Death and Despair in China's Rustbelt

Photographer: Qilai Shen/Bloomberg

In a snow-covered valley in northeast China, an hour from the North Korean border, a street with brightly-painted apartment blocks hides a story of fear and anger as dangerous to the country as its rollercoaster stock market or sliding currency.

The frozen alluvial river plain that was once at the forefront of the Communist Party’s first attempt to build a modern economy has now fallen behind, leaving a valley of brutal murder, protests, anger, suicide and regret.  

Tonghua steel plant. 

Photographer: Qilai Shen/Bloomberg

This is the city of Tonghua in China’s rustbelt, where a desperate handful of steelworkers has gathered each week outside the management office of their mill in freezing temperatures to demand months of wages they say they’re owed. The answer, according to interviews with workers and residents, is always the same: there is no money.

This is the last vestige of protests that once drew thousands, and which, one fateful day nearly seven years ago, ended with a manager being beaten to death.

Since then, the city’s once-vaunted state-run steel mills have slipped inexorably into decline, weighed down by slumping global markets, a changing economy, and the burden of costs and responsibilities to the people of the town they fostered.

Tonghua’s story is repeated across the country, where state-owned enterprises that were the bedrock of China’s industrial development have become its biggest burdens. Typically overstaffed, inefficient and heavily indebted, they offer President Xi Jinping a stark warning of what the country could face if the millions of workers who depend on these lumbering corporations should get thrown out of work with nothing to fall back on.

Uprisings have started from less in China. 

Closing Steel Mills

The country’s leaders have vowed to reduce excess industrial capacity and labor in state enterprises even as they battle the slowest economic growth in a quarter of a century. China will eliminate up to 150 million metric tons of steel-making capacity in the next five years, the State Council said after a Jan. 22 meeting.

QuickTake China's Pain Points

The council, China’s cabinet, said it will achieve the target through mergers and acquisitions, relocation or converting some plants to other industries. It pledged to set up special funds to subsidize companies and laid-off workers during the change, and to help lenders write down bad debts.

“The market has forced our hands,” said the official Xinhua News Agency in a Jan. 24 commentary. “Local governments and companies will bear the main responsibility, while the central government will help.”

Tonghua Technology Center.

Photographer: Qilai Shen/Bloomberg

Eliminating that amount of steel capacity could lead to 400,000-500,000 job cuts and may fuel social instability, Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute, said in an Internet message.

These giant state-owned enterprises, or SOEs — some among the largest corporations in the world — now cover the country, but they had their roots here in the northeast more than half a century ago. With mountains rich in iron ore and coal and fertile valley floors, the area, also known as Manchuria, was the center of former leader Mao Zedong’s first five-year plan in 1953, which proclaimed that grains and steel would be the cornerstones of Communist China.

Known for its icy winters, steamed buns and distinct dialect — a favorite of stand-up comedians — the northeast was the Guangdong of its time, the cradle of China’s first automaker, its first major oilfield, its first machine-tool manufacturer.

Underpinning it all were the new steel mills, fed by the region’s coal and iron. 

Abandoned apartment buildings next to the plant.

Photographer: Qilai Shen/Bloomberg

Towns sprang up to support the new industries — company towns where the employer provided schools, hospitals and even hot water from its furnaces to warm apartments during the sub-zero winters.

Such was Tonghua, 500 miles from Beijing, and now the fifth-largest city in Jilin province, with 2 million residents.

After the reforms of Deng Xiaoping in the 1980s ushered in China’s economic boom, Tonghua, and other steel cities became pollution-choked crucibles that fed the expansion, churning out girders and bars to reinforce the concrete towers of the nation’s building spree.

China’s steel output in 1953 was less than 160,000 tons — not enough to make one kitchen knife for each Chinese family. In 2015, it was equivalent to more than half a ton for every citizen.

“The steel mill during its heyday was hellish and streets were stifled by thick fumes,” said Zhang Dongwei, who runs a transport and logistics business in the city. “There was a flotilla of trains constantly coming in with coal and iron ore and going out with steel wire and bars.” 

Train tracks leading to the plant.

Photographer: Qilai Shen/Bloomberg

Lines of those trains sat rusting in the sun under a glittering white coat of the winter’s first snowfall in November, idled by the shift in China’s economy.

As early as 2003, former President Hu Jintao recognized that as new electronics and consumer-goods factories sprouted along the coast in the south and east, the industrial cities in the north were getting left behind. He launched a strategy of investment to rejuvenate the region. One of its key projects was a new state-of-the-art mill for the Tonghua Iron & Steel Group.

After officials sank a ceremonial shovel into the ground to begin the project in 2007, the Jilin Daily newspaper described a scene of staff working round the clock to install “advanced and modern” equipment. The 3 billion yuan ($460 million) investment, scheduled for completion in 2009, was backed by loans from State Development Bank.

But China’s decade-long building boom was about to stall as the world slid into an economic crisis. From a peak in June 2008, prices of Chinese steel fell by about half within five months. 

Protest as Watershed Moment

The cold-rolled-steel plant designed to make higher-value silicon steel plates didn't go into full production, and the clusters of new residential blocks lining the street to the mill stayed mostly empty.

Instead, the company and town became embroiled in a battle that became a national scandal, and a warning to the country’s leaders that the task of reforming the state’s behemoths is about much more than economics.

Under pressure of volatile prices, rising debt and central government pressure to reform, Tonghua had agreed to a joint venture in 2005 with a private company, Jianlong Steel Holding Co., said a former company employee who worked with management and asked not to be identified because he hasn’t yet received severance pay.

The partnership was widely seen as the brainchild of Wang Min, who had been appointed Jilin governor the year before, and had made a name for himself for encouraging private enterprise in the southern city of Suzhou.

Branded “Wang the Audacious” after he vowed to transform some 800 provincial SOEs within a year, he was famous for short speeches, short meetings and short documents, according to state news agency Xinhua and local media.

Jianlong wanted majority control in the new venture, but that was a step too far even for Wang, according to Professors Wang Shiquan and Li Ningqing at Northeastern University in Shenyang in neighboring Liaoning province, who jointly published a case study on Tonghua Steel. 

Water vapor and smoke
Water vapor and smoke. Phoptographer: Qilai Shen/Bloomberg
Photographer: Qilai Shen/Bloomberg

Initially, the venture was touted as a success. Output rose and profits increased by more than 50 percent a year as Jianlong cut costs by tightening rules on everything from raw-material purchases to free heating for residents, wrote Wang and Li.

But the conflict between the old state-run system and the new, private management began to cause friction, said the former employee in an interview in a cafe near the mill.

He said Jianlong’s minority position made it hard for the company to appoint or fire managers, decide pay, or take advantage of the kind of cost savings its other subsidiaries enjoyed through public tenders for raw materials. By the time the global financial crisis hit in 2008, the two sides were ready to split, the former employee said.

But then the situation changed. To mitigate the effects of the global recession, China’s central government began to pump 4 trillion yuan of stimulus into the economy, much of it into big construction projects. The rising tide lifted all boats and Tonghua Steel swung back to a profit in June 2009, the professors said.

Instead of quitting, Jianlong struck a deal with the provincial government to take control, promising to inject 1 billion yuan in cash and swapping some assets. The state would retain at least 34 percent and Jianlong promised not to fire workers, according to the case study.

When the provincial government announced the agreement on July 22, 2009, it caused a storm of protest among workers and management. The chairman, An Fengcheng, smashed a teacup during the meeting and proclaimed “I’m not going to serve a private boss,” the New Century Weekly and other local media reported.

Cooling towers at the steel plant. 

Photographer: Qilai Shen/Bloomberg

The next day, according to interviews with residents and workers, people from the town gathered in front of the management office shouting slogans and holding banners that read: “Jianlong: Get Out!”

The company’s furnaces halted as workers joined the crowd, which swelled to over 10,000 according to local media reports.

Chen Guojun, a Jianlong executive, went to the coking plant to encourage people to return to work. It was a fatal miscalculation. Pushed and shoved by the mob, he eventually fled into an office building, according to people who were in the crowd.

Blocked by protesters, police and paramedics were unable to reach him in time, the people said. By the time they found Chen, he had been beaten to death. Only after the government announced on the local TV channel that Jianlong would never be allowed to acquire the mill, did the crowds begin to disperse. As people lit fireworks in the district to celebrate their victory, emergency services retrieved Chen’s body.

The protest became a watershed for China’s efforts to reform SOEs, underlining workers fears that the changes would smash the “iron rice bowl” that had been promised to them for half a century. 

More Than Jobs at Stake

Jilin’s Communist Party Commission removed An Fengcheng as party secretary at Tonghua Steel. And Jianlong withdrew from the venture, eventually turning its attention to other targets, including the acquisition of bankrupt Shanxi Haixin Iron & Steel Group in northern China, and an expansion into shipbuilding.

Jianlong didn’t respond to requests for comment on the venture. Tonghua Steel’s information office referred all questions on the company to the Tonghua City government. Neither the city government, nor the Jilin provincial government answered faxes to their information departments about the company’s operations and management, the joint venture, or the death of Chen.

Interviews with local residents in Tonghua, including some in the protest that night, as well as court records, local newspaper reports and official documents, show that there was more at stake than jobs with the arrival of Jianlong.

With more than 20 billion yuan worth of assets at its heyday, seven furnaces, tens of thousands of employees, poor oversight and entangled local interests, Tonghua Steel was far more than an employer. As well as supporting hundreds of contractors, it was the center of a micro-economy in stolen materials and equipment that supplied black markets, junk yards, and illegal furnaces. 

A man pushes a bicycle rickshaw. 

Photographer: Qilai Shen/Bloomberg

Theft and pilferage were rampant and many feared that Jianlong would put a stop to these lucrative sidelines, according to current and former staff. Under their winter clothing, workers smuggled out iron ingots that were used as feedstock for small, unlicensed furnaces.

“Jianlong blocked a lot of people’s paths to riches,” said Zhang, 31, the logistics company owner, in an interview in January. Tonghua Steel was “a goose that laid golden eggs for some folks here.”

At a trial in January 2010, three brothers named Li and 28 people identified as members of an organized crime syndicate pleaded guilty to charges ranging from racketeering to buying and selling shotguns, according to court documents.

The court said their major crime was repeated conspiracy to defraud Tonghua Steel, since as early as 1983, earning at least 50 million yuan through bribing mill officials, selling poor-quality iron ore at inflated prices, and stealing from the mill.

In April 2010, a local court investigating the death of the general manager Chen found Ji Yigang, a power-plant worker with a previous criminal record, guilty of intentional wounding and sentenced him to life in prison, according to the China Labour Bulletin. The police department in Tonghua declined to respond to questions about the cases or the incidents at the steel mills. 

Statues of pandas and residential buildings. 

Photographer: Qilai Shen/Bloomberg


Building Boom Running Out

Whatever the motives that led to Chen’s death, the protesters’ victory was short-lived.

Three months after Ji was convicted, Tonghua was taken over by Beijing-based Shougang Steel, another SOE, which bought a 77.6 percent stake for 2.5 billion yuan. The Jilin government was left with 10 percent, according to the professors.

"It seemed a happy ending at that time,” they wrote. “This acquisition appeased the government, the management and the workers. We all thought it was a harbinger for spring then."

But China’s stimulus-inspired building boom was running out. The country’s steel demand peaked in 2013. As the nation’s mills kept churning out metal, prices collapsed. Chinese steel now sells for about a third of the price at the 2008 peak.

In January 2015, the head of the new cold-rolled plant Wu Yan, who had given a tour of the plant to reporters during its construction, was found dead in his office. The police said he committed suicide, according to an official in the company, who asked not to be named.

In May, the dreaded announcement from management finally arrived: The payroll was too burdensome and the company would have to lay people off. 

Traffic and pedestrians. 

Photographer: Qilai Shen/Bloomberg

Workers immediately went to protest in front of the office building, said a steelworker, who has worked at the mill for more than 30 years and spoke on condition of anonymity because he was still employed at the company.

Shougang backed down and said people don’t have to sign up for early retirement or buy-out programs, but warned that there are only enough jobs for a third of those who remain.

In a dimly-lit little restaurant opposite the plant in November, the steelworker said he hadn’t been paid since August. He said he rejected the early retirement plan that Shougang management had offered him in April.

By mid-January only one of the three major blast furnaces was still operating. At least one has to keep going in winter to heat thousands of workers’ homes in temperatures that can fall as low as -30 degrees Celsius (-22 Fahrenheit).

When a power cut caused even that plant to temporarily stop, a post in a local online chatroom summed up the sense of hopelessness under the pseudonym Tonghua Melancholy: “Is our mill finally grinding to a halt?”

Another suggested: “Why don’t you just smuggle some iron ingots out in the darkness?”

Tonghua Melancholy replied: “Can’t be bothered. Stuff’s cheaper than cabbages these days.”

Tonghua Iron & Steel Group Co. headquarters stands in the Erdaojiang district of Tonghua, Jilin province, China, on Wednesday, Jan 6., 2016. The city of Tonghua is in China's rustbelt, where a desperate handful of steelworkers has gathered each week outside the management office of their mill in freezing temperatures to demand months of unpaid wages.

Tonghua Steel headquarters.

Photographer: Qilai Shen/Bloomberg