Industrial dynamic at core of China's fight with economic slowdown

Special Report:Global Financial Crisis

by Chinese media writer Cheng Yunjie

BEIJING, Dec. 6 (Chinese media) -- China's infrastructure construction has gone up

a gear after the massive capital input announced by central government at the

beginning of November. But still a number of industries are suffering the domino

effect of the deepening global financial crisis.

Henan Provincial Statistical Bureau chief Liu Yongqi said that to give the

Chinese economy "a boost strong enough", "the government needs to optimize its

investment to facilitate industrial dynamic so as to secure production and

employment."

CHAIN REACTION

Field survey by Chinese media reporters showed that even the less export-oriented

central interior -- namely, Henan, Anhui, Shanxi, Hubei, Hunan and Jiangxi

provinces -- have started to feel the pinch of slowing world economy. Industries

like textile, automobile, steel, coke and coal, iron ore and minerals have seen

many enterprises, especially private and smaller ones, slip into the doldrums

over the past three months.

Immediate results are shrinking power consumption, rising inventory, more

payment default and tighter capital flow on the corporate side and reduced tax

revenue on the government side.

In Shanxi's Changzhi City where coal, coking and iron making generated 80

percent of local productive value, a slew of enterprises have ceased production

since October or had to operate under capacity.

Changping Group, the city's largest private iron and steel maker, has lost

so far more than 400 million yuan from a combination of raised production costs

and shrinking market demand. The first 10 months have seen its iron and steel

output decline by 80 percent over the same period last year.

In Tangshan of north China's Hebei Province, more than half of local blast

furnaces have ceased production while the city of Handan, also in Hebei, has

seen more than two thirds of its smaller iron and steel companies unable to

sustain normal production.

Even larger competitors have reported declines in profits. The Wuhan Iron

and Steel Group, for instance, has slashed its production by 30 percent so far,

with its monthly profits plunging from 1.12 billion yuan in August to 46 million

yuan in October.

WISDRI Engineering and Research general manager Xiao Bai said that the

doldrums afflicting the iron and steel industry partly resulted from the blind

investment and over capacity of the past few years. "The financial crisis simply

accelerated the industrial cycle," he said.

Luoyang Development and Reform Bureau chief Li Shengping held that iron and

steel was one of the worst affected industries. "But it did give us a clue that

the global financial crisis had affected China's tangible economy."

From the export-oriented eastern coast to the central interior, a chain

reaction to the deepening credit crunch is clearly in view. In October, the

industrial power consumption, a key indicator for industrial dynamic, fell 50

percent from September in Zhejiang, 13 percent in Anhui and 11 percent in Henan.

Jiangxi Provincial Economic and Trade Commission director Tu Qinhua

explained that market shrinking triggered by the financial crisis had forced

many enterprises to sell off their products at lower prices, which further

weakened industrial profitability and eroded investment confidence.

In a high-profile meeting last Friday, the Political Bureau of the Central

of the Communist Party of China decided that the financial crisis would inflict

much bigger losses over global tangible economy and that the impacts on the

Chinese economy would become "increasingly noticeable".

With the annual central economic conference around the corner, Liu Yongqi of Henan Statistics Bureau expected the government to draw up more policies to maintain corporate dynamic, including easing capital strain and facilitating machinery manufacturing that might give a bigger drive to a broader sphere of industries.

CAPITAL DILEMMA

China's central bank, the People's Bank of China, has removed the credit

ceiling for commercial banks, cut requirement ratios twice and interest rates

three times since September.

But many local officials and enterprises confessed that the domestic

financing environment was not really improving as commercial banks tended to

issue loans sparingly in the difficult times for fear of bad debts.

"We've seen a general guideline that banks should lend more to small and

medium-sized enterprises. But without specific measures from commercial banks,

the policy can hardly be implemented," said Tu Qinhua from Jiangxi.

Yuan Wentao, secretary of the Yanshi City Committee of the Communist Party

of China in Henan, echoed that after shareholding reforms, China's major

commercial banks (Industrial and Commercial Bank of China, China Construction

Bank and Bank of China) had all gone public and changed from "solely

state-owned" into "having a diversified ownership".

"That means banks would no longer bow to government orders," he said.

An insider of the banking industry said that commercial banks' in-house

evaluation system held loan officers responsible for every non-performing loan

they had granted. As a result, few loan officers would risk losing their jobs to

help a company that fell into financial difficulties but had a good market

prospect.

But there are people who advocate banking prudence. Unlike the Western

economy which slipped into recession after the collapse of financial markets,

China's concern should be the other way around because the country's weakening

tangible economy may hit its banking system which might lead to more serious

trouble, they say.

To remedy the situation, the State Council, China's Cabinet, held an

executive meeting on Thursday, deciding to stimulate the "credit distribution

enthusiasm" of commercial banks through "optimized supporting policies" and

"innovative mechanism".

To be specific, local governments were encouraged to channel fiscal input

into credit guarantee companies to help activate the money-lending of commercial

banks. Moreover, tax break will go to private credit guarantee companies

servicing small and medium-sized enterprises.

Yuan Wentao thought this measure "viable" but contended that credit

guarantee should utilize more social funds to avoid the concentration of credit

risk to governments.

Four years ago, Yanshi city government set up a credit guarantee company

with its 10-million-yuan registered capital coming from fiscal input. No bad or

non-performing loans had occurred yet.

This month, Yuan will also organize a special meeting where a number of

financially-strained local companies with good market prospects will be

recommended officially to banks.

In response, Anhui Province's Wuwei County government has planned to spend

30 million yuan setting up credit guarantee companies. As the guarantee premium

was capped at one percent of the credit, much lower than the market average,

local credit guarantee companies would receive subsidy for the premium spread

until June.

Moreover, a risk compensation fund of two million yuan has been launched to

offset a certain proportion of the losses that financial institutions may derive

from extending loans to smaller enterprises.

To alleviate industrial burden, Wuwei county government also promised to

cover two percent of the newly increased interest payment for industrial

enterprises who secure loans from designated financial institutions by the end

of June.

The whole stimulus package would cost Wuwei County a fiscal input of 60

million yuan, about 5.5 percent of its 2007 fiscal revenue of 1.1 billion yuan.

But in some less developed counties where fiscal outlay heavily relies on

central government's transfer payment, capital strain has been a long-standing

headache.

As the central government's 4-trillion-yuan stimulus package required local

government to pay a counterpart fund from local finance, Lian Weiliang,

secretary of Henan's Luoyang City Committee of the Communist Party of China,

said this might be the time to consider allowing local governments to issue

bonds.

Confident about the ongoing battle with the slowdown, Wuwei County

magistrate Lian Xuwen said that the first quarter of next year would be a proper

time to evaluate the effect of these stimuli and consider a policy adjustment.

(Zhang Xudong, Zhang Xianguo, Zhu Jianmin, Liu Zhaoquan, Li Ming also

contributed to the reporting.)