For various reasons, local efforts to reduce overcapacity are still in a state of wait-and-see, awaiting the formulation of policies. Since the overall national policy framework remains unsettled and specific supporting measures have yet to be put in place, it would be extremely difficult for each province to independently carry out capacity-reduction initiatives—unless local governments possess substantial financial resources and effective means to do so.

“Many localities are eager to secure favorable policies, and they hope that by submitting their proposals earlier, they can garner more support—this also serves as a form of public commitment,” said the aforementioned local government official.

The capacity-reduction plans for the steel and coal industries in eight provinces—Anhui, Hebei, Shanxi, Guizhou, Jilin, Liaoning, Shandong, and Henan—have already been submitted to the relevant departments of the State Council, according to a report by a journalist from 21st Century Business Herald, who obtained this information from policy officials in those provinces responsible for drafting the plans. “These are among the first eight regions nationwide to submit their plans,” said the official.

As the top priority in supply-side structural reform, capacity reduction has already achieved broad consensus at both the national and local levels. Before this year’s Spring Festival, the State Council issued guidelines on capacity reduction for two industries, explicitly requiring the steel and coal sectors to cut capacities by 100 million to 150 million tons and around 500 million tons, respectively, over the next three to five years. Interestingly, in this round of capacity-reduction efforts, local governments appear to be stepping up their actions far beyond the national expectations; some regions that have already formulated specific plans have proposed cumulative capacity-reduction targets that add up to substantial totals.

“Currently, the coal capacity-reduction targets set for these eight provinces already account for 90% of the national plan,” the source said. “If we add up the figures from all 31 provinces and cities, the total would definitely exceed the national target—and could even double.”

The “hard nut to crack” in the battle to reduce overcapacity

The aforementioned individuals did not disclose the specific targets for capacity reduction in the eight provinces. Currently, the local capacity-reduction targets that are visible are scattered throughout the supply-side structural reform work plans already released by various regions.

For example, Shanxi Province plans to cut coal production capacity by 258 million tons by 2020. Guizhou Province aims to reduce the scale of its coal mines by around 70 million tons over a period of three to five years. Hebei Province, meanwhile, has pledged to cut steel production by 60 million tons and coal-fired power generation by 40 million tons by 2017.

“Everyone recognizes that our production capacity is absolutely excessive, rather than relatively excessive in a structural sense,” said an official from the local government’s think tank.

A reporter from the 21st Century Business Herald reviewed the financial statements of listed companies in the coal and steel industries (based on the third-quarter reports for 2015) and found that among the 53 A-share listed steel companies, only four reported positive growth in total operating revenue during the reporting period. Of these, just 22 companies posted positive net profits—meaning nearly 60% of the listed steel companies suffered losses.

Among the 53 listed companies mentioned above, seven saw their net profit growth rates plunge below -1,000%. The lowest growth rate was that of Wukang Development, at -4,056%. In the first three quarters of 2015, Wukang Development reported a loss of 1.4 billion yuan. The company with the largest loss was Jiugang Hongxing from Gansu Province, posting a loss of 3.5 billion yuan.

By region, among these 53 listed companies, 16 are located in the eight provinces mentioned above, accounting for 30% of the national total.

The figures for the coal industry are even more pessimistic. During the reporting period, among the 37 A-share listed companies in the coal sector, only two saw year-on-year growth in total operating revenue, and just three reported year-on-year growth in net profit. As many as 92% of the coal industry’s listed companies suffered losses. Among them, Shanxi Coal Industry recorded the largest loss, posting a massive loss of 1.4 billion yuan in the first three quarters of 2015.

Of these 37 companies, 21 are located in the eight provinces mentioned above, accounting for more than half. Among them, Shanxi Province has the largest number, with a total of 12 companies.

A reporter from the 21st Century Business Herald, after examining financial statements of listed companies in two industries, found that among the very few listed companies experiencing positive profit growth, the vast majority are small- and medium-sized enterprises. Some of these companies achieved positive net profit growth by reducing their total operating costs.

Among the nine companies in the steel industry with positive growth in net profit, with the exception of Shandong Iron and Steel and Linggang Shares, none had total operating revenues exceeding 2 billion yuan. Similarly, among the three coal industry companies with positive net profit growth—Lanhua Chuangke, Baotailong, and Yongtai Energy—not a single one is a large-scale enterprise; all are small- and medium-sized companies.

This indicates that the key state-owned enterprises in the aforementioned major regions are the real “hard nuts to crack” in this battle to reduce overcapacity. Meanwhile, some companies with more flexible product structures and better cost control have managed to survive the industry-wide overcapacity thanks to their advantage of being “smaller ships that can turn around more easily.”

Local Game of Capacity Reduction

At the end of March, just recently past, Vice Premier Ma Kai convened a symposium with selected enterprises during his research visit to Anhui Province, listening to their suggestions and opinions. According to a reporter from 21st Century Business Herald, participating companies included Huainan Mining and Magang Group. Addressing overcapacity was one of the key topics discussed at the meeting.

“Anhui’s key players are the ‘Three Coal and One Steel’—the Huainan Mining Group, the Huaibei Mining Group, the Wanbei Coal & Electricity Group, and the Ma'anshan Iron and Steel Group—all state-owned enterprises—and they certainly have a stance,” said a local expert.

Just a few days before this symposium, Anhui Province Governor Li Jinbin visited the Huainan Mining Group for a research trip and chaired a symposium to study and promote efforts aimed at resolving overcapacity and achieving transformation and development for the “Three Coal and One Steel” enterprises.

Once known as the “loss king,” Ma’an Shares recorded a massive loss of 3.8 billion yuan in 2012. After briefly reaching breakeven in 2013 and 2014, Ma’gang Shares issued a preliminary earnings forecast at the beginning of this year, predicting a net loss of 4.82 billion yuan for 2015. However, the actual results showed an even larger loss—5.1 billion yuan.

Take Huainan as another example: constrained by an overly simplistic industrial structure, its GDP fell from 81.9 billion yuan in 2013 to 78.9 billion yuan in 2014 and further to 77 billion yuan in 2015, making it the only prefecture-level city in Anhui Province to experience negative economic growth for two consecutive years.

The difficulties faced by Huainan and other regions are a microcosm of the challenges that resource-based cities across the country are grappling with in their efforts to reduce overcapacity. On the one hand, some prefectural-level cities—known as “steel cities” or “coal capitals”—still have an economic structure dominated by primary industries, or even by a single giant enterprise, and this situation has not fundamentally changed. Under these enterprises’ massive losses, local economic development is hampered, local finances remain weak, and while there is strong determination to resolve excess capacity, the capacity to do so is lacking. On the other hand, the dominance of state-owned resource enterprises has squeezed the room for survival and growth of other businesses, leaving a large number of workers from overcapacity sectors with no viable avenues for re-employment.

The two aspects mentioned above—financial resources and personnel—are widely regarded as the most challenging issues in the current effort to reduce overcapacity. This is true in some regions of Anhui, in Shanxi, and even more so in Northeast China.

Earlier this year, Ma Steel (Hefei) Company (Hegang) approved a staff relocation and reallocation plan, under which nearly 5,000 employees were reassigned, with the relocation services being handled by Hefei Yili.

“There are relatively many state-owned enterprises in Hefei, and they tend to perform well. However, in other counties and cities where there are few or no state-owned enterprises, it becomes much more difficult to persuade employees to leave the state sector and enter the social workforce,” said a local expert.

Local authorities are actively submitting proposals and expressing their stance.

It is precisely in this dilemma-ridden battle to reduce overcapacity that many localities have still announced massive targets for capacity reduction—targets far exceeding the national expectations.

“Right now, enterprises are facing many conflicts—first, how to reassign employees and where to get the funding? Second, they have a lot of debt; how can it be resolved?” said the aforementioned local government official.

The aforementioned individuals also pointed out that precisely because of the reasons mentioned above, local efforts to reduce overcapacity remain in a state of wait-and-see, awaiting policy guidance. Since the overall national policy framework has yet to be finalized and specific supporting policies have not been issued, it would be extremely difficult for each province to independently carry out capacity-reduction initiatives without adequate financial resources and effective tools at their disposal.

According to the current pace of policy releases, opinions on capacity reduction in the two industries have already been issued, but provincial targets have not yet been allocated proportionally. Detailed implementation guidelines are still pending until local feedback is compiled and incorporated.

Therefore, among the plans already submitted by the eight provinces mentioned above, the main contents generally include a five-year plan to reduce overall production capacity in the coal and steel industries, the specific reduction targets allocated to major enterprises, the number of employees to be reallocated, as well as the desired tax and financial policies.

Under such a game-theoretic dynamic, some localities have submitted their proposals quite proactively. “Many localities are eager to secure favorable policies and hope that submitting their proposals earlier will help them garner more support—this also serves as a kind of public commitment,” said the aforementioned local government official.