China Research

During the last fifteen years, Chinese crude steel production increased eightfold. But in 2015 the Chinese crude steel production will show a slight decline of around 2 per cent. Main reasons are less infrastructure investments and a lower demand from the construction sector. We estimate the overcapacities of the Chinese steel industry over the domestic demand of more than 250 million tons per year. As a result the Chinese exports of rolled steel products (flat and long) will climb up. During 2014, the total Chinese exports equaled around 93 million tons. For 2015 we expect a rise to around 135 million tons: nearly 9 million tons will go into the countries of the European Union while more than 50 per cent of the exports will be delivered directly to the Asian neighbor countries, another 10 per cent to the Gulf region and around a sixth to the Americas.

An important question is why China could sell its steel products on such a low-price level. First, prices for the raw materials iron ore, coking coal and steel scrap declined during the last year. As a result the producer costs came down. Second, the depreciation of the renminbi cheapened the Chinese steel exports beginning from the third quarter 2015 onward. But does it make sense to export even in case that 11 from 15 of the leading Chinese steel producing companies generate losses during the first half of 2015? In our view, the number of Chinese loss producing companies will increase in the second half of 2015. An important point is that in some provinces the steel exporting companies get subsidies for exports which compensate them partly or fully for their losses.

But will China now reduce its crude steel production or hold it on such a high level even in the future? We expect that China will stabilize the steel production on the current level and ramp up its exports even with losses for the steel producers. But what is the reason behind this on a first appearance economically abstruse behavior? In our point of view, there exists a political and a social misdemeanor behind the export and production activities of the Chinese steel producers. They often do not act independently from the political management in China.

The Chinese steel producing companies belong to the leading employers in many provinces. Even when they are privately or in majority privately owned, the province governments delegate a high responsibility for full employment in the region to them. If they are state-owned, there exist sometimes directives for high-employment levels. The provincial government by itself has an own interest in high employment levels in the region.

On the one hand, full employment or nearly full employment generates high income in the region and result in higher standards of living. In the internal ranking with other province politicians, the “helpful” province government improves its relative position and this enables them for further career leaps. If the people in a region are employed and have a higher standard of living, this will normally result in political calmness and social harmony in this part of the country. And the political calmness and social harmony secures the political survival of the provincial political leaders. On the other hand, if a province is politically instable because of unemployment, population movements and social unrests, the political careers of the members of the province government will end very quickly.

But currently the Chinese steel industry behaves very cautiously and helps to secure social harmony and economic stability. The overcapacities in the steel production lead to further rising exports which means that the Chinese problems with the huge volumes of steel production will be exported to other countries. We expect therefore that anti-dumping measures will be the answer to this Chinese behavior by both NAFTA the European Union.

Dr. Heinz-Jürgen Büchner
Managing Director Industrials, Automotive & Services
IKB Deutsche Industriebank AG, Frankfurt

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In a few days, the United Nations’ Climate Change Conference is scheduled to start. Particularly three developments are encouraging since the failure in Copenhagen six years ago. First, there seems to be more global co-operation on this important issue. Second, this improved global understanding seems to include jointly China and the U.S. Third, China has discovered the limits of very rapid economic growth, either voluntarily or involuntarily by enormous air and water destruction in the world’s largest country (by population). The (quite) new Chinese popular awareness of the environment is certainly encouraging and cannot be neglected by politicians anymore.

In Hong Kong’s South Chinese Morning Post, I could read in the beginning of this month about horrible pollution problems in northeastern China with noted record pollution. Many other concrete examples of this kind certainly exist as well. Altogether, China as the number one global CO₂ producer has certainly a special responsibility to make the fight against global pollution more effective (without forgetting India). Improved co-operation with the U.S. on this issue would most certainly be beneficial for both China itself and the whole globe.

Before, China – even as the number one global CO₂ polluter – gave the U.S. the main responsibility for CO₂ pollution and global warming, explained by the lower population in the U.S. or its highest pollution per capita. Since pollution really has become a global phenomenon, such a distinction does not make sense anymore. This is why the whole world is waiting for good Sino-American co-operation on all environmental issues.

In this context, it should be singled out that carbon energy production – and not car pollution – widely is regarded is regarded as the most terrifying threat to a better environment in China (without neglecting car pollution). China has to act strongly in both of these two decisive fields, by domestic developments and by co-operation and business with western firms.

Consequently, there still exist many commercial opportunities for many western firms – Swedish companies included – with the big country of China, despite weakening growth prospects compared to the past decade.

However, there still is a catch. Sure, China seems to be committed to its environmental goals, for example peaking CO₂ pollution by the year 2030. But on which GDP and/or industrial production levels will this peak be reached? So far, I haven’t observed any numerical details on this important detail. At least I would like to see, two or three growth scenarios and their assumed effects on the environment.

Unless more measurable changes are planned, my doubts about major future effectiveness of environmental improvements will stay in place. I do hope they will come. Shouldn’t the environment be a good area for improved Chinese transparency?

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

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• China and Germany will consecutively hold the G-20 presidencies in 2016 and 2017. They should work together proactively in shaping a focused and practicable G-20 agenda for the mid-term.
• As countries with different, yet complementary, capacities and priorities, China and Germany should place sustainable cross-border infrastructure investment high on the agenda of the G-20.
• China puts the focus on potentially environment-intensive cross-border infrastructure investment. With its new finance institutions, China can help to ease budgetary constraints and to integrate Central Asian economies into global market networks.
• Germany is well positioned to bundle the technical expertise of industrialized countries and international finance institutions so as to minimize the ecological, socioeconomic and economic footprint of the infrastructure investments proposed by China.
• Chinese-German collaborative initiatives on infrastructure investment will have to actively address and reconcile the concerns among potential recipients about an asymmetric distribution of net gains in favor of China.

“Once you start thinking about growth, it is hard to think about anything else”. This statement by Nobel Prize Laureate Robert Lucas could have been the overarching guideline of past G-20 meetings. The 2014 Brisbane Summit Meeting, for instance, named stronger growth even twice in the first two sentences of the Leaders Communiqué. Other issues were subordinated to pushing growth.

At the same time, everywhere, even in the poorer regions of the world, the call for a better quality of life and higher well-being of people has become louder. Demands for reducing environmental damage and resource absorption while moving away from one-sided physical capital accumulation with its hefty carbon footprint have become part of an intense public debate in most political systems.

China is a prime example for these demands. China’s Five-Year-Plan 2016-2020 whose basic features were communicated at the end of October 2015 targets a lower annual average GDP growth rate of 6.5% towards a “moderately well-off society” and towards more ecological security by sticking to “green” development. The “good-bye” to investment-driven growth and the “welcome” to consumption-driven and service-oriented growth has become a standing matter in each official statement of Chinese economists and political leaders.

China will hold the G-20 presidency in 2016. Its plea for more quality of life and a lower carbon footprint could perhaps be the beginning of a new paradigm for global governance giving a much higher priority to sustainability targets.

However, there is another call from China which triggers second thoughts whether the country welcomes the same developments abroad which it welcomes at home. This is the “Road and Belt Initiative”. This initiative is an investment-driven strategy in its purest form, including a deep carbon footprint. “Infrastructure gap” assessments signal a high need for these investments which apart from the established finance institutions are to be financed by new institutions (AIIB, NDB, Silk Road Fund) that are all financially powered by China.

No doubt, the dismal history of assessing “gaps” in the past (such as “savings gaps”, “foreign exchange gaps”, “aid gaps”) invites a critical judgment. Gaps are moving targets. They are often conceived as static or mechanical and therefore misleadingly suggest having reached a finishing line once the gap is closed. However, it is also clear that long gestation periods, corruption issues, maintenance costs and financing bottlenecks led international institutions in the past to be very reluctant with regard to large-scale infrastructure investment, especially into cross-border infrastructure.

To provide a novel and innovative response to infrastructural needs, however, sustainable cross-border infrastructure investment should be put high on the agenda for the Chinese and German G-20 presidencies in 2016 and 2017, respectively. An ambitious infrastructure agenda, however, cannot be adequately launched and pursued within just one year. China will need support in overcoming concerns about the new financing institutions that it has sponsored.

Here, the G-20 presidency of Germany in 2017 could help. Germany should put cross-border infrastructure investment high on its G-20 agenda, thereby pushing for the explicit consideration of sustainability and the lowest possible carbon footprint. Through working on a shared agenda, China and Germany could give a two-year, practicable focus to the G-20. China would receive signals from Germany where to stop in the excessive expansion of infrastructure investment. On the other hand, China would induce Germany to consider major infrastructure investment from the perspective of mutual benefit and gains, thereby helping to overcome the characteristicly excessive caution and inertia in German infrastructure policies.

Germany’s contribution to a G-20 infrastructure agenda would be to collect and bundle all expertise available within the industrialized countries and the multilateral finance institutions (World Bank, European Bank for Reconstruction and Development etc.) to ensure that cross-border infrastructure investment projects proposed by China meet criteria of ecological, social, economic and financial sustainability and do not become a hunting ground for transnational corruption networks.

Furthermore, Germany could use rich experiences from cross-border investment projects within the EU to tackle the challenges of asymmetric benefits between partner countries. For instance, it is likely that a number of small Central Asian countries could see highways crossing their territories to one-sidedly benefit Chinese construction companies or Chinese traders of consumer goods as well as commodities. As cross-border infrastructure investment in Central and South Asia are facing security and geopolitical concerns (such as a perceived encirclement of India), consultation process within the G-20 should be initiated by China and Germany to address these concerns upfront from the very beginning.

Chinese-German cooperation across two consecutive G-20 presidencies would not only balance the two objectives of economic transformation and sustainable development. It could also support the multilateral agenda for reducing carbon emissions. Simultaneously, it would acknowledge that a prudential and sensitive view on environmentally risky infrastructure investment would not forego the benefits that a better physical infrastructure offers for regions and people which on the long way between China and Europe are today more decoupled from markets than they were during the high time of the historical Silk Road.

^*This article was originally published by MERICS on November 10. We thank MERICS for allowing to re-print the article.

Rolf J. Langhammer
Professor, Kiel Institute for the World Economy and Mercator Institute for China Studies (MERICS), Berlin

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