China's Steel Industry Is A Classic Tale Of Overbuilding

Transcript

DAVID GREENE, HOST:

We're tracking an important change in the economy in China. Steel consumption is down in that country for the first time in two decades. So far this year, the country's hundred biggest steel companies have lost at least $11 billion. Thirty-seven plants have closed and tens of thousands of workers are jobless. For more on this, we turn to NPR's Frank Langfitt in Shanghai. He covers China's economy. Frank, good morning.

FRANK LANGFITT, BYLINE: Hey, good morning, David.

GREENE: So Frank, just remind us. I mean, the steel industry in China was growing year after year, an important driver in that country's economy. What's happening now?

LANGFITT: Well, in some ways, I guess, it's kind of a classic boom-and-bust story. This is a case of overbuilding. There're way too many plants and just - right now - too little demand. All of this was driven by China's housing boom, which we've been talking about for years. And today, even in Shanghai - but certainly around the countries I drive around - there are just so many empty apartment blocks. The other thing is that a lot of this was also driven by infrastructure. The government was spending a lot of money on roads and bridges. But they were running up too much debt. So as GDP growth is slowing, they've been closing down plants, and they've been laying off people.

GREENE: So this is actually something now that the government is going to have to manage. I mean, slowing down building, closing plants, I mean, pushing people out of work - how hard is this going to be on the government?

LANGFITT: It's going to take some time. I was talking to a woman named Helen Liu. She's an iron ore analyst with U-Metal. That's a website that covers the steel industry. And here's what she said.

HELEN LIU: (Through interpreter) I think it will take more than five years. It concerns a lot of issues. For example, local governments' tax revenue and social stability.

LANGFITT: I was talking to a neighbor of mine in Shanghai who works for a big multinational steel company. And he says to get supply and demand in line is actually going to take probably more like a decade.

GREENE: You know, it's interesting. I have this image of China having an authoritarian government that can sort of just make very sweeping, quick decisions to change supply and demand whenever it wants to. But even an authoritarian government, I mean, can't do things like that that quickly.

LANGFITT: No, not at all. And in fact, it's not the way people think about it. Even an authoritarian government like China's - and Xi Jinping the president is very powerful right now - they've got to pay attention to domestic, internal politics and also public opinion. What Helen was talking about there was the big issue being, like, tax revenue and social stability. Local officials, they want to keep these steel mills open because even a steel mill that's operating at 50 or 60 percent capacity, they pay taxes, which local governments are desperate for. The other thing the government is always concerned about here is mass layoffs - could it lead to mass unrest? That makes them really nervous.

GREENE: And that is something the Chinese government has always worried about. I mean, the big fear that there could be labor protests and people rising up. Does that seem likely here?

LANGFITT: You know, we have thousands of protests here every year, but they tend to focus really on distinct grievances. And they don't target the overall system and definitely don't target the party. Also, China's been through this before. When I was here in the '90s, I was covering a period when they were actually closing down so many state-owned enterprises that weren't making any money, and they were laying tens of millions of people off. Now, there were lots of protests back then, but it never really threatened the rule of the party. Party, of course, is very cautious. They know that they're not elected. Their rule has really been based a lot on their economic performance. So they're always aware of these vulnerabilities.

GREENE: Well, Frank, you've been covering China's economic performance for many years now. I mean, is there some broader lesson here?

LANGFITT: Well, one thing that's good here is that this is something that actually has to happen. And we often report on this as a negative thing 'cause it's hard on the economy and hard on the people. But the fact of the matter is, China has to shift away from this old industrial model. What they want to do is build much more of a consumption economy, something that's a lot more sustainable. The other thing is there is so much pollution now in China. Today in Beijing, it's awful. There's a red alert. Schools are closed. And a lot of China's steel mills, they're really energy inefficient. They emit up to 12 times more carbon dioxide per ton than a lot of modern mills that you'd find in the U.S. And actually, fewer mills would be good for our lungs and a lot better for the planet.

GREENE: That's NPR's Frank Langfitt in Shanghai. Frank, thanks as always.

LANGFITT: Happy to do it, David. Transcript provided by NPR, Copyright NPR.