Can China be trusted?

The Ministry of Industry and Information Technology (MIIT) reported that from May 27 2010, Beijing would no longer provide financial support or approve projects that expand production capacity in industries already marked by excess capacity, high levels of energy consumption and pollution.

To see this in perspective, China's steel industry raised capacity in 2009 by 58 million tons to 660 million tons, and succeeded in achieving overcapacity of 200 million tons. As demand declines, that over capacity rate will continue to increase and mills will face mounting debt.

Beijing's inference that energy demand by the steel and aluminium industries is the cause of supply problems lacks credibility.

Thermal power

The spin ignores China's massive thermal power generation expansion and contribution from alternative energy sources, and where low dam levels in many areas have affected hydro generated power supply for some aluminium smelters, the major steel mill bases are less affected.

China's thermal power expansion is not only rapidly outpacing renewable energy development; total planned thermal capacity is further increasing to provide backup supply for wind and solar projects using large base load units.

The comment in John Garnaut's July 7 article on pricing decline on long-steel products, in fact merely reflects the decline in construction and the approaching end of China's major domestic and foreign rail construction program. While Beijing may be giving comfort to investors in the aluminium industry inferring resumption of "full production in 2011", it is ignoring the reality of the post stimulus economy.

Beijing needs an excuse for the cutbacks and hopes that by creating an image that China is sacrificing aluminium and steel production to reduce energy demand and emissions as part of its climate change "policy", it will win foreign support and confidence at home.

State-owned enterprises, local governments and manufacturers, embraced stimulus lending as the promise of quick profits from the property and stock markets. The sudden growth of divisions and subsidiaries of these entities produced a needed boost to balance sheet profits, replacing the core revenue stream and in many, corporations avoided trading losses. Unfortunately, these assets are still recorded at "book value", yet to be realised in the market place.

With property and stock markets declining and wages and conditions on the rise, Beijing has to factor in the impact of these events on its future economic strategy in falling property and stock markets and rising bank risk loans and bad debt.

Beijing is relying on incentives to move low-tech labour industries to the interior, and while this has the capacity to provide work closer to home for the rural migrant workers, Beijing will inherit the problem of unemployment and rising civil unrest in the adversely affected industrial centres along the east coast. The moves will also require supporting administrative, middle level management and trained technicians, not just the migrant workers.

Misleading information

While Garnaut's article on "China's Plan to use internet for propaganda" merely highlighted what was commonly known, it was timely and highlights the problems of relying on official data, or China's media releases for credible source material.

One example of this media propaganda was highlighted during the disastrous auctions of NPLs (non performing loans) by the asset management companies. A release by the China Banking Regulatory Commission reported "… the four AMCs [Asset Management Companies] had either written off or recovered, US$104.9 billion in NPLs ... of which only US$22 billion was recovered in cash."