Steel yourself

China just announced one of the largest single layoffs in history

Obsession
China's Transition
Obsession
China's Transition

China may soon have a rust belt of its own.

Chinese officials announced plans to lay off roughly 1.8 million workers in the coal and steel industries, as part of president Xi Jinping’s politically difficult effort to restructure the world’s second-largest economy. It’s unclear as to the time frame for the cuts, which were announced by Yin Weimin, China’s minister for human resources and social security.

In recent decades, China built its economy on heavy state investment in export-oriented manufacturing industries. Those investments created large numbers of jobs for low-skilled people flooding China’s fast-growing cities.

But China seems to have over-invested, leaving a glut of capacity in the heavy industrial sector that has forced plants to cut prices deeply. The low prices mean those factories are effectively operating at a loss subsidized by the state.

China has long said that over time it plans to shift from an export-driven economy to one that relies more heavily on internal consumption. Now, with the global economy slowing, China really has no choice. There simply is not enough external demand elsewhere around the globe for China to export its way back to the high levels of growth it achieved over the last few decades.

Of course, the risks and ramifications don’t rest solely with China. Countries as varied as Brazil and Australia are large suppliers of crucial raw materials, such iron ore and coal, for China’s industrial sector. They’ve been faced with steep declines in the price of those commodities. Brazil’s economy has sunk into a deep recession, in part due to its weak export sector.

On the other hand, any indication that China will be idling steel capacity should be a welcome sign of the US steel sector. Publicly traded US steel companies notched a $1.4 billion loss during the fourth quarter of 2015, according to the US Department of Commerce. And outside the US, the world’s largest steel company, ArcelorMittal, also blamed cheap Chinese steel exports for its fourth-quarter loss.

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