Monday, January 12, 2009

The Central Govt's Power to Consolidate, or Not

The South China Morning Post is reporting that the State Council is considering measures "such as tax cuts and incentives, to promote consolidation in the slumping steel industry". ("Beijing to Discuss Steel Industry Incentives and Consolidation", 13 Jan 2009.) These measures are apparently separate from the previously announced four trillion RMB stimulus package.

Consolidation among steel industry firms is certainly desirable; China's steel industry currently suffers from over-capacity among dozens of firms. This news, however, is probably not anything new. China's government has been talking about consolidation for years -- among both the steel and auto industries. So why has nothing happened until now? Is it due to the central government's unwillingness or inability to force consolidation?

The evidence would seem to argue for the former.

There are plenty of examples in which the central government was able to force consolidation and/or reorganization. Recent moves with the telecom industry come to mind. Also, several years ago, the central government was successful in consolidating the civil aviation industry. Local governments all over China had their own airlines, and in one fell swoop, these local airlines (with the exception of Hainan Airlines) were divvied up among China's current Big Three SOE airlines. Regardless of the reason, it can be assumed that the central government simply decided it was time for consolidation and took steps to make it happen.

If they could force this kind of consolidation on the airline industry, then why not the steel industry, or the auto industry? Why only use incentives and suggestions? Are the reasons political or institutional?

I had a conversation this afternoon with a visiting scholar from Beijing who took a stab at a hypothesis: Not surprisingly, it has to do with the staying power of the Communist Party. The logic here (at the risk of oversimplifying) is that, planes falling out of the sky run a much greater risk of causing widespread social instability than do problems with the quality of mainland steel or autos.

Poor oversight of a fragmented airline industry could potentially lead to maintenance problems, and ultimately, to plane crashes. Such news would cause people to question the viability of the Party which has staked its legitimacy on social stability, not to mention economic growth and more nationalistic themes such as technological prowess (which could be called into question should planes start to fall).

The perceived potential for social instability necessitated actions to force the consolidation of the airline industry. The lack of such potential in the steel or auto industries means that the central government is only willing to spend enough political capital to give really strong suggestions to the local government owners of firms in these industries. Suggestions that, until now, most have chosen to ignore.

At least that's my friend's theory. Does it sound plausible? Is there any evidence that would confirm or refute this theory?

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