China's industrial overcapacity is not only because of excess planning but because the country is becoming more modern. The economy will not collapse as a result, says DW's Frank Sieren.
Time's up for thousands of coal mines due to close this year as Beijing takes drastic measures to speed up China's modernization. This will not only affect coal miners, though. Between five and six million workers in obsolete and uncompetitive state companies that continue to employ people despite major losses are expected to be laid off. However, cutting jobs is not the only way to deal with this issue.
So that the reforms do not deal too heavy a blow, Chinese steel producers are being allowed to sell their state-subsidized products on the world market at cheap prices. However, by doing this, they are exporting the problem. Jobs on the other side of the world are now in danger. At the end of February, thousands of workers and their managers demonstrated against cheap Chinese steel in Brussels. Beijing was not bothered. It will be tough enough in China as it is. In the coal and steel industries alone, 1.8 million jobs will be lost, some 15 percent of the workforce. There have not been such cuts in at least two decades.
Millions of tons of overcapacity
But there is no other way of reversing the overcapacity of 60 million tons of coal per year. Some 500 million tons are due to follow in the next three to five years. In the steel industry, overcapacity rose from 132 million tons to 327 million between 2008 and 2014. Reforms have long been overdue in other sectors. Cement producers almost doubled their output in the same time frame from 450 million. Oil refineries tripled their production to 230 million tons.
However, all this is not quite so dramatic as it appears at first sight. On the contrary: It is very normal for countries that are becoming more modern and ridding themselves of inefficient, polluting industries. Germany too was once forced to give up its coal industry and did not collapse as a result. In 2014, only 7.6 million tons of coal were mined in Germany - 70 percent less than 20 years earlier. In 1960, there were still some 17,000 miners working in Germany. Today, there are only 913 left. Germany suffered an even more dramatic development in the electrical industry and textile sector. Over 400,000 jobs were lost in the latter between 1955 and 1980.
Comparative processes in Germany
Germany's economy did not become weaker as a result. On the contrary: it became more competitive. It will not be any different in China - just that the process there will be much more complicated and protracted. Like the German government at the time, the Chinese government today has to ensure that the restructuring process is not too abrupt. That's why the mining sector continued to be subsidized for decades. It is a never-ending process. There are always cuts in industries that are no longer competitive while jobs are created elsewhere.
Recently, there has been some debate as to how the metal and electrical industry can continue producing competitively in Germany and at what wage levels. Employees want a 5 percent wage increase, while employers say that this would impair Germany's competitiveness. In any event, Germany's experience shows that the earlier restructuring begins, the faster it is to tell which sectors are competitive and which are not to make the entire restructuring process cheaper. The Chinese government and its predecessors have taken plenty of time. Therefore, the problem is now more urgent than ever.
Power struggle between Beijing and the provinces
Regions that are entirely dependent on the coal or steel industry are doing everything to prevent the factory closures announced by Beijing. The game between Beijing and the provinces is not unlike that between Brussels and the EU member states: When push comes to shove, it's each man for himself. Contrary to Brussels though, Beijing is now more determined than ever. It is putting up the equivalent of 14 billion euros ($15.3 billion) to pay off workers and settle the factories' debts. That's a good investment.
DW's Frank Sieren has lived in Beijing for over 20 years.