The State-Business Nexus in China’s Steel Industry - Chinese Market Distortions in Domestic and International Perspective ...
<ul><li>For the last 20 years, China’s crude steel output has grown exponentially from about 50 million tons (mid 80s) to ...
Today, China has become the  – by far – largest steel nation in the world. In terms of crude steel production, China prese...
3.  Market and State in the Chinese Steel Industry The State-Business Nexus in China’s Steel Industry <ul><li>China’s stee...
4.  Market Failure Meets Policy Failure The State-Business Nexus in China’s Steel Industry However, the ‘China Steel Inc.’...
5.  Governmental Micro-Management – Some Instruments The State-Business Nexus in China’s Steel Industry Grants, equity inf...
6.  There Are No Cost Advantages The State-Business Nexus in China’s Steel industry <ul><li>China does not have a genuine ...
7.  Discretionary Interventions at the Global Markets Interface The State-Business Nexus in China’s Steel industry <ul><li...
The State-Business Nexus in China’s Steel industry The Chinese steel industry is firmly embedded in a powerful state-busin...
Prof. Dr. Markus Taube Partner THINK!DESK China Research & Consulting GERMANY Phone: +49 - (0)176 - 21 603 441 Internet: w...
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The State-Business Nexus in China's Steel Industry - Chinese Market Distortions in Domestic and International Perspective

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Presentation of the following report at the European Parliament by THINK!DESK China Research & Consulting:

Report shows Chinese state-business relations provoke severe market distortions in the international steel market

25/02/2009 1:18 pm

Basis for future EU action / EUROFER asks Commission for strict enforcement of EU trade laws

EUROFER presented yesterday at the European Parliament, under the patronage of Elisabetta Gardini MEP, a 166 pages report on The State-Business Nexus in China’s Steel Industry - Chinese Market Distortions in Domestic and International Perspective, which has been prepared by Prof. Dr. Markus Taube of the renowned THINK!DESK China Research & Consulting.

“The report reveals in astonishing precision how the Chinese government organizations are severely interfering in the global market system by distorting the cost/price competitiveness of Chinese steel enterprises to the disadvantage of foreign steel makers. We are asking the European Commission and the Member States to strongly react on this by a strict enforcement of EU trade laws, based on the results of this important report. Any further dialogue with China must have the objective of securing a level playing field for European steel makers. This is even more important in order to reduce the impact of the current economic crisis over the next years”, says Gordon Moffat, Director General of EUROFER.

The report reveals in detail how China’s steel industry is firmly embedded in a powerful state-business relationship. Chinese steel companies are not operating in a competition based domestic market environment, but rather uphold very close relations to government agencies on local, provincial as well as central levels. The Chinese government programs the development of the steel industry by means of comprehensive and detailed catalogues outlining development goals and instruments of government intervention. A multi-layered system of politico-business alliances can be identified on the national level: ‘China steel Inc.’ made up of the National Development and Reform Commission (NDRC), the China Iron and Steel Association (CISA), the State-owned Asset Supervision and Administration Commission of the State Council (SASAC) as well as the top management of China’s leading steel enterprises; and on the local level: Local governments and enterprises form their own local alliances promoting local steel production activity, protecting them in the face of adverse central policies. The politico-business alliances (“China Steel Inc.”) as well as local levels result in irrational capacity expansion and creation of massive excess steel capacities (pre-crisis estimation of more than 100 million tonnes per year). Chinese governments support their steel companies by a broad array of mechanisms including, inter alia, grants, various kinds of ‘in-kind’ as well as fiscal subsidies, capital market interventions, preferential tax arrangements, subsidized loan facilities, access to systematically under-priced inputs, non-execution of internationally accepted minimum standards of labor protection and environmental sustainability.

China has shifted from a net importing country to the – by far – largest steel exporter worldwide (20.7 percent of global steel exports in 2007). Chinese steel exports to Europe have increased at an even greater speed than China’s total steel exports. The Chinese share of total EU steel imports has quickly risen to reach almost 30 percent in 2007 from only 2 percent in 2003 – with a growing share in the area of higher value-added flat products. But China does not have a genuine competitive cost advantage in steel making; cost structures and sales prices of China’s steel enterprises do not reflect real market constellations and scarcities. In general, China’s steel enterprises are operating at artificially depressed cost levels. Chinese steel exports to Europe actually incur higher costs than those th

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The State-Business Nexus in China's Steel Industry - Chinese Market Distortions in Domestic and International Perspective

  1. 1. The State-Business Nexus in China’s Steel Industry - Chinese Market Distortions in Domestic and International Perspective Presentation of the Report prepared by THINK!DESK China Research & Consulting for EUROFER – the European Confederation of Iron and Steel Industries February 2009
  2. 2. <ul><li>For the last 20 years, China’s crude steel output has grown exponentially from about 50 million tons (mid 80s) to nearly 500 million tons in 2007. </li></ul><ul><li>Especially in the new century, China’s steel production expanded dramatically with production in 2007 having increased by 250% in only four years. </li></ul>1. The Chinese Steel Miracle The State-Business Nexus in China’s Steel Industry Development of the Chinese steel industry, 1949 - 2007
  3. 3. Today, China has become the – by far – largest steel nation in the world. In terms of crude steel production, China presently commands a share of more than one third of the world’s total output (36% in 2007) 2. Conquering the Global Markets The State-Business Nexus in China’s Steel Industry Since 2006, China has become the – by far – largest steel exporter in the world. In 2007, Chinese steel exports already held a share of 21 percent of all internationally traded steel.
  4. 4. 3. Market and State in the Chinese Steel Industry The State-Business Nexus in China’s Steel Industry <ul><li>China’s steel industry is integrated in a multi-layered system of politico-business alliances: </li></ul><ul><ul><li>The ‘China Steel Inc.’ is bringing together central government’s top policy makers and top managers of the leading steel conglomerates. </li></ul></ul><ul><ul><li>Substituting the traditional system of top-down planning the ‘China Steel Inc.’ has become a new, highly effective cartel determining long-term industry planning and providing corporate leadership to the Chinese steel industry </li></ul></ul>
  5. 5. 4. Market Failure Meets Policy Failure The State-Business Nexus in China’s Steel Industry However, the ‘China Steel Inc.’ is not almighty, but facing a group of local ‘renegade’ state-business alliances defying central policies as well as unwelcome initiatives of other local alliances. Market failure meets policy failure! The ‘toxicity’ of Chinese government interventions in the market process is further enhanced: - overcapacities remain in place - market clearing processes are not allowed to unfold - price distortions are exaggerated by discretionary allocations Spillovers of Chinese domestic market distortions on the global markets are becoming increasingly ‘toxic’
  6. 6. 5. Governmental Micro-Management – Some Instruments The State-Business Nexus in China’s Steel Industry Grants, equity infusions, unpaid dividends and other preferential access to capital Government infusions (18 bn RMB Ma’anshan) Debt-equity swap (27.5 bn RMB Anshan, Baosteel, Lanzhou, Shougang, Taiyuan) Government foregoing dividend payment (industry profit around 190 bn RMB in 2007) ‘ In-kind’ contribution: Government provides productive assets to another company through govenment-mandated mergers (51% stake in 3 MT E’cheng to Wuhan at no cost) Access to policy-driven lending at favourable rates 47 companies benefited from preferential lending through State Key Technology Renovation Project Fund including Anshan, Baosteel and Panzhihua (75 bn RMB) Low cost loans for major listed steel companies such as Baosteel, Wuhan, Anshan and Shougang China Development Bank committed to provide Anshan with 18 bn RMB loan including 10 bn at preferential rates , to promote strategic development of the company Preferential tax programmes Tax refunds, tax breaks and tax cuts foregoing tax collection worth 7.6 bn RMB from listed steelmakers (Transparency on central government programmes only, not on local level) Preferential access to inputs, land and energy Free use of land or at less than adequate remuneration (Baosteel, Anshang, Xinyu) State-owned steel companies provide steel substrate (HR) to rerollers at significantly depressed price levels
  7. 7. 6. There Are No Cost Advantages The State-Business Nexus in China’s Steel industry <ul><li>China does not have a genuine competitive cost advantage justifying its increasingly dominating presence in the international markets, notably the EU. </li></ul><ul><li>Moreover, netting out subsidies and impact of government market interventions would proof the real «market-based» cost structure of Chinese steel production to be substantially higher than nominally reported. </li></ul>Chinese cost calculation incorporating subsidies, see analysis «Does the Chinese Steel Industry Posses a Genuine Competitive Cost Advantage», Full Report, page 35
  8. 8. 7. Discretionary Interventions at the Global Markets Interface The State-Business Nexus in China’s Steel industry <ul><li>VAT export rebates, export taxes, export/import licensing, quota systems, etc. </li></ul><ul><li>Capacity for discretionary fine tuning of cost-based export incentives and disincentives on the product level. </li></ul><ul><li>High flexibility with only days separating policy decision from implementation. </li></ul>
  9. 9. The State-Business Nexus in China’s Steel industry The Chinese steel industry is firmly embedded in a powerful state-business nexus. Chinese governments support ‘their’ steel enterprises by a broad array of mechanisms which are not conforming to the principles of competition based markets. China does not possess a genuine competitive cost advantage in steel making. The Chinese steel industry’s export offensive is not based on superior competitiveness, but rather its access to resources at below market prices. Chinese government organizations are interfering in the global market system, impeding its allocative and welfare enhancing function. Given the absolute size of the Chinese steel sector, fluctuations in its supply and demand patterns do have a substantial potential for destabilizing the global steel and their raw materials markets. Given the phenomenon of a twin market failure plus policy failure in China’s steel markets the China factor has become a risk to global steel market development. 8. In a Nutshell
  10. 10. Prof. Dr. Markus Taube Partner THINK!DESK China Research & Consulting GERMANY Phone: +49 - (0)176 - 21 603 441 Internet: www.thinkdesk.de E-Mail: [email_address] Skype: thinkdesk Twitter: www.twitter.com/thinkdesk Slideshare: www.slideshare.net/thinkdesk XING: http://www.xing.com/net/china/ DISCLAIMER: The information contained in this presentation is based upon or derived from sources that are believed to be reliable; however, no representation is made that such information is accurate or complete in all material respects, and reliance upon such information as the basis for taking any actions is neither authorized nor warranted. This presentation is intended for the use and assistance of clients of THINK!DESK China Research & Consulting. It should not be regarded as a substitute for the exercise by the recipient of their own judgement. THINK!DESK China Research & Consulting and/or any person connected with it accepts no liability whatsoever for any direct or consequential loss of any kind arising out of the use of this presentation or any part of its contents. It should be noted that a variety of factors, including e.g. changes in prices, shifts in demand, variations in supply, international currency movements, technological developments, governmental actions and/or other factors, including our own misjudgements or mistakes, may cause the statements herein concerning present and future conditions, results and trends to be inaccurate. Contact

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