China: Supply-side reform set to safeguard future

The government is restructuring the industrial sector to lower costs and promote efficiency.

When the 23 kilometer main section of the Hong Kong-Zhuhai-Macao Bridge was completed in July and rose above the waters of the ocean to connect the three cities, the new form of steel used in its construction was hailed as a prime example of China’s continuing development in the field of materials science and manufacturing.

The bridge, which has a full span of 55 km and is the longest of its kind in the world, is a great advertisement for the duplex stainless steel developed by Taiyuan Iron and Steel, which was being used for the first time.

Meanwhile, in March, the company, which specializes in developing high-tech materials, began supplying stainless steel for Hualong One, a domestically developed third-generation nuclear power station in Fujian province, one of 10 either completed or being constructed with stainless steel made by the company.

Many new growth points such as these are the result of the nation’s ongoing supply-side structural reform, which is focused on increasing high-tech production while reducing low-end capacity, along with the Made in China 2025 strategy designed to support innovative and sustainable development.

“Our products will shine on the global stage through integration with markets related to the Belt and Road Initiative and huge advances in infrastructure and trade,” Li Xiaobo, Tiaiyuan Iron and Steel’s chairman, said.

Seeking growth

Liu Peilin, deputy director and a research fellow at the Department of Development Strategy and Regional Economy at the State Council’s Development Research Center, explained the strategy.

“Supply-side reform aims to raise the labor force participation rate, optimize the allocation of labor and capital, and accelerate technological development,” he said. “If we only stimulate the demand side, it will just lead to inflation. The current challenge we face, from my point of view, is to satisfy the higher demand by providing a higher level of supply to jump over the middle income trap.”

Li Guanghui, vice-president of the Chinese Academy of International Trade and Economic Cooperation in Beijing, noted that other countries are adopting similar measures: “Under the current global business conditions, the world’s major economies are actively seeking to rejuvenate their manufacturing sectors for future growth.”

To that end, the United States has proposed a manufacturing industry renaissance program, Germany has the Industry 4.0 strategy and Japan, France and the United Kingdom have their own programs to revitalize manufacturing and stimulate exports.

To improve the manufacturing sector’s earning potential, China aims to make breakthroughs in high value-added products, such as next-generation computer numerical control machines, large passenger jets, complex ships, offshore engineering products, sensors and industrial software. That would improve the country’s capabilities in key manufacturing technologies and allow companies to compete with rivals such as South Korea, Japan and Germany.

Progress has already been made in shipbuilding. Chinese shipyards are outperforming their South Korean rivals in the construction of high-end mega-container ships, cruise liners and other special-purpose vessels, having already sharpened their manufacturing edge and grabbed a larger share of the global market, said Jin Peng, secretary-general of the China Association of the National Shipbuilding Industry in Beijing.

Between January and August, China’s shipbuilders received new orders amounting to 13.34 million dead weight tons, accounting for more than 32.9 percent of new orders worldwide and surpassing the 27 percent held by South Korean companies during the same period, according to the association’s data.

For example, COSCO Ship-ping Heavy Industry is building four of the world’s biggest subsea support vessels for Maersk Supply Service. The first of the four, Maersk Installer, was delivered this month.

Lin Zhongqin, an industry expert and president of Shanghai Jiaotong University, said it is the first time a Chinese shipyard has built a vessel for Maersk, which usually buys ships from South Korea and Europe.

Meanwhile, Hudong-Zhonghua Shipbuilding in Shanghai delivered the first of four 174,000-cubic-meter trifuel diesel electric liquefied natural gas carriers to an Australian client on Oct. 13.

Dong Liwan, a shipping industry professor at Shanghai Maritime University, said capable Chinese shipyards are now focusing on higher-value vessels, such as LNG and liquefied petroleum gas carriers. Some have also started to develop new sectors, including fishing vessels and ocean farming facilities.

Transformation

These achievements are a result of the campaign to transform the nation’s SOEs, whose combined assets surpass 150 trillion yuan ($22.66 trillion)-double China’s annual GDP.

The central government has actively restructured State-owned Enterprises in a bid to improve efficiency and competitiveness. The move has seen the number fall to 98 from 117 five years ago.

Li Jin, chief researcher at the China Enterprise Research Institute in Beijing, said the reform will cut unprofitable “zombie” companies, reduce excessive capacity and improve administration.

“Zombies” are economically unviable businesses, usually in sectors with severe overcapacity, kept alive via aid from the government and banks.

“A modern corporate system, which separates government administration from business operations, will allow SOEs to function as efficiently as other businesses,” Li said.

Nie Huihua, an economics professor at Renmin University of China in Beijing, was blunt: “Unsuccessful action against zombie companies poses a major threat to China’s economic structure. So China is resorting to SOE mergers to create more global powerhouses and avoid cutthroat competition, in addition to restructuring redundant industries to aid supply-side structural reform.”

Sinochem, a State-owned conglomerate involved in energy, agriculture, chemicals, real estate and financial services, is an example of how unprofitable companies are being slashed to boost efficiency.

“The group has closed 56 departments and lowered the head count at its headquarters by 32 percent since the reform started,” said Ning Gaoning, the chairman.

The reduction of excess capacity and rapid responses to the market reaction are key parts of the reform, he added.

Between January and August, Sinochem generated net income of more than 10 billion yuan, a company record, from its fast-growing businesses in fertilizers, seeds, pesticides and new materials, both at home and overseas.

China Eastern Airlines has also joined the first batch of SOE pilot reforms, and is experimenting in mixed ownership by making 2.25 billion shares in a subsidiary, Eastern Airlines Logistics, available to institutional investors.

China Eastern holds 45 percent of the shares, while Legend Holdings holds 25 percent, Global Logistic Properties has 10 percent and Deppon Logistics holds 5 percent.

According to the 36th meeting of the Central Leading Group for Deepening Overall Reform in June, the government will completely restructure the country’s SOEs by the end of the year to further reduce operating costs.

Reducing overcapacity

Concerted efforts have also been made to reduce overcapacity in sectors such as coal, cement and glass. In the coal industry, the government has closed obsolete facilities and is exploring ways to upgrade technologies.

From January to August, centrally administered SOEs in the three sectors beat government targets, especially in the coal industry where capacity was reduced by more than 55 million metric tons, said Xiao Yaqing, minister of the State-owned Assets Supervision and Administration Commission.

The National Energy Administration plans to cut coal production by 150 million tons this year, an 83 percent reduction from last year’s target of 250 million tons, which saw output fall to 2.3 billion tons, more than 11 percent lower than in 2015, according to data from the China National Coal Association.

Li Wei, general manager of Yankuang Group, the largest State-owned coal company in Shandong province, said the company has closed an outdated coal mine and an old aluminum plant.

“Thanks to the measures, the combined losses shrank by 1.6 billion yuan in the first nine months of the year,” he said.

“We aim to build the company into a first-rate high-efficiency supplier of clean energy. Clean technologies will help the industry to achieve green and sustainable development.”

However, Shi Yong, vice-president of the China Machinery Industry Information Research Institute in Beijing, warned that a number of core links in the country’s industrial chain are missing, such as integrated circuits and industrial system solutions, which is preventing the manufacturing sector from achieving high-end production.

Shi said it is essential for the country to ensure that it has complete and functional industrial, innovation and financial chains, supported by big data analysis, cloud computing, online platforms and business-friendly innovations.
Source: China Daily

Source.