China: New Year, New Economic Era

By Kate Gordon


Happy February, and Happy Chinese New Year!

It’s not just a new year for China, according to reports coming out of a recent State Council meeting—it’s also a new economic era. Government leaders, faced with an economic slowdown and overcapacity in traditional manufacturing industries, are calling for a large-scale “supply-side reform” and a shift from a production-based economy to one that is more focused on consumption and services. According to Premier Li Keqiang, who heads China’s economic overhaul, heavy industry itself will play a key role in this economic transition: “Steel and coal sectors should take the lead,” said Premier Li in a recent statement, by “cutting overcapacity, digest[ing] unreasonable inventories, reduc[ing] costs and improv[ing] efficiency.”

In this post-Paris summit world, where countries have agreed to dramatically curb carbon emissions, China’s shift away from high-carbon manufacturing can seem like a dream come true. After all, China is the largest single emitter in the world, surpassing the U.S. back in 2007, and the manufacturing and power generation sectors together make up 85 percent of its carbon emissions. Fully 25 percent of China’s emissions are due to products manufactured in China but consumed abroad, according to Zhu Liu of Harvard’s Belfer Center.

There is no question that China’s economy is in need of some balance and diversification, and not only from a carbon standpoint. But as I noted in a recent Wall Street Journal post, there’s also no question that a truly sustainable global economic transition, where countries like the U.S. and China move from fossil-based systems to low- or no-carbon alternatives, will require a strong and vibrant manufacturing sector. Today’s wind turbines are 80 percent steel, after all; solar systems require steel or aluminum support beams; and many green buildings rest on concrete foundations.

China has made a strong commitment to a new economic model that is not only less manufacturing-intensive, but also lower-carbon. In December, at a side meeting of the UN climate change summit in Paris, Chinese leaders committed to dramatically increasing renewable energy targets, aiming for up to 200 gigawatts of solar power and 250 gigawatts of wind power by 2020. (For reference, the U.S. currently has a little more than 24 gigawatts of total installed solar capacity—one-tenth of China’s proposed amount.)

So will China accomplish these twin economic goals by closing down its manufacturing base while ramping up its renewable energy purchases, thus ensuring those energy-intensive factories are built overseas—potentially in lower-cost markets with fewer environmental standards? Or will it instead take a more integrated approach to its manufacturing sector by pushing these industries to become lean, efficient, and flexible contributors to the low-carbon future?

The latter approach is not only preferable, it’s very possible. Here’s why:

  • China has a history of retooling existing manufacturing to meet the needs of the new economy. Its investments in semiconductor plants and labor skills positioned China well to gain market share in the related technologies of solar and flat panel displays. (The rush into solar production is also a good reminder that a wholesale shift to a new industry like solar can bring its own overcapacity issues, however.)
  • The steel industry in particular has already demonstrated its ability to become more efficient, retool, and capture emerging markets. The U.S. Rust Belt is no stranger to steel sector challenges; the industry lost 260,000 American jobs to global competition between 1970 and 1990. The remaining steel plants had to change strategy; in some cases closing down, but in others, reducing energy costs by nearly 30 percent since 1990, and finding new markets such as wind turbine manufacturing.
  • Strong industrial sectors such as those found in China’s Hebei Province are sometimes best served by building on existing infrastructure and geographical assets, not abandoning them altogether. Supply chains, developed labor skills, and access to transportation systems and ports are all strong competitive advantages China has developed as a manufacturing powerhouse; those assets should be part of a transition strategy, not abandoned by that strategy.

For all these reasons, China is on the right path in trying to integrate its existing industries into its broad goal of a more sustainable economic transition. Even with the new opportunities that may accrue to the steel sector in particular, however, the transition will have costs as the sector contracts to deal with overcapacity issues. China’s central government has recognized this reality and has just announced the creation of a 100 billion yuan ($15.25 billion) annual fund for the next five years to address overcapacity in the steel and coal sectors, focused primarily on relocating workers.

China’s efforts to address the on-the-ground impact of economic transition may ultimately provide examples the U.S. can learn from—just as China can look to the U.S. Rust Belt experience for some good (and bad) lessons in how to capitalize on industrial strengths while moving toward a lower-carbon future. After all, we’re all in this global energy transition together.