Beijing’s 2015 Industry Consolidation Targets: Problem or Solution?

Beijing released policy guidance for consolidating nine “key” industries on January 22, triggering concerns that China is redoubling efforts to boost state-owned enterprises and tighten their grip on the marketplace. The circular, Guiding Opinions on Pushing Forward Enterprise M&A and Reorganization in Key Industries (“Opinions”), was issued by a collection of Chinese bureaucracies under the coordination of China’s Ministry of Industry and Information Technology (MIIT), hardly a reform-oriented department of Chinese government, and one often in opposition to foreign business organizations in China.

The initial reaction was unease that “consolidation” means more state capitalism and central micro-management of industrial policy – cold water thrown on hopes for a market reform-driven Xi-Li era in Chinese policymaking. That would argue for abandoning bets contingent on strong Chinese growth, since without new reforms China’s economy is sure to stagnate. But hold on: a closer reading reveals this to be a follow-up to an initiative announced years ago. And while China’s industrial planners have long been announcing such roll-ups with limited effects, this round of consolidation talks is more significant for private and foreign firms – but not for the reasons heard so far, and not necessarily in undesirable ways.

Consolidation – Not a New Idea

The industry consolidation initiative outlined in the Opinions originated in an August 2010 State Council circular which tasked administrative planning of consolidation to various government agencies, but lacked any quantitative specificity. The State Council issued a second consolidation circular clarifying some objectives in December 2011.

The Opinions specify quantitative consolidation goals in nine “key” sectors: automotive, steel, cement, shipbuilding, electrolytic aluminum, rare earths, electronics and information, pharmaceuticals, and agriculture – a summary of these goals is provided in Table 1. Successful consolidation, however, depends on other reforms. Local officials won’t relinquish small town SOEs without replacement sources of fiscal support. So in parallel with consolidation talks we see movement on center-local fiscal reform and also central expenditures to support local income growth.

Getting past local resistance to consolidation would be great for private Chinese and foreign firms: it would jumpstart joint venture restructuring, enterprise expansion, cross-border dealmaking and other moves — benefitting China’s consumers, adding to forecast GDP and shaving tail risks. It is no guarantee of further market opening, but it fits into a story of reorientation – which at least raises the prospect of expanding opportunity for non-state firms –better than people think.

Nothing Written in Stone

Given the potential concentration of global market power in firms with questionable corporate governance and non-transparent interactions with a state that is also a market participant, it’s understandable that the reaction to these consolidation plans was sullen. But there are two alternate readings that deserve serious attention by investors and business leaders, readings which could mean more upside opportunity than has been seen for some time.

First, China’s central planners have been talking about consolidation for decades, but without an organic market logic backed by pro-competitive reforms, little happens. The National Development and Reform Commission (NDRC) has long wanted to consolidate the steel industry, for instance, to manage energy consumption and create national champions that could better compete abroad. A plan was announced in 2001, but then the number of steel enterprises doubled between 2002 and 2006 as firms saw profits rise and piled in. From a hefty 3,000 ferrous metals firms at the start of the decade, there were 7,000 by 2005, 8,000 by 2010 and – after a brief pullback in 2011 – currently around 11,000 (Figure 1). The top three are world-scale but accounted for only 14 percent of the total production in 2005, while in Japan, South Korea and the United States the top three control well over half of the market. China’s steel industry is balkanized, with each province promoting its own local champion, and conditions are similar in other industries. The reasons are deep-seated: so take consolidation plans with a grain of salt.

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