Occupation of China Gas Plant Shows Xi’s Supply-Side Dilemma

  • Steel company took action after gas supplies threatened
  • Tensions rising as unpaid bills mount amid economic slowdown

The battle over shutting down swathes of China’s excess industrial capacity might never have been so literal as when one steel company decided to occupy a gas supplier so it could keep production rolling.

As northeast China enjoyed some rare blue sky one morning last December, personnel from Hebei Jingye Steel and Iron Co. took over the Yingde Gases Co. facility that powered the steelmaker’s factory on the same premises, according to a March filing by Yingde Gases with the Hong Kong stock exchange. 

The incident stemming from unpaid bills remains unresolved, with Jingye Steel staff still in occupation, Yingde Gases says. Jingye Steel denies any use of force, and in a written response to questions didn’t address the occupation. Both the municipal court and the Beijing-based arbitration committee that Jingye Steel says are looking into the case didn’t respond to questions submitted by fax and email.

Broader Challenges

The conflict illustrates the tensions created by a jump in accounts receivable across China amid the weakest economic growth in a quarter century; a tally published in March showed the shortfall at about $590 billion. Problems with cash flow also have become evident in the bond market, where a small though rising number of companies have been unable to make interest payments. For a list of companies with potential repayment challenges, click here.

President Xi Jinping has championed so-called supply side reforms, with closure of surplus industrial capacity and a reduction in leverage in his increasingly indebted country. Yet while officials have pledged to eradicate "zombie" companies that are unable to pay their way, all politics is local when it comes to job cuts that cast a cloud over places like Xibaipo, the town near the Jingye Steel plant.

"The consequences of both action (killing zombies) and non-action (keeping them alive) are huge," said Iris Pang, a Hong Kong-based senior economist for greater China with Natixis Asia Ltd., addressing the nation’s overcapacity problems, not the particulars of the Jingye Steel case. "This creates a dilemma for the central government. Even local governments suffer from this dilemma as they have to balance between growth, defaults and worker benefits."

U.S., Europe

When it comes to steel, reluctance to shut down companies unable to meet their bills has had international ramifications. The European Union has launched an anti-subsidy review of Chinese steel and India has imposed import barriers on the metal. U.S. Treasury Secretary Jacob J. Lew this week called on China to cut excess industrial capacity for key metals.

In the case involving Jingye Steel, one of China’s top 20 producers of the metal as of 2014 World Steel Association records, the December incident followed a slide in profitability across the industry as the nation cut back on investment growth.

"We asked them to pay the money that they owed us according to the contract," Yuan Lemin, director of the anticorruption section at Yingde Gases, said in a telephone interview. He added that "we have tried many legal ways and all efforts, but this problem is not yet solved."

There’s no clear public evidence that Jingye Steel’s business is unsustainable or that its Pingshan County factory is unprofitable, and contractual disputes between companies aren’t unusual. At the same time, the nature of the Yingde Gases complaint highlights the wider stress points that are showing up across China’s $10-trillion plus economy.

Resolution Efforts

In its filing with the Hong Kong stock exchange, the company said Jingye Steel owed it 86 million yuan ($13 million) in overdue bills, and reported the December incident to the Pingshan County Public Security Bureau. An official at the county government said by telephone that officials are trying to resolve the dispute.

Jingye Steel, in a written response to questions, said allegations by Yingde Gases that its staff were threatened are "sheer fabrication" and "seriously untrue." The company also flagged that it had created more than 50,000 jobs for the local economy and undertaken public-welfare projects such as road repairs and disaster relief. On its website, Jingye Steel highlights the local town’s place in Communist Party history -- it was the jumping-off point for Mao Zedong’s final, victorious military push across north China.

As for Yingde Gases, Moody’s Investors Service cut the company’s credit rating last August, citing exposure to the domestic steel industry, rising stock of overdue receivables and increasing debt. Yingde Gases is one of the largest players in the independent provision of on-site industrial gas in China, according to Moody’s.

Weakening Growth

With China facing excess steel capacity, the challenges for the industry aren’t about to recede. And a weakening in data for April -- with slower gains in lending, industrial output and retail sales -- signal that a credit-fueled recovery may be waning.

"New money is needed to bail out old money," raising the risk banks end up saddled with more bad debts and need capital injections to keep solvent, said Fraser Howie, the co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise. With overcapacity and debt problems unresolved, the economy faces a "slow, painful, grind down."

— With assistance by Enda Curran, Martin Ritchie, and Yinan Zhao

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