******************** POSTING RULES & NOTES ********************
#1 YOU MUST clip all extraneous text when replying to a message.
#2 This mail-list, like most, is publicly & permanently archived.
#3 Subscribe and post under an alias if #2 is a concern.
*****************************************************************
NY Times, August 30 2015
Zombie Factories Stalk the Sputtering Chinese Economy
By MICHAEL SCHUMAN
Miao Leijie loses money on each ton of cement his company produces. But
stopping production is not an option.
When the plant opened in 2011 to supply the real estate and
infrastructure industries in the northern Chinese city of Changzhi, the
company raised most of the initial money from banks. Now, Mr. Miao, the
factory’s general director, needs to keep churning out cement simply so
the company can pay the interest on its loans.
It will be tough for the business, Lucheng Zhuoyue Cement Plant, to get
out of the hole. Customers and investments are drying up, and the
company is borrowing even more money to stay afloat.
“If we ceased production, the losses would be crushing,” Mr. Miao said,
as he chain-smoked in the company’s quiet, spartan office. “We are
working for the bank.”
Changzhi and its environs are littered with half-dead cement factories
and silent, mothballed plants, an eerie backdrop to the struggling
Chinese economy.
Like many industrial cities across China, Changzhi, which expanded
aggressively during the country’s long investment boom, has too many
factories and too little demand. That excess capacity, many economists
indicate, will have to be eliminated for the Chinese economy to return
to healthy growth.
But rather than shut down, Lucheng Zhuoyue and other Changzhi companies
are limping along in a kind of march of the undead.
To protect jobs and plants, the government and its state-owned banks
sometimes keep money-losing businesses on life support by rolling over
or restructuring loans, providing fresh credit or offering other aid.
While this may seem like an odd business tactic, it is part of a broader
strategy to help maintain social stability, a major goal of China’s
leadership. Authorities in China’s provinces and cities also back
struggling factories just because they are deemed important to the local
economy.
Similar strategies have been tried before, with little success. In
Japan, such businesses, known as “zombie companies,” are blamed for
contributing to that country’s two decades of economic stagnation.
As China allows its own “zombies” to stalk the economy, the situation is
clouding the country’s outlook, making it difficult to predict where
growth is headed. If the leadership doesn’t address the underlying
problem, the economic weakness could be prolonged.
Concerns have already been rising that China’s slowdown is worsening and
its problems are becoming harder to overcome. Such fears helped ignite a
dramatic sell-off on stock markets around the world. Shares on the
Shanghai stock exchange have tumbled by more than third since the June high.
“Global investors have now come to realize that China’s travails are
beginning to affect everyone,” said Frederic Neumann, co-head of Asian
economic research at HSBC in Hong Kong.
A Threat to Prosperity
Far from the sparkle of Shanghai or the export zones of Shenzhen,
Changzhi is a modest city of three million people who live in low-rise
apartment complexes and work in boxy factory compounds. The local
economy depends on steel manufacturing and other heavy industries that
girded the country’s decades-long era of high growth. As the property
market grew and the government plowed money into roads and other
infrastructure, cement factories sprouted on the city’s outskirts to
capitalize on the bonanza, creating hundreds of well-paying jobs. In
recent years, the busy local shops and crammed fast-food restaurants
along Changzhi’s narrow downtown streets bustled with new prosperity.
But the country’s economy is slowing down, threatening that wealth.
Gross domestic product expanded 7 percent in the second quarter of 2015.
While that would be a stellar performance by the standards of most
countries, it is the slowest pace for China in a quarter-century.
Some industries are plummeting, wreaking havoc in less economically
diverse cities and towns. Empty apartments built during the boom are now
weighing down the property sector. Businessmen in Changzhi complain that
construction projects supported by the local government have also been
scaled back.
As a result, Changzhi’s cement plants are saddled by excess capacity.
Companies in the province can produce three times as much cement as what
was actually needed in 2014, according to the Shanxi Provincial
Association of Building Material Industries. Two-thirds of them lost
money in that year.
Such conditions have turned once promising companies into zombies. While
trucks are still parked outside the sprawling industrial compound of
Changzhi’s Huatai Cement Clinker Company, there are far fewer than just
a couple of years ago, and they have less to haul. The money-losing
company has produced a mere 200,000 metric tons of cement this year,
even though it is able to make one million.
As a state-owned enterprise, Huatai has been kept running with the help
of special assistance. Huatai gets coal on credit and access to cheap
loans from its parent company, which is owned by the provincial
government. That has allowed management to keep all its 300 workers on
the payroll — the company’s top priority. “Our employees need to eat,
they need to live,” said one manager, who declined to give his name.
Such measures may help sustain employment, but they also delay the much
needed overhaul of Chinese industry. A study of China’s labor market by
the International Monetary Fund released in July noted that state-owned
enterprises tended to keep workers that they did not need. From an
economic perspective, it would be better for such businesses to downsize
or even close, releasing their trained staff to work at companies or in
sectors with stronger prospects. That would shift resources away from
less productive parts of the economy, helping get growth back on track.
Without such a shift, the economy could suffer in the future. Raphael
Lam, deputy resident representative at the I.M.F. in Beijing, says
Chinese policy makers should move more forcefully to enact pro-market
reforms and allow state-owned enterprises to restructure. If not, he
says, “Over the long term, there would be an increasing likelihood of a
sharper slowdown.”
‘Eternal, Unpaid Vacation’
The situation is also complicating matters for workers not lucky enough
to keep their jobs. Though unemployment has remained low nationally,
workers in troubled Changzhi complain that good jobs are hard to find.
At the Changzhi Cement Group, where the only sound is a barking dog, a
former company electrician, Zhao Liwei, 43, watches TV inside a decrepit
room for janitors at the compound’s entrance. Two years ago, as
production at the state-owned plant ground to a halt, her paychecks
stopped coming. Most employees were left to fend for themselves
Since the factory was never formally shuttered, they have not received
severance payments or other compensation, Ms. Zhao said. Though a
private company took on a handful of employees to produce cement in a
portion of the plant’s facilities in August, the work is only temporary.
Ms. Zhao has not worked at all. The only jobs in the area, she says, are
sweeping floors and waiting tables, for as little as 500 renminbi, or
$78, a month. She earned twice that working at the factory. “We were
promised an iron rice bowl” — the Chinese term for lifetime employment —
she said. But now “it is like we’ve been left on an eternal, unpaid
vacation.”
Some of these idled workers have faced biting hardship. Sitting outside
a nearby deteriorating residential complex, Du Jianping, 45, says that
she has to rely on handouts from her parents to put food on the table
for her 12-year-old daughter. She and her husband lost their jobs at the
Changzhi Cement Group, and ever since, Ms. Du has been earning a
pittance selling women’s clothes and children’s toys at a stall outside
a train station.
She feels trapped, fearing she would be unable to get better work
elsewhere. “We are too old to find jobs in the cities,” she said. “I
hope the government could help lift up the cement industry so that it
can recover.”
Beijing is sensitive to such pleas. Fearing that joblessness could lead
to social instability, the government has made maintaining employment a
primary goal of its economic policy. Premier Li Keqiang said during a
news conference last year that the lowest growth rate acceptable to the
regime “needs to ensure fairly full employment and realize reasonable
increase of people’s income.”
That helps explain why Beijing is taking stronger action to prop up the
economy. On Aug. 25, the central bank cut its benchmark interest rate
for the fifth time since November. Almost two weeks earlier, it suddenly
devalued the renminbi, which some analysts see as an attempt to lift
China’s sagging exports by making them cheaper in international markets.
The government is also planning to use state banks to finance another
round of infrastructure spending aimed at aiding beleaguered industries
like cement. Managers in Changzhi argue that the authorities should be
doing even more to help, by setting a minimum price for cement or
supporting local construction projects.
Still, such steps may do little more than keep zombie companies alive —
to the detriment of the overall economy. By pumping up growth with fresh
credit and stimulus, the government might temporarily revive some
factories, but also exacerbate the economy’s problems of excess capacity
and high debt.
The consulting firm IHS Global Insight estimates that debt relative to
China’s output will reach 254 percent in 2015, nearly double the level
of 2008. Such debt levels can pose substantial risks to an economy if
borrowers are unable to repay them and a wave of defaults follows. “The
size of debt only accumulates,” said Grace Wu, a senior director at the
rating agency Fitch in Hong Kong. “That doesn’t help with the underlying
economy. It doesn’t help create jobs.”
Over the long term, Chinese policy makers are trying to decrease the
economy’s dependence on excessive investment for growth and allow
household consumption to play a bigger role. That means the factories in
many heavy industries, like cement, may never run again at full tilt.
Wang Xiaohu has not completely given up hope. Over the years, Mr. Wang,
a 40-year-old businessman, put 20 million renminbi, or $3.1 million,
into Changzhi Ruili Building Materials Ltd., which can produce 300,000
metric tons of cement annually. But now the factory site is watched over
by a lone, elderly security guard in an ill-fitting uniform. Mr. Wang
was forced to idle the plant about 18 months ago, laying off nearly all
of his 100 employees.
Mr. Wang, though, has refused to liquidate the factory. Instead, he
maintains the machinery, waiting for the day when the economy revives
and he can produce cement once again — a day that even he acknowledges
may never come. “Many of the small and medium cement plants here are
like this,” Mr. Wang says. “The chances are slim that they will ever
reopen.”
_________________________________________________________
Full posting guidelines at: http://www.marxmail.org/sub.htm
Set your options at:
http://lists.csbs.utah.edu/options/marxism/archive%40mail-archive.com
