On Thursday, the US House of Representatives held a hearing on the Chinese economy called “Evaluating the Financial Risks of China,” and much of it focused on what that country’s economic slowdown has done to the American steel industry.
One of the Chinese economy’s biggest problems is that it produces too many goods and doesn’t have enough places to sell them. One of those goods is steel.
For years the country has been promising to unload some of its overcapacity and stop manufacturing so much steel. But it hasn’t lived up to those promises – at least, not to the witnesses in attendance.
“The damage that has been done to the industry has been extreme,” said Thomas Gibson, president of the American Iron and Steel Institute.
Gibson pointed out that 33 steel manufacturers have gone bankrupt since the 1990s. He also said that, between 2011 and 2015, the Chinese government claimed that 90 million tons of overcapacity in its steel market had been taken care of. In reality, 300 million tons had been added to China’s steel output.
“They don’t use the word ‘net,'” said Gibson.
Sounds convenient. Gibson went on to say that the only way to handle this problem is to continue enforcing international trade agreements and going after violations as they see them.
And we’re going to keep seeing them.
Painting into a corner
China doesn’t really have a choice here. Its economy is slowing, but it needs to keep its people fed and employed, even if it means manufacturing things that the word has more than enough of.
- Goldman Sachs
That means that the government has to tell its banks – mostly state owned – to keep lending to companies that aren’t actually healthy and productive. During the hearing, one witness pointed out that 40% of China’s new debt is going to pay down interest on old debt.
And over at Goldman Sachs, analysts have noted that even though the government is stimulating the economy in order to blunt the pain of the slowdown, demand for steel isn’t picking up.
“A substantial amount of money, to the tune of 36% of GDP, was created in China in 2015. Official statistics show that another $1 trillion … has been injected into the economy in Q1 2016. However, unlike the experience of 2009, we have not yet seen a meaningful increase in steel demand this year.”
You’ll recall 2009. It was a spectacularly dreadful year.
The Chinese avoided the worst of the global recession by engaging in a massive stimulus program. It rained cash on the economy, and now China’s debt-to-GDP ratio is over 280%. Growing itself out of this problem isn’t an option in this slowdown, but China has to sell whatever it can anyway.
The Chinese Communist Party’s greatest fear is a deterioration of “social harmony,” which tends to happen when people are laid off their jobs and struggling.
Unfortunately, this seems increasingly like a zero-sum game.