As the world is shocked by $1 trillion of capital leaving China in 2015, Beijing is looking to lay off up to 400,000 steel workers as a first step to reducing overcapacity.
As of January 1, the government has set up a industrial restructuring fund expected to draw over $7 billion to focus on transitioning laid-off workers to gainful employment in other industries (or presumably early retirement where possible).
Another report has the central government in Beijing spending $15 billion annually to this end, with local governments pitching in about the same to bring the annual total to about $30 billion.
These sums are key to the success of the much-needed restructuring; earlier this month, analysts voiced skepticism that China's latest official efforts to curb steel overcapacity will gain much traction, citing the fact that unwillingness of local governments to lose key sources of tax revenue and shoulder social security costs of masses of unemployed workers have hitherto rendered such endeavors ineffective.
Hopes seem high that things this time will be different: Asian steelmaker stocks rallied on news of the latest plans.
Per the first article cited above (Bloomberg), some 3 million workers in the steel, coal, cement, aluminum and glass industries are endangered by a production cutback of 30 percent over the next 2-3 years. If overcapacity in other industries is considered, perhaps as many as 10 million workers face the chopping block between now and 2020; assuming the bulk of this redundancy is from the inefficient state-owned enterprise (SOE) sector, that's up to one-sixth of the entire state enterprise workforce of about 60 million.
These numbers, while large, are actually tame compared to the estimated 30 to 40 million state enterprise workers who were axed in a short period between 1998 and 2000 in the run-up to China's accession to the WTO in 2001. Those workers got only a fraction of the employment transition assistance that's now proposed.
In fact, the big losers in this round of restructuring could be the party bosses at the heads of defunct SOEs: the climate of graft-busting makes it unlikely that they can pocket public assets in closed-door sweetheart deals even as their workers lose their livelihoods, as they notoriously did in the past. And that will also be a big plus, especially for the Xi-Li administration's legitimacy.
As well, although local governments will lose tax revenues from plant closings, this fiscal burden should be relieved within a few years by a normalized steel market, with prices rising back up from their presently depressed levels.
These downsizing plans for steel and coal are just a start to ridding China of overcapacity, but they are effectively pilot programs which must exhibit demonstrable progress first before broader restructurings can cut across other industries.
And they will be crucial to ease renewed fears that China is once more goosing short-term growth at the expense of deeper retooling of the economic development model - something Li Keqiang has attempted to assuage with recent statements.
As many would have expected, only actual deteriorating market and economic conditions could have compelled Beijing to finally do something about its industrial overcapacity and deflation; the country clearly can't have another $1 trillion of capital leave it in 2016.
The strains on the financial sector will be too great: though risk remains minimal for big state bank failures, overall banking industry concern about overcapacity-related credit risk is rising.
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