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.

The Many Ironies of India-China Economic Relations

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

Pickpockets are not uncommon in crowded places in India. Victims are generally realists and tend to resign themselves to their misfortune quickly often not even bothering to go to the police. Not so, however, actor-turned-politician Manoj Tiwari, head of the Delhi unit of India’s ruling party, the Bharatiya Janata Party. When he lost his iPhone Seven Plus at a demonstration, he promptly complained at the local police station. Politicians in India are often able to get the police to expend extra effort on their behalf, so Tiwari’s response was not really surprising.

What was surprising was the fact that the politician had lost his phone at a protest against Chinese-made goods organized by an affiliate of the BJP’s parent organization, the right-wing hyper-nationalist Rashtriya Swayamsevak Sangh. And as American as Steve Jobs might have been, the iPhone is the quintessential made-in-China product.

Such ironies are a dime a dozen in the India-China relationship. Continue reading “The Many Ironies of India-China Economic Relations”

Work and Workplaces in the ‘New Era’: Labour Issues at the 19th Party Congress

P. K. Anand, PhD, Research Associate, ICS

In the week preceding the beginning of the 19th Party Congress of the Communist Party of China (CPC), state-run media trumpeted the increase in minimum wage levels in 17 regions & cities in China in 2017. Out of these, four major cities namely, Beijing, Shanghai, Shenzhen and Tianjin, have set the minimum wage levels at 2,000 RMB per month. The increase in the minimum wage levels does not carry a linear narrative, however. Some provinces have expressed reluctance to implement minimum wages, wages are also not commensurate with rising house rents, increasing costs of travel from home to the workplace, etc. On the other hand, the increase in wages also adds to the rising labour costs for investors and enterprise managements. In this scenario, the Party-state has the task of striking a fine balance between maintaining economic growth and encouraging investments, while also increasing the material wealth and ensuring the well-being of the workforce.

Xi Jinping’s political report to the 19th Party Congress is reflective of the apprehensions and disquiet of the Party-state in the need to undertake this balancing act Continue reading “Work and Workplaces in the ‘New Era’: Labour Issues at the 19th Party Congress”

Tibet, the 19th Party Congress and China’s United Front Work

Tshering Chonzom, PhD, Associate  Fellow, Institute of Chinese Studies

What does a powerful Xi Jinping as General Secretary of the Communist Party of China mean for the People’s Republic of China’s (PRC) various minority nationalities, especially the Tibetans? The nature and extent of authority accorded to the United Front Works Department (UFWD) that handles nationality, religious and overseas Chinese affairs, during Xi’s second term is an important starting point for analysis.

The UFWD organized a press conference on 21 October 2017 on the sidelines of the 19th Party Congress, in which its leadership saw the organization as an important player in Xi’s new formulation of ‘new era’. For instance, the various conferences held under its aegis in the past five years – such as the Second Central Xinjiang Work Conference (May 2014), Central Nationalities Work Conference (September 2014), 6th Tibet Work Forum (August 2015), National Religious Work Conference (April 2016) – are retroactively characterised as work convened ‘under the guidance of the new era of socialism with Chinese characteristics’. Indeed, at the national religious work conference that was held from 22-23 April 2016, Xi called upon the UFWD to take the lead in coordinating responsibilities with various organisations. In his report to the 19th Party Congress, he likens United Front work to a ‘magic weapon’ that will ‘ensure the success of the party’. Continue reading “Tibet, the 19th Party Congress and China’s United Front Work”

China’s 19th CPC Congress: Redefining Economic Growth

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

There are several aspects of the recently concluded 19th Congress of the Communist Party of China (CPC) that are noteworthy for India.

First, CPC General Secretary Xi Jinping has attempted to redefine what acceptable economic growth is in China. The expression ‘contradiction’ is an important one in the Chinese communist lexicon and until the 19th Party Congress, the ‘principal contradiction’ was the one between ‘the ever-growing material and cultural needs of the people and backward social production’ or, in other words, China’s inability to provide for the basic material needs of its people. Following nearly 40 years of economic reforms, this challenge has now been met with China eradicating poverty at the most massive scale and at the quickest pace in human history.

This process has, however, also resulted in rising income inequalities between individuals and between regions in China, and massive environmental damage and health crises across the country. Continue reading “China’s 19th CPC Congress: Redefining Economic Growth”

Key Issues in Urbanization in China

Lu Ming, Professor, Antai College of Economics and Management, Shanghai Jiao Tong University

A version of this article was originally published in the Business Standard as Towards sustainable urbanisation in China’, 6 May 2017. This is part of a series by Chinese economists facilitated by the ICS.

China has received enormous dividends from its decades of urbanization, which provided labour resources for the development of its industrial and service sectors and rapidly raised the income of the Chinese people. A large number of Chinese farmers became part of the country’s modernization process, allowing for poverty alleviation in rural areas. At the end of 2016, the urbanization rate of China stood at around 57%

China however, continues to face serious impediments in the urbanization process.

One of these is China’s household registration system or the hukou, which connects a person’s right to access public services with whether or not he has a resident status in a locality. The reality is that some one-third of city dwellers in China are trans-regional immigrants who actually do not possess local household registration. As a result, they do not enjoy the same level of social security and public services as local urban residents.

This is a particularly serious social problem for China. Continue reading “Key Issues in Urbanization in China”

Political Embers Flare as Tawang Contends for the Dalai Lama’s Reincarnation

Tshering Chonzom Bhutia, PhD, Associate Fellow, ICS

The Dalai Lama’s visit to Tawang district in Arunachal Pradesh from April 7 to 11 garnered plenty of media attention. One of the most prominently discussed questions centered around the Dalai Lama’s reincarnation.

The Chinese side was unequivocal in not only objecting to the visit but also commenting on the reincarnation issue. The Chinese position, as encapsulated in remarks by scholars from important Chinese think tanks, is that the Dalai Lama’s reincarnation has to be approved by the Chinese government and selection has to be based on a combination of not just “historical rules” but also current “Chinese laws.” The reference to Chinese laws is with respect to the 2007 State Administration for Religious Affairs (SARA) regulation delineating procedures for the selection of reincarnated monks, including eligibility conditions, application procedures and the government and religious institutions to be approached for approval. The regulation basically excludes “any foreign organization or individual” from the reincarnation selection process, obviously in an attempt to legitimize China’s authority and exclude the Tibetan Diaspora (and others) in the selection of the next Dalai Lama.

The Chinese have consistently maintained that any reincarnation must be determined on the basis of the late 18th century procedure instituted by the Manchu Qing rulers of China. Under this “golden urn system” of selecting reincarnations, the names of prospective candidates would be placed in an urn, from which lots would be drawn to pick the real incarnation. Therefore, any other method being suggested by the Dalai Lama is seen as contrary to established rules and illegitimate, for it denies the Chinese government’s authority in the process.

Much of the recent interest in the issue was sparked by comments made by local officials in Tawang Continue reading “Political Embers Flare as Tawang Contends for the Dalai Lama’s Reincarnation”