China Chatter: The Mercantilist Resurgence

Is Beijing really committed to open markets? China’s recent moves suggest otherwise.

In recent years, the public face of development in south Jiangsu Province has been foreign investment, private enterprise and-above all else-clean (looking, at least), tree-lined industrial parks with large signs displaying logos of well-known multinational companies. But don't be fooled. What's really happening is the development of a new mercantalist model just up the highway from neighboring Shanghai.

Here, the heavily industrialized south bank of the Yangtze River faces the distant, opposite bank through haze and some of the heaviest barge traffic in the world. It has been this way, more or less, since the mid-1980s and the first throes of what China's economists call the "Su'nan model" of economic development. In linguistic terms, ‘Su'nan' means South Jiangsu Province; in economic terms, it means the transformation of collective agriculture units into profit-making factories. Though most foreign commentators have spent the last two decades focused on private enterprise and its impact on manufacturing centers such as Shenzhen, Beijing has long taken the most serious interest in the establishment and growth of "town-village" enterprises such as those that have made southern Jiangsu Province one of China's wealthiest regions.

Nevertheless, from the point of view of Chinese economists and economic planners, the days of Su'nan are numbered or over, and public and government criticism of the system is now commonplace. Much of the opprobrium is reserved for the government officials who remained in charge of Su'nan companies, just as they were in charge of their former incarnations as collective farms. As a result, deep government connections allowed the Su'nan collectives unbridled ability to pollute without meaningful penalty, and to withdraw wealth and profits without meaningful oversight. But the days of deep government involvement in this region are far from over. In fact, they're returning in the guise of a new model.

At Zhangjiagang, one of the Yangtze's more pronounced riverbends and biggest boom towns, massive piles of scrap metal rise above fences, cranes, buildings and random industrial equipment on a sprawling piece of property. Owned by the privately-held Fengli Group, this scrap yard-perhaps China's largest-is also known as the East China Scrap Distribution Base. And, by virtue of its government connections and evolving Chinese industrial policies toward natural resources, Fengli is now the sole licensed importer and distributor of scrap steel to the massive Su'nan area, handling roughly one million of the 5.83 million tons of scrap steel that China imported in 2006. The companies that used to import those one million tons? They're now buying from government-protected Fengli.

And things may be moving back even further. At a May meeting of (mostly) Chinese recyclers in Tianjin, Yan Qiping, Secretary General of the China Association of Scrap Metal Utilization, and a highly influential figure in Chinese industrial and natural resource policy, suggested that Fengli was just the beginning. Soon, he reported, China will revoke import licenses from its roughly 500 scrap steel importers in favor of group, unified purchases like those occurring in Jiangsu. The reason is simple, he explained:

The disordered competitions in foreign purchases are not propitious for the healthy development of the import market of scrap steel.

If this sounds like a radical about-face on China's open market policies from the last two decades, well, it's not. In 2005, having been burnt by rising iron ore prices (largely driven by China's record-high demand for the commodity), Beijing announced that individual steel mills would no longer have the right to negotiate iron ore prices from the world's largest iron ore producers. Instead, Shanghai's state-owned Bao Steel Corporation-China's largest steel maker, with ambitions of becoming the world's largest-was given the right to negotiate the iron ore price for the entire Chinese steel industry (which accounts for roughly 40% of the world's iron ore imports).

Ore and scrap are just the beginning. Despite claims to the contrary, Beijing wants to bring "order" and control to the world's markets-especially those in which China is a big buyer.

Whether cartel behavior signals a wider trend in China's resource-consuming industries is difficult to judge. But as it happens, the future of Su'nan is not only Fengli. Just up the Yangtze is China's largest private steelmaker, the Jiangsu Shaggang Group. By any measure, Shaggang is a modern Chinese success story: Founded in 1975, the company has survived and prospered in a highly competitive market and region. But recently, it seems that the company can't keep up with the regulatory and financial advantages of its bigger state-owned rivals. And so, to the surprise of many, it is seeking financing and a state-owned partner. Among the suitors are China's largest state-owned mills, including Bao. According to reports in the state media, a merger between Bao and Shaggang would result in the world's second largest steel company and a singular state-owned presence that could-by virtue of size and ownership-transform the world's commodity markets in ways mostly unknown to the developed world.

Adam Minter is a freelance journalist based in Shanghai. He blogs at Shanghai Scrap.