Steel Overcapacity and China's Overseas Investment Plans

Among a multitude of topics, the G-20 Summit held in September in Hangzhou considered the issue of overcapacity in the global steel industry. A number of G-20 countries from the European Union (EU) as well as the United States (US) specifically highlighted overcapacity in China’s domestic steel industry, which they contend results from state support in the form of cheap inputs and bank credit, and has resulted in a flood of low priced steel on the global steel market. They urged China to accept global monitoring of its efforts to reduce steel overcapacity. Not surprisingly, European and American steelmakers have reacted adversely to the current situation, urging their governments to take protective measures against Chinese steel exports. Aside from initiating attendant anti-dumping measures, the EU and US have proven unwilling to grant China market economy (ME) status, which Beijing expected to obtain at the end of 2016. ME status would prevent WTO members from initiating protective actions against Chinese exports as easily as they can now. All of these pressures have broader implications for China. One relates to the future of China’s outbound investments, particularly infrastructure projects connected to the One-Belt, One-Road (OBOR) connectivity plan. Indeed, one of China’s major motivations behind OBOR is to implement projects that will be able to absorb Chinese exports, particularly steel and metal exports, in which China has built up a large excess capacity over the years. With China’s domestic economy slowing, these industries need external outlets and OBOR projects, in concept, offer great opportunities. However, the G-20’s proposed monitoring of global steel production and China’s installed capacities might lead to strict conditions on export of such steel and the projects they move to. The end result of such limits might be to slow down the development of the OBOR and Chinese outbound investments.