Chinese Steel Subsidies Detailed by Trade Organizations; No Easy Overproduction Fix

• July 28, 2016

A recent report by five U.S.-based steel trade associations analyzed 25 of the largest steel companies in China detailed the amount and type of government subsidies each company received in recent years.

The analysis found that these subsidies and policies have led to tremendous overcapacity and created a fragmented domestic steel sector in China made up, primarily, of inefficient, heavily polluting companies, all of which require government subsidies at several levels to stay open.

The report analyzes the output and financial figures of steel majors such as Baosteel,Hebei Iron & Steel, Wuhan Iron and Steel Corp. (WISCO) and relatively small companies, as well. It details state support methods used by the Chinese steel industry such as cash grants; equity infusions; government-mandated mergers (WISCO and Baosteel are actually undergoing one such merger right now) and acquisitions; preferential loans and directed credit; land use subsidies; subsidies for utilities, raw material price controls; tax policies and benefits; currency policies; and lax enforcement of environmental regulation.

Biggest Tools of Subsidy

The report specifies cash grants and capital infusions as the most common type of subsidy received by Chinese steel companies. Many receive tax breaks and other enticements that are, honestly, also common in the West, but the sheer volume of cash grants and infusions is way out of step with market economics.

Hebei Steel, for example, reported that it received received a total of $10.66 million (CNY 71 million) in governmental subsidies in 2014, in addition to $2.25 million (CNY 15 million) as deferred subsidies. These included a large number of subsidies for technology-related upgrades, and development and environmental protection. It also had tax benefits, preferential loans, and energy and water subsidies.

The most frequently seen forms of support in important national-level subsidy programs directed toward the steel industry are cash grants, preferential loans and tax benefits. At the national level, subsidies have increasingly been focused on environmental protection, energy-savings, technology upgrades, and industry consolidation and restructuring. Yet precious little progress has been seen on actual upgrades to the facilities that have received the subsidies.

Government bodies and subordinate administrations in China often allocate cash grants via “special funds.” The authorities usually publish a regulation of how each special fund should be managed and forms of subsidies disbursement; funds should not be used for other purposes.

However, the trade associations’ review of the corporate filings of China’s largest steel companies revealed that fewer companies have been receiving large subsidies in recent years.

Regional Problems

This is where the problem of a large country with competing regional interests comes into play.

China’s 12th Five-Year Plan (2011-2015) for the steel industry includes region-specific guidelines. For northern and central areas the focus is clearly on restructuring the steel industry through mergers and acquisitions, according to the report, removing obsolete or unused production capacity, and upgrading technology. Industry development is still encouraged in western China to take advantage of resources and to accommodate relocated production from the east.

Border regions, meanwhile are encouraged to explore and utilize mining resources, energy and markets beyond China’s borders.

In relation to issues of overcapacity and environmental pollution in the steel industry, Hebei
province is highly important. If this were the early 1980s, it would be the equivalent of the steel-producing Western Pennsylvania region of the U.S. Hebei shoulders more responsibility for capacity reduction and has received more subsidies for environmental protection from the national government than any other province, mostly to clean up its skies but also to transition to new technology and keep local workers employed.

Local governments are required to implement the overall policies set by the central government. However, there persists some parting between the central government’s policy directive and implementation at the local level due to divergent interests of the local and central governments.

While the central government wants to reduce overcapacity, steel enterprises usually are responsible for much social stability in local areas, including through providing employment. There are truly not any easy solutions for fixing the overproduction problem in China.