the removal of term limits for the Xi Jinping presidency in China mean for the developing world and, in particular, for South Asia?

One possibility is there could be a demonstration effect. China’s decades-long rapid economic growth has been a source of envy and inspiration for many countries in the developing world. Some like Vietnam, for instance, have used China as a model in launching its own opening up and reforms process. Other countries, including many in South Asia, have seen Beijing as an alternative to the West for financial resources and capital.

With Xi’s latest move, an ambitious autocrat could try to sell the idea to his people or elites that matter that he – and he alone – holds the solutions to a country’s problems.

And often, as in the case of President Abdulla Yameen in the Maldives, who has imposed a state of emergency in the island nation, they will do so with considerably less finesse than Xi. Continue reading “Unlimited Xi Presidency in China: Implications for India”

Term Limits Off for Xi: Some Reflections for India

Jabin T. Jacob, PhD, Fellow, Institute of Chinese Studies

When China’s National People’s Congress – the rough equivalent of India’s Lok Sabha, but toothless – meets in the coming week it has to deal with a proposal by the ruling Communist Party of China to amend the state constitution to remove term limits for the President of the state. Coming from where it does, this is pretty much a direct order to the NPC to remove the term limits.

Removing term limits for the President, imposed in 1982, is a roundabout way of saying that the norm of two terms for the CPC General Secretary – Xi’s more powerful avatar – too, is not set in stone. Continue reading “Term Limits Off for Xi: Some Reflections for India”

China’s Global Influence in the Film Industry

Preethi Amaresh, Former Research Officer, Chennai Centre for China Studies (C3S)

China’s rise is the economic story of the 21st Century and the entertainment industry is no exception. Cinema was introduced in 1896 in China.[i] The film industry is viewed as part of China’s modernization process and with the global influence wielded by the country’s economy, the rise of “cultural industries” in China is seen as the next step on a path from a developing nation to a world power.

Before the 1949 revolution, China had a vibrant film industry. There were studios in Shanghai – the city was known as the Hollywood of China – which made comedies, romances and melodramas on an almost weekly basis, which were very popular with domestic audiences. But during the Cultural Revolution, the ruling Communist Party of China under Mao Zedong came close to destroying Chinese cinema. Soon after the Cultural Revolution the film industry again flourished as a medium of popular entertainment. [ii]

With China’s liberalization in the late 1970s and its opening up to foreign markets, commercial considerations made its impact in the post-1980s filmmaking. Fifth-generation Chinese filmmakers who had graduated from the Beijing film academy   sought to popularize Chinese cinema abroad. Continue reading “China’s Global Influence in the Film Industry”

A China Gazer’s Random Musings – No. 2

Kishan S. Rana (IFS Retd.), Emeritus Fellow, Institute of Chinese Studies, Delhi

China in Africa

As a second secretary at the Indian Embassy in 1963-65, I occasionally visited Peking University (Beida), always in the company of African diplomats, who went to meet students from their countries at that great institution. I sometimes accompanied a friend from the Egyptian Embassy, circumventing the tight surveillance that we as Indian Embassy officials faced. That first indirect exposure sparked my interest in Africa. Little did I anticipate that I would spend nearly ten years in Africa (Algeria, Kenya and Mauritius and, later Namibia).

How is China seen in Africa? Given that in 2016 China committed itself to US$100 billion by way of credits and loans for African states – significantly more than the World Bank – what has been the impact? Glib talk about neo-colonial actions aside, the reality is rather complex. Continue reading “A China Gazer’s Random Musings – No. 2”