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President Xi Jinping, left, is maneuvering to wrest control of economic policymaking from Premier Li Keqiang (file photograph from March 2016).

Xi Jinping, Li Keqiang take political battle into economic arena

KATSUJI NAKAZAWA, Nikkei senior staff writer | China

TOKYO -- Anshan was blanketed in heavy smog, a grayish cityscape standing in sharp contrast to the endless stretches of green corn fields we had passed to reach the steelmaking hub in Liaoning Province.

It was hot out, with the temperature hovering above 32 C, yet the sun was, perhaps appropriately, invisible.

Anshan's future is as murky as its skies. Its mainstay steel mills are under threat from the central government's industrial overhaul campaign -- one that is pressing for substantial capacity cuts.

In 2015, the state-owned Ansteel Group churned out 32.5 million tons of crude steel, the seventh most in the world, according to the World Steel Association.

The economy of Liaoning Province, which is dependent on steel mills and other heavy industries with too much capacity, shrunk in the first half of this year.

Now it is being told that the world needs a lot less steel.

The Chinese government has set a target of reducing the country's overall steel capacity by 100 million tons to 150 million tons by 2020, with a cut of 45 million tons slated for this year.

This means China's steel industry needs to slash its production by nearly half of Japan's annual crude steel output. Achieving this ambitious target will require Liaoning, the center of the northeastern rust belt, to sacrifice several million tons of output.

The effects are already being felt:

  • A worker at an Ansteel affiliate in his 40s said the best he can hope for is to keep his job, even at lower pay.
  • On the day I visited, many stores along Anshan's main shopping streets were closed.
  • New office buildings are under construction in Shenyang, the capital of Liaoning, but they are attracting few interested occupants.

Economic data sets also paint a gloomy picture. The northeastern province's gross domestic product in the first quarter of this year suffered a 1.3% decline from a year earlier. The drop, unveiled after other provinces had reported their own growth rates, sent shock waves across the nation. China's overall real growth during the period was 6.7%.

For the first half, Liaoning's economy shrank by more than 1%.

Signs of trouble started appearing last year. Some parts of the province -- heavily dependent on coal, magnesite and other minerals -- posted sharp economic contractions of 10% to 20%.

I visited China in early August with a group of journalists put together by the Japan National Press Club.
In answering a question, Zhang Shaouri, deputy director of the province's information office, said 1 ton of coal does not make enough of a profit to buy a cup of ice cream. Coal mines in Fushun have already been trimming production, he said.

But Zhang projected a rather optimistic outlook, saying the province's economy is expected to start recovering in the second half of this year. The situation will get better next year, he went on, and improve further the year after that.

Zhang's picture of blue skies, however, was by no means convincing. China's capacity cuts are supposed to peak this year. If the province loyally follows the central government's instructions, it will be impossible for its economy to start picking up in the second half.

There are only two routes to a rebound, the second one involving a lot of cheating:

  • The province ignores the central government's target and maintains or even expands steel production.
  • It tampers with data to make the economy look as though it is recovering.

Liaoning, by the way, is the birthplace of the so-called Li Keqiang index. When the premier was Liaoning's Communist Party secretary, he told a U.S. ambassador to China that GDP figures were unreliable. Li said he used three relatively reliable indicators to assess economic conditions -- electricity consumption, how much cargo trains are carrying, and outstanding medium- and long-term bank loans.

Less in need of the Li Keqiang index is Hangzhou, the capital of Zhejiang Province, whose economy is booming. The city next month plays host to this year's Group of 20 summit.

Hangzhou, the booming capital of Zhejiang Province, will hosting the G-20 summit next month.

Condominiums in newly developed residential Hangzhou neighborhoods cost 40,000 yuan to 50,000 yuan ($6,000 to $7,500) per sq. meter -- four to five times prices in Shenyang and on par with those in Beijing suburbs, where properties are among the most expensive in China.

A 100-sq.-meter flat in Hangzhou is worth more than $1 million, comparable to home prices in central Tokyo.

But consider this: Most Hangzhou citizens do not earn as much as their industrial nation counterparts. Also, condo ownership in China, where the land is owned by the state, only entails limited-term use; condominiums are not seen as permanent assets.

Still, condo prices in Hangzhou have soared, and buyers are apparently looking to turn a profit by flipping them down the road.

This smacks of a bubble.

One reason Hangzhou is booming might be because it is home to the Alibaba Group Holding internet behemoth. Demand for consumer products, especially daily necessities, remains high in China. And Chinese consumers buy almost everything online these days.

No wonder, then, that Alibaba has been rapidly expanding.

Indeed, Zhejiang is home to many profitable private sector companies, and the province is mostly free from the problems of excess that plague much of the rest of the country.

This brings us back to Liaoning and other northeastern provinces that are powered by heavy industries.

The widening economic disparities between the two regions seem to have political implications for the ongoing power struggle between President Xi Jinping and Premier Li.

Xi served as the party secretary of Zhejiang Province in the mid-2000s. Li was the party chief of Liaoning Province around the same time.

Some local political observers say Liaoning has become Beijing's latest political target. Indeed, Wang Min, a former top official in the province, in March was put under investigation on suspicion of corruption.

Meanwhile, the province is not doing itself any favors. It announced its GDP data for both the first and second quarters of this year after notable delays that came in for criticism from Communist Party media outlets.

Many entertainment complexes in Shenyang, the capital of Liaoning Province, have gone dark.

News services also pointed out Liaoning's dismal GDP figures, portraying the province as an economic underachiever.

Despite massive financial support from Beijing over the past 10 years, the province's economy barely manages to limp along, one report said.

Some articles went so far as to criticize past leaders. This is unusual in China and indicative of which way the political winds are blowing.

The attacks seem to have two targets -- Bo Xilai, the former governor of Liaoning who has been sentenced to life in prison for corruption and abuse of power, and Li.

Bo was the province's No. 2 party official, while Li held the top post. So consider the media criticism of Liaoning's poor economic performance as an indirect swipe at the premier.

Xi and Li are still vying to be the one directing China's economy. With growth under strong downward pressure, a key issue during the annual closed-door meeting of party seniors at the beach resort of Beidaihe, held earlier this month, was how to manage the situation.

Xi may appear gentle, but his ambition tells him to make all important decisions himself, according to a party official who knew the president during Xi's stints in local government.

Xi once served as party secretary in Hangzhou, which is now preparing for the G-20 summit, at which the president hopes to consolidate his broad policymaking leadership.

Li, though, is still putting up a fight. In early July, the two clashed over how to reform state enterprises.

Caught between the two leaders, state-run China Central Television and the central government's website have been striving to serve up a steady diet of balance.

Headlines reflect that both leaders have issued instructions on reforming state-owned enterprises. "Xi calls for competitive, excellent and large state enterprises," one headline might say. "Li wants to weed out unprofitable capacity, make state enterprises leaner and unleash market forces," another might answer.

These reports show that Xi and Li are not only competing to be the country's economic czar, but their prescriptions for bringing state-run enterprises back to health vastly differ.

The official news outlets have injected buzz into the country's internet community with these kinds of stories. Many online comments ridicule the sharp policy differences between the two men.

Their power struggle is an open secret. The winner will be the one who comes up with the most convincing answers to two questions:

  • Who is to blame for the country's serious economic slowdown?
  • How should the government respond?

It is impossible to predict how the battle will pan out.

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