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Policies to help prevent industry uncertainty
2005-12-07
China Daily
The economy is growing at a spectacular pace. But it is not all good news. How can the economy be stabilized by applying the proper braking mechanism?
The Central Economic Work Conference last week put forward the idea of maintaining fast and steady economic growth. Given the already fast-paced gross domestic product growth, it is self-evident that macroeconomic regulation will become one of the key tasks in the coming year to ensure the stability of the economy.
But regulation is not easy, partly because of diverging judgments of the situation.
There is a widely cited estimate that China has more than 100 million tons of surplus steel production. It is also largely agreed that 70 million tons of capacity is building up while another 80 million tons is in the pipeline.
Government officials and think tank analysts used to be in accord with regard to these figures.
The State Council's Development Research Centre (DRC) predicted in a recent report that steel supply, including production and imports, is to surge to 453.36 million tons next year, up 48.03 per cent from this year, as more production capacity is released. Total demand, according to the report, will rise to 336.85 million tons, up 10.12 per cent.
The gap would reach 116 million tons, a figure still within the range of general market forecasts.
But a deputy secretary-general of the China Iron and Steel Association said the report exaggerated the potential of supply while underestimating demand by more than 90 million tons.
One side is represented by professional economists; the other side is the most authoritative industrial group. How do observers take sides?
The State Council research centre reportedly adjusted down its estimate of oversupply by 60 million tons.
Without verifiable statistics, policy-makers will be fumbling in the dark in terms of macroeconomic regulation.
Although the DRC and the steel association are sharply divided, it is nevertheless obvious that the rapid increase in steel production and capacity build-up is creating large risks.
Price initiatives are often a reliable sign of any change in demand-supply relations.
China's top producer Baoshan Iron and Steel Co Ltd has revealed it will cut prices on some of its steel products by at least 10 per cent.
The China Iron and Steel Association urged major domestic firms to cut steel plate production by 5 per cent to help maintain prices.
If the market is in an equilibrium or supply cannot satisfy demand, price cuts would not pop up.
Low-end products used to suffer from market saturation while high-end products, such as steel plate, were short of demand. Now supply of steel plate has soared.
Meanwhile, the national fixed asset investment has slowed down. The major industrial products that require steel have also been slowing down in recent months.
Policy-makers seem more informed of the situation and have set the tone for economic work at the next stage.
Besides the Central Economic Work Conference, the recent State Council executive meeting and the national development and reform conference both conveyed a strong message that the State would keep a tight rein on oversupply.
Such a concept, if translated into concrete action, should prevent the steel industry from having to weather drastic ups and downs, and should stabilize the economy overall as well.
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