Industry pruning won’t help China this time

Beijing signals it will not permit price wars

- ELLEN ZHANG KEVIN YAO CLAIRE FU

China's hardened rhetoric against price wars among producers is raising expectations Beijing may be about to kick off industrial capacity cuts in a long-awaited, but challenging, campaign against deflation that carries risks to economic growth.

Communist Party leaders pledged this month to step up regulation of aggressive price-cutting, with state media running its harshest warnings yet against what it describes as a form of industrial competition that damages the economy.

These signals echo Beijing's supply-side reforms a decade ago to reduce the production of steel, cement, glass and coal, which were crucial to ending a period of 54 consecutive months of falling factory gate prices.

This time, however, the fight against deflation will be much more complicated and poses risks to employment and growth, economists say. The trade war with the US meanwhile is intensifying price wars, squeezing factory profits.

Challenges Beijing didn’t face last decade include high private ownership, misaligned incentives at local and national level, and limited stimulus options in other economic sectors to absorb the job losses resulting from any capacity cuts.

Beijing sees employment as key to social stability. Exporters and even the state sector are already shedding jobs and cutting wages, while youth unemployment runs at 14.5%.

“This round of supply-side reform is far, far more difficult than the one in 2015,” said He-Ling Shi, economics professor at Monash University in Melbourne.

“The likelihood of failure is very high and if it does fail, it would mean that China's overall economic growth rate will decline”