Laying off 1.8m workers challenges govt’s plans to cut industrial overcapacity

The Government Work Report released on Saturday reemphasized the importance of reducing excess capacity in many domestic industries. It is estimated that 1.8 million workers in the steel and coal mining industries might be laid off in the process. The layoffs would benefit the industries, but would also leave the central and local governments with the problem of a large number of unemployed workers. It's a sensitive issue, considering the possibility of social unrest if the matter is dealt with improperly. As painful as they will be, the layoffs cannot be avoided, experts said, though the central government does have the ability to weather the challenge.

Coal mine workers walk in the mining area after finishing a downhole operation on Friday in a Shanxi coal mine.

As China forges ahead on plans to reduce industrial overcapacity, the steel and coal mining industries are seen as the major breakthrough points.

Clear targets have been set - the country plans to cut 100-150 million tons of steel capacity over the next five years and 500 million tons of coal capacity over the next three to five years, Xu Shaoshi, chairman of the National Development and Reform Commission (NDRC), the country's top economic planner, said at a press conference on Sunday.

For the country, the cuts are necessary to spur the long-term economic growth, but for some individuals, the cuts are a source of anxiety.

Wang Guowei, a 34-year-old father of two girls, now works for a State-owned coal mine in Changzhi, North China's Shanxi Province. Recently, rumors about more layoffs at his coal mine have kept him on edge.

"My company sent home some female and elderly workers last year, but now they say there will be more [people to be laid off]," he said. "I'm so afraid that it could be me."

Things are more desperate for Wang Mei, a woman in her 40s who used to work at the logistics department at a small coal mine in Datong, Shanxi.

She was sent home three years ago. The company promised to pay her around 1,000 yuan ($153.7) each month, but she hasn't received the money in a year and a half.

"I don't know what else I can do. It's not easy for a woman at my age to find another job," she said.

'No massive layoffs'

The capacity cuts are expected to impact around 1.3 million workers in the coal sector and 500,000 workers in the steel sector, Yin Weimin, minister of Human Resources and Social Security, said at a press conference on February 29.

But experts predicted that far more workers will be affected because other sectors, such as cement, aluminum and shipbuilding, are also dealing with massive supply gluts as the economic growth slows down.

The determination shown by the central government to cut overcapacity and clear out "zombie" companies has sparked fears that there will be a second round of "mass layoffs" similar to what happened in the 1990s - when many workers at the State-owned Enterprises (SOEs) were axed to improve efficiency in the sector.

But Xu, the NDRC chairman, reassured the public at the Sunday press conference that there would be "no mass layoffs," citing measures taken by the central and local governments.

Finance Minister Lou Jiwei said Monday that the central government would allocate 50 billion yuan each year over the next two years to aid laid-off workers.

Many local governments have also rolled out supportive measures. For instance, the government of East China's Jiangsu Province said that it would give subsidies to companies that did not cut jobs or cut fewer jobs.

To reduce industrial overcapacity, the government favors mergers and acquisitions over bankruptcies because these methods are effective ways to reduce the size of layoffs, Wang Guoqing, research director at the Beijing Lange Steel Information Research Center, told the Global Times on Sunday.

"It is sure that some people will lose their jobs, but the size of the layoffs will be much smaller than in the 1990s," Feng Liguo, an expert at the China Enterprise Confederation, told the Global Times on Sunday, adding that the current social security system is much more developed than it was in the 1990s.

A way out

Emotionally, layoffs would be harder on SOE workers than those in the private sector, experts said, as most SOE workers, especially the older ones, believe their jobs come with a guarantee of lifetime employment.

But times change and attitudes evolve. Some younger workers have a more open mind about their future.

"I guess I will be fine if I get laid off. I'll find another job eventually," Yan Tao, a 30-year-old man who works for State-controlled Guofeng Iron and Steel in Tangshan, North China's Hebei Province, said on Sunday.

"The key issue in employee replacement is guaranteeing workers' legitimate rights," Feng told the Global Times. "Otherwise, it might trigger unrest."

Experts have noted that laid-off workers could find jobs in China's services sector which now accounts for more than half of the country's GDP.

It's already happening at some SOEs. For instance, around 300 workers at State-owned Wuhan Iron And Steel Co, which is suffering losses, were retrained in September 2015 to do security work.

The fast-growing e-commerce sector is another option.

"Two girls at my office have quit and started their own stores on WeChat," Jiao Wen, a 30-year-old woman who works in Xiongshan coal mine in Shanxi, said on Sunday.

No pain, no gain

It's not just the workers who will have endured the painful process of industrial restructuring. The local economies that rely on the coal, steel and other industries that suffer overcapacity will face tougher times as the GDP growth, fiscal revenue and employment take a short-term hit.

Several provincial economies have already felt the effects of capacity cuts.

GDP growth of Shanxi, whose pillar industry is coal mining, slowed to 3.1 percent in 2015 from 4.9 percent in 2014. The GDP growth of North China's Hebei, a major steel-producing region, rose to 6.8 percent in 2015 from 6.5 percent in 2014, but both figures were below the national economic growth rate.

"Life was too easy for these places, which were able to grow rapidly just by selling resources," Feng said. "But now things are getting harder."

Feng said the economies of these regions need to innovate and diversify, but it will take a long time to restructure their economies.

The industries themselves will eventually also benefit from the capacity cuts, Wang noted.

In 2015, overcapacity and sluggish demand had pushed the steel industry's capacity utilization rate down to 67 percent. If capacity falls by around 150 million tons, the utilization rate would jump to the comparatively "healthy level" of around 80 percent.