China cuts coal and steel Production as well as jobs

China cuts coal and steel Production as well as jobs

Emilio Fabio Torsello
The Asian giant's economic performance is under scrutiny: Europe and the USA accuse Beijing of dumping in its steel exports. Meanwhile, Moody's downgrades the country's credit rating, as well as 63 financial institutions and companies controlled in whole or in part by the Chinese state

Beijing plans to cut coal production by 500 million tons by 2020. The plan also involves scaling back steel production by 150 million tons and placing limits on water consumption. The cuts - announced just months after the Paris climate conference (COP21) - are outlined in the thirtheenth 5-Year Plan, which was presented during the National People’s Congress (NPC), which began on March 5.

The 5-Year Plan is an essential document that dictates economic planning in the Chinese system. It was drawn up during the course of a months-long process before being presented to the NPC, which generally approves the plan without objection.

Beijing's Environmental Policies and Nearly 2 Mln Layoffs

The production cuts will not be painless. Given that coal currently makes up 64% of China’s energy mix, the government’s plan entails laying off 1.8 million workers in the steel and coal industries (1.3 mln in the coal sector and 500,000 in the steel sector, respectively). Around one thousand mines may be closed by 2016, and any companies that aren’t able to stay afloat or comply with emissions reduction targets will certainly feel the pinch.

In order to forestall the ensuing panic, Beijing has put approximately 15.3 billion dollars on the table (100 million yuan), to be used to support laid-off workers, implementing relocation and retraining programmes (these being highly specialised fields).

Steel: USA and Europe Investigate Possible Dumping

However, Beijing’s ‘pivot’ towards lowered consumption of natural resources is part of a broader (and very complex) effort to restructure the Chinese economy. Key in this scenario are a progressive consolidation of domestic consumption and raw materials exports that have hit a ceiling in terms of sheer material limits, but also of increased scrutiny by western trade partners. Europe and the United States have accused China of dumping specifically in its steel exports, with the 28 EU trade ministers requesting an acceleration (from nine to seven months) of the application of antidumping tariffs on Chinese steel. While the country’s domestic steel consumption has gone down 5% in 2015 (year by year), according to data released by Moody’s, exports have gone up 25.5% during the same period, flooding foreign markets. This in the context of a production surplus that, according to data issued by the China Iron and Steel Association, is estimated at 400 million tonnes per year.

Moody's Downgrades China's Credit Rating Along with 63 Companies and Financial Institutions

While the Chinese government is banking hard on environmental policies and taking measures to cushion the blow by providing for the transition of affected workers to other sectors, Moody’s is taking the entire economy to task. Last week the rating agency downgraded 25 Chinese financial institutions and 38 partially state-owned enterprises and subsidiaries from ‘stable’ to ‘negative’ and expressed scepticism over the government’s proposed reforms. Numerous financial analysts, including Goldman Sachs, have even gone so far as to deem the government’s projection of +6.5% annual GDP growth through to 2020 as ‘optimistic.’ The country’s GDP growth in 2016 was just +6.7%