Wednesday

2nd Dec 2020

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The right approach to addressing overcapacity problems, from a Chinese perspective

  • Development of the steel industry in China is mainly to meet its domestic demand, rather than to export to other countries. (Photo: Thyssengroup)

Recent weeks have seen further worrying moves in Brussels.

The European Commission opened new anti-dumping investigations on steel products originating from China, and the European steel industry organised a demonstration against so-called Chinese dumping on the EU market and the granting of Market Economy Status for China.

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The protectionist sentiment is worrying and the confrontational approach is regrettable and misleading.

Nobody should be under any illusion: overcapacity, including excessive capacity of the global steel sector, is one of the many challenges we are all faced with. Not only has the European steel industry sector been hard hit, iron and steel industries in China and many other emerging economies are bearing the brunt, suffering badly from excessive production and flagging demand.

According to some estimates, a reduction of overcapacity by 30% in those industries with the most excess capacity – iron and steel, coal, cement, ship building, aluminium and flat glass – is expected to affect the employment of three million workers.

Not to mention that China is also confronted with many other daunting tasks: lifting the remaining 70 million people out of poverty, advancing industrialisation to transform China into a post-industrial society, rebalancing the economy from investment and net exports to consumption and innovation.

The situation is serious and requires a response.

But what kind of response? Grumble, curse, cut the ground from under others' feet, retreat into protectionism and be at each other's throats?

If history serves as a guide, these are unwelcome if not irresponsible responses. They may help with venting one's anger and frustration and obtain short-term gains, but fail to serve one's long-term self-interest and the common interest of all.

Obviously, how to respond to challenges belongs to the competence of each and every country. I only wish to share what we believe to be the best possible approach and option and what China has been doing and will continue to do with regard to the issue on hand.

Steel production halted

First, digest the problem and not dump it on to other's doorsteps.

Development of the steel industry in China is mainly to meet its domestic demand, rather than to export to other countries.

To effectively deal with the overcapacity problems, China has taken tough measures to control new capacity. Painful as it is, China has cut its steel industry capacity by more than 90 million tons over the past few years and investment in iron and steel assets by 13% last year and the growth of Chinese steel production has basically come to a halt.

To continue to address overcapacity in a serious and resolute manner, China has made elimination of overcapacity the top priority for this year and will cut the steel industry capacity by another 100-150 million tons.

'Zombie companies'

Second, take the tackling of overcapacity as an opportunity to accelerate economic restructuring.

The Chinese word for "crises" is made up of two characters, crisis and opportunity.

Guided by our conventional wisdom that opportunities are embedded in crises and that we must be good at getting to grips with them, China is pushing through essential reforms and restructuring against all odds.

Being fully aware that much of China's industrial overcapacity is heavily concentrated at the lower end of the value curve, we have taken restructuring of the iron and steel sector an important part of our endeavour to complete the difficult transition of moving China away from an investment-led economy to a consumer-oriented one.

China is actively restructuring the steel sector by eliminating outmoded capacity, creating exit strategies for "zombie companies" based on market rules and encouraging promotion of innovation, technology, quality and management to meet production safety, energy consumption and environmental protection standards, thereby ensuring an effective supply of high quality products.

In addition, we have put in place stricter supervision over local authorities to guard against excess production and tendency to protect enterprises with favourable policies.

Training and relocating workers for new jobs

Third, support training and relocating workers for new jobs and businesses to minimise the negative impact of transformation.

Like elsewhere in the world, pressure of globalisation and reform and restructuring has its impacts on Chinese society. Restructuring of the iron and steel sector gives rise to concerns and worries. Yet, there is a common understanding that there is pain to be taken for change for the better.

This time around, the Chinese government has taken up measures to help redundant labour change career path. The central government is setting up a special fund to retrain workers and support local government efforts to reduce overcapacity.

And with rebalancing under way in the Chinese economy and with numerous new industries emerging, now it is far easier to get new and better-paid jobs than in the reform of the country's inefficient state-owned industries in the late 1990s.

This should also mean China can rely more on domestic consumption, instead of pouring yet more concrete into a country that has already built too many steel mills and cement plants.

Staying the course

Fourth, stay the course of transformation against headwind.

Our attitude to life is shaped and moulded by the great intellectual legacy over thousands of years and values associated with Lao Tzu, Confucius and Mozi, including the wisdom that as heaven maintains vigour through movement, a gentleman should constantly strive for self perfection.

And the many vicissitudes we have gone through have taught us that to maintain the status quo and protect underperforming sectors is only a temporary adaptation to circumstances rather than a long-term solution.

To be competitive we have to live with the world as it is and when the world changes we must remain nimble to seize opportunities that come with challenging circumstances and swiftly adjust ourselves in a pragmatic and clinical manner.

Indubitably, the unfolding new normal and structural transformation could be more painful and even more prolonged than in the late 1990s since restructuring of upstream industries are more arduous and difficult.

Yet to achieve high quality, efficient and sustainable growth is not an impossible dream, as we are determined to endure hardships and put our strength, determination and willingness to see to its conclusion our set objective.

One Belt One Road

Fifth, China remains committed to opening-up to achieve international competitiveness and promote win-win.

In our globalised world, we are interdependent. This is not an option but a reality. Our progress and achievement proves that the relationship we've built with our global partners especially those strategic partners determines our common prosperity.

Given this, we are working closely with our neighbours, and neighbours of neighbours, in the One Belt One Road initiative to forge closer economic ties, deepen co-operation, expand development in the Eurasian region, and build a community of common interest, destiny, and responsibility.

We are expanding opportunities for both China and the EU by increasing market access and levelling the competitive playing field, including through the negotiation and early conclusion of the China-EU Investment Agreement.

We are advancing, as I mentioned before, economic reforms and restructuring, including financial sector opening, that would create a more rapidly growing Chinese market for European goods and services by moving China toward more home-grown, consumption-led growth.

And we are strengthening cooperation on a range of international economic and financial issues, so that we are better able to work together on common global challenges.

Steel dialogue

Last but not least, global excess steel capacity calls for global action.

All concerned countries should step up dialogue and exchange to seek to resolve their concerns through closer cooperation rather than resorting to trade defence measures, which are not sound remedies.

China stands ready to engage in dialogue and consultation with the EU through platforms including the China-EU Steel Dialogue to resolve their differences and properly manage trade friction.

In this connection, I wish to mention a conversation I had some weeks ago with a European business leader who works with the steel industry.

Contrary to my expectation, he didn't pick a fight with me. Rather, he was very friendly, frank and open-minded. Of the many interesting points he shared with me, three are especially impressive.

Opportunity or challenge?

One, China represents more of an opportunity than a challenge. For many years Western policy makers and scholars, as well as media pundits and commentators, including those in Europe, have engaged in heated debates on whether the rise of China represents a threat or an opportunity for the current international order. In recent times, the "threat talk" has regained momentum.

For Europe, China is both a challenge and an opportunity. In the final analysis, China represents more of an opportunity than a challenge. Putting into perspective, China's shift from major exporter of low-value added manufactured goods towards higher-end production and domestic consumption augurs well for Europe.

And it is very important for Europe to keep in mind there is only one China in the world and Europe should not miss the opportunity that a transforming China will bring to the rest of the world.

Two, Europe and China can and should work with each other and not against each other.

Europe and China are neither strategic competitors nor rivals. With long-standing civilisations behind them, both Europe and China set great store by economic development as well as social equity and justice. In areas where the two sides diverge, both have the wisdom and capability to accommodate and work things out in a mutually beneficial manner. The successful settlement of the solar-panel dispute was a case in point.

Three, it is imperative that Europe holds on to its values of openness and inclusiveness. While the concerns and worries of the steel sector could be well appreciated, it is highly necessary to remind ourselves that to keep Europe's social model and give concrete hope to European citizens and the younger generation, Europe must reform and change. The same goes true for the steel industry. Even if China is not out there in the steel industry market, there are other competitors with competitive edge.

Though voices like this are not very much in the headlines of the local media, they are worth listening and heeded to.

Before I conclude, I wish to reiterate one more point. Whether or not China's market economy status is recognised, the EU and all other members of the WTO are under obligation to apply the rules of the WTO, namely Section 15 of the Protocol on the Accession of China to the WTO, which requires members to stop using the 'analogue country method' in anti-dumping investigations against China as of 11 December 2016.

It should be clarified and not confused – this is not a bilateral negotiation between China and the EU. This is not about whether or not China is up to the market economy criteria of the EU. This is simply irrelevant. The real issue is about the EU standing by its values of - and commitment to - fair trade, multilateralism, and rules-based international order.

We look forward to the EU's clear-cut compliance with its WTO obligations and apply equal terms to China in its calculations of anti-dumping duties.

Disclaimer

This article is sponsored by a third party. All opinions in this article reflect the views of the author and not of EUobserver.

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