The announcement of the cut in banks’ reserve requirements made a general reference to economic restructuring. The move does not seem so large when you put it up against the specifics announced today: 15 percent across the coal and steel industries, or 1.8 million workers, which I believe qualifies as the largest single layoff announcement in history. Coal and steel are closely connected in China because so much of coal production feeds into steel production. The Reuters report at The Guardian:
This announcement was unexpected because coal and steel are far from the heart of the overcapacity in China’s industrial economy. The excess capacity in construction, for example, is surely greater than 3 million workers. Nevertheless, it all ties together. Cuts in construction, industrial equipment, or any of a dozen other industries would necessitate cuts in steel, which in turn requires cuts in coal. Reducing capacity in coal and steel might as well come first.
The nature of the adjustments points to past imbalances in the economy as the central government pursued glamour over substance in economic development. In solar panels, for example, central government policy supported solar manufacturing strictly for export, even though domestic need for solar capacity was and remains greater than that of the countries factories were trying to export to. Surely China’s economy could be more balanced if practical and domestic needs were not so subservient to marquee export categories.
The drastic cuts in steel point to quality issues. China for the past half century has been known for cheap steel — low prices, but also the lowest quality of any steel producer in the world. Product quality scandals in a wide range of categories have made it a challenge for China to keep exporting.
One of the latest scandals involved laminate flooring which U.S. retailer Lumber Liquidators had custom-manufactured in China. Tests shows illegal levels of industrial solvents in the products. Chemical levels were so high that the Centers for Disease Control (CDC) estimated the cancer risk of a person living with the tainted flooring to be not much less than 1 in 100, and other less serious diseases were far more likely. Lumber Liquidators could go bankrupt because of the scandal, and it has responded by banning all Chinese-made laminate products from its stores. This story at USA Today:
This is just the latest example of how an entrenched indifference to quality can make it difficult to maintain a market position. In a world that is becoming more product-conscious, China will have to make that adjustment as well. Other U.S. retailers pulled similar products, and at least a generation will have to pass by before Chinese-made laminate flooring can get a second chance at the U.S. market.
For these and other reasons, the 1.8 million job cuts announced today for the coal and steel industries are just the tip of the iceberg, and it is hard to imagine that the industrial restructuring can get very far before more monetary easing is forthcoming.