The International Monetary Fund (IMF), an arbiter of China’s status as a market economy, has urged China’s government to more effectively address the nation’s steelmaking capacity and levels of output as well as its support of state-owned enterprises (SOEs).
The report lists the steel, aluminum and paper industries as among 10 industrial sectors that are “defined by low capacity utilization rates and a large share of firms incurring losses.” The report’s authors add, “China’s protracted excess capacity has contributed to downward pressure on global prices, rising market share for Chinese firms and tensions with key trading partners. But overcapacity is also damaging for China by weighing on medium-term growth, the environment and financial stability.”
In a 92-page staff report document posted to the IMF website in mid-August, the organization states, “SOEs have been structurally less efficient than the private sector, reducing economy-wide productivity.” Adds the IMF, “SOE profits have fallen and are significantly lower than those of the private sector.”
The report’s authors also state, “After many years of downsizing, SOEs started growing after the global financial crisis, accounting for three-quarters of the rise in corporate debt/GDP since then. Under the current reform plans, SOEs would extend their size further, potentially crowding out private sector development.” Pointing out a contradiction, the report’s authors write, “SOEs continue to account for 50 percent of zombie debt outstanding, suggesting that significant further progress is necessary.”
The IMF report portrays the SOE support as a drain on China’s overall economic health. “The relatively lower profitability is especially striking given that SOEs receive substantial implicit support (e.g. credit and land) estimated at about 3 percent of GDP, even excluding other benefits such as operating in protected markets. Another way to illustrate the relatively lower efficiency is that in the industrial sector, SOEs account for more than half of corporate debt and 40 percent of industrial assets but less than 20 percent of industrial value added.”
The IMF’s criticisms were posted just two days after China’s own statistics bureau reported the nation produced 74 million metric tons of steel in July 2017, the second consecutive monthly record. According to an online news item from Reuters, the monthly figure is up 10.3 percent from July 2016.
The July figure extrapolated over 12 months would result in 888 million metric tons of steel produced in China in 2017, 9.9 percent greater than the 808 million tons of output in 2016.