We could be seeing the start of a major change in industry policy in China that takes the country back in time and puts a crimp on the market economy and future growth.
It’s a question vital for Australia, which is tied right into the growth direction of the Chinese economy, and Japan, which is seeing its hesitant recovery driven more by China than any other of its major markets.
Reports yesterday on Chinese Government linked websites suggest such a move could be in order.
It seems to be a direct response to the enormous investment in the metal processing industries, cars, wind power, and cement over the past five to eight years.
Provincial and city governments are often the worst offenders and much of that investment is in excess, unused capacity which is not earning its way.
The official Xinhua newsagency reported on its website that China was studying curbs on overcapacity in industries including steel and cement.
The news saw sharesmarkets in Hong Kong, China and Japan fall, but Australia finished flat.
It said a decision of the State Council, China’s cabinet, will see the government lift “guidance” of the steel, cement, glass, coal, and power equipment industries.
"China’s State Council, or the Cabinet, warned Wednesday of overcapacity in emerging sectors such as wind power, and said the country would move to "guide" the development of sectors troubled by overcapacity and redundant projects.
"Overcapacity has persisted in sectors of steel and cement, while redundant projects have also surfaced in emerging sectors of wind power and poly silicon, according to a statement issued after an executive meeting of the State Council, which is presided over by Premier Wen Jiabao.
"Under the current situation, the country would particularly enhance "guidance" over the development of steel, cement, plate glass, coal chemical, poly silicon, and wind power sectors, the statement said.
"The guidance would include strict market access, reinforced environmental supervision, and rigid land use permission."
The first sign of this has come in the steel industry (other consolidation policies have appeared in aviation, appliances and several other sectors) which has emerged as the most vital of all industries, as we have seen with the Rio Tinto//Stern Hu situation.
According to a statement in mid August, China’s Ministry of Industry and Information Technology announced a three-year moratorium on approvals of new expansion-related proposals in the iron and steel industry.
Xinhua reported MIIT Minister Li Yizhong as saying overcapacity in the steel industry was "the most evident" of all the industrial sectors, with this year’s estimated total output capacity at 660 million tonnes, compared with estimated demand at 470 million tonnes.
(It’s now running at an annual 550 million tonnes, according to the 50.6 million tonnes produced in July (up around 12% over the year).
Projects with total capacity of about 58 million tonnes already under construction would continue.
Outdated capacity is being closed, with the Government saying that steel mills in Hebei Province would reduce their overall capacity from 120 million tonnes to 80 million tonnes annually over the next two to three years.
But there have already been reports of workers blocking the closure of at least two mills and killing one manager.
This new approach follows reports the day before about the need for China to emphasise economic restructuring while aiming at higher economic growth.
Xinhua and China Daily both revealed that a report delivered by Zhang Ping, Minister of the National Development and Reform Commission, the top economic planning agency said .
"The country should continue to promote economic restructuring and change its growth mode while it strives to maintain a high growth rate," Zhang said in the report.
"In the current economic situation, policy support was necessary to encourage firms to innovate, adjust their structure, and strengthen management, said Zhang.
"An acceleration in the transition of the country’s growth mode and structural readjustment is directly linked to the country’s ability to stand out amid increasingly fierce global competition, achieve sustainable development, and maintain social stability in the long run," said Zhang.
"Zhang said in the report that the government would continue industrial restructuring and stimulus plans, and urge firms to innovate in key technologies, with a pledge of financial support.
"The government would continue to conserve energy and curb emissions and pollutants, said Zhang.
"It would focus on narrowing the income gap between urban and rural residents and between western and eastern regions in a bid to expand domestic consumption, he said.
But in another report delivered at the same session Tuesday, Zhang said China’s economic recovery was still unstable, not consolidated and unbalanced despite "positive changes" in the economy, echoing similar comments made by Premier Wen Jiabao a day earlier.
Zhang said falling exports had dealt a heavy blow to the national economy, and external demand remained weak with the world economy still in recession and expecting a slow recovery.
China’s exports seemed unlikely to repeat the fast and sustainable growth they had before the crisis, with rising protectionism and United States and European countries trying to correct over-consumption, Zhang said.
But this is just not a Chinese problem. For example Germany, Japan and the US have excess
