Beijing’s Battle with overcapacity Takes Urgent Turn: State Firms Ordered to Eliminate Losses
Beijing,September 13 – Facing a growing threat of deflation,the Chinese government is intensifying pressure on state-owned enterprises (SOEs) to address widespread overcapacity and declining profits. In recent weeks, at least seven SOEs, including Sichuan 15th Construction company and gansu Power Investment Group, have held meetings emphasizing the imperative to eliminate financial losses.
The push, initiated following President Xi Jinping’s call to action in July, reflects concerns about significant imbalances between supply and demand across key industries. China’s solar panel manufacturing capacity, for example, currently exceeds global demand by a substantial margin, driving down prices and eroding profitability.
Zhang Xiong, general manager of Sichuan 15th Construction Company, reportedly told staff last month that the company must implement “institutional mechanisms to ensure that we ‘cannot and dare not’ make losses.” The company,based in Sichuan province,is focusing on revenue growth and cost reduction,requiring each project to develop a loss-prevention plan subject to monthly monitoring.
Similar directives were issued at Gansu Power Investment Group, where executives from loss-making subsidiaries were instructed to “shift thier mindsets” and formulate a plan for returning to profitability by next year, with losses now designated a “red line.”
While SOE reform efforts are not new, the surge in these meetings since July suggests a heightened urgency to demonstrate responsiveness to Beijing’s policy direction. Though,economists caution that simply demanding profitability without addressing underlying demand issues could exacerbate deflationary pressures.
“A stern talking to won’t bring more contracts,” noted Xu Tianchen,a senior economist at the Economist Intelligence Unit.
Data from the Ministry of Finance reveals a concerning trend: profits across the state-owned sector were flat last year and have declined by 3.3% in the first seven months of 2023. Reports indicate that wage cuts and the rise of secondary employment are already occurring within the sector.
So far, a concrete plan to address overcapacity has only emerged in the polysilicon industry, where major companies are considering forming a cartel to purchase and decommission excess production capacity.
Notably, the recent meetings have largely avoided discussion of potential job cuts, a sensitive issue given the government’s emphasis on social stability. Shaanxi coal Research Institute did address the issue, with Vice President Hao Jing calling for loss mitigation alongside “employee stability through resettlement.”
Experts warn that the pressure to avoid reporting losses could be counterproductive. Alicia Garcia-Herrero, Natixis chief economist for the Asia-Pacific region, suggests that suppressing the acknowledgement of losses will not eliminate them, but rather drive them underground, hindering effective resolution.
Sources: Reuters reporting.