A look around China's industrial heartlands shows that not much has changed on the ground.
What spare capacity reductions?
We return from a tour of the Chinese industrial heartlands having found little evidence of substantial spare capacity reductions.
This is at odds with official reports of targets met or exceeded, but is perhaps unsurprising against the backdrop of a renewed focus on growth and stimulus ahead of rebalancing and reform.
State-owned enterprises (SOEs) are very much aware and ostensibly supportive of government efforts to reduce spare capacity in the steel and coal industries, but so far progress has been slow.
An imposition of restricted working days in coal has worked to tighten supply, to an extent, but has not seen a reduction in the workforce or productive capacity.
Indeed, many producers seem poised to ramp production up again when allowed to do so.
Perhaps a bigger incentive not to expand production is the higher price the supply restriction allows them to enjoy.
In steel, where there has been no working day reduction, there has been no supply reduction at all; quite the opposite.
Supported by extra infrastructure spending and a new boom in the property market, steel production has been climbing despite the reported closure of capacity.
To square the circle it helps to know that of the 45 million tonnes of capacity closed, only 10-20% is thought to refer to operating factories.
The rest refers to production lines already suspended for lack of profitability, and so has no impact on observed production.
If the government’s targets are to be met, this does imply eventual cuts to operating capacity, but in steel it looks set to be only a small amount. We may see a larger impact in coal.
However, it is unclear how large an impact on productivity this will yield.
How will it affect a new generation of workers?
By and large SOEs seem very reluctant to fire workers, claiming a responsibility for their workforce which harkens back to the Quaker ethic in the West, but may have more to do with government concerns over instability resulting from increased unemployment.
Instead, surplus workers will be relocated to other arms of the SOE – many have established ventures in other fields like healthcare, real estate, and logistics – which keeps them employed but at questionable value to the employer or wider economy.
Politically, this may make sense, but it is another sign of how far from the 2013 reform agenda the government’s policy has strayed.
More broadly, growth and employment can, and most likely will, be kept around current levels with ever greater stimulus.
We fear though that the new generation of workers won’t have the same protection when the reckoning ultimately arrives.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.