March 13, 2015 / 5:20 AM / 4 years ago

COLUMN-How far will China's Xi walk in Thatcher's footsteps?: Russell

—Clyde Russell is a Reuters columnist. The views expressed are his own.—

By Clyde Russell

LAUNCESTON, Australia, March 13 (Reuters) - Is China’s President Xi Jinping walking in the footsteps of Margaret Thatcher, and if so, how far is prepared to go down the path of the former British leader?

Of course there are significant differences between the economic and social challenges facing China today and those that confronted Thatcher in the early 1980s in the United Kingdom, but there are enough similarities as well.

Thatcher was trying to transition an economy away from state-controlled and inefficient industries that were no longer globally competitive.

Xi is trying to shift China to a consumption-led growth model, and away from the heavy industries that, similar to Britain a century and half earlier, are the foundation of the economy’s wealth.

Thatcher’s chosen battleground was coal mining, and to some extent inefficient heavy industries.

The combative former prime minister believed that the strength of unionised labour had to be broken in order to drag Britain into a more competitive and globalised world economy.

Thatcher was prepared to sacrifice thousands of blue collar jobs and social harmony to achieve her aims, and while she was successful, it came at the cost of making her a figure of hate among those most affected by the changes.

To successfully transform China from being reliant on heavy and polluting industry, Xi will also have to run the risk of unpopularity in certain segments of the population and heightened economic costs.

Like Thatcher, Xi’s government appears to be choosing coal, and the industries that rely on the cheap but dirty fuel, as its battleground.

The reasons are different to those of Thatcher, as the Chinese are more concerned about the long-term impacts of pollution, not just on the environment but also on health and quality of life, two key factors in the social cohesion and harmony so valued by Beijing.

Premier Li Keqiang told the annual session of the National People’s Congress last week that the government would do everything it could to fight pollution.

Words have been backed by action, and a new environmental law went into effect at the start of this year that allows for greater powers to punish officials that don’t follow regulations.

Already anecdotal evidence is mounting that some of the most polluting factories and steel mills are shutting, with industry sources reporting most of the facilities in Linyi, a coastal city in Shandong province, have been idled.

China also aims to keep coal consumption below 4.2 billion tonnes a year by 2020, a figure that would be 10.5 percent higher than consumption in 2014.

The limit on coal use means other energy sources will have to take on a greater share of demand, which is expected to rise by about one-third by the end of the decade.

To achieve such a cap on coal use implies that there will be only limited expansion of the coal-fired power fleet, but more importantly, there will have to be closures in industries such as steel and cement.

There are plans to close steel mills in Hebei province, which is next to Beijing, and in other coastal provinces where pollution is worst.

Certainly, China has too much steel-making capacity, with 1.2 billion tonnes a year available compared to output of 823 million tonnes in 2014.

But closing plants comes at a cost, not only of jobs lost but also to the already stretched finances of local governments.

If steel mills, nickel pig iron, cement plants as well as iron ore and coal mines are closed, the social impact will be hard to avoid and could potentially create the Chinese equivalent of the rust belt in the United States or northern England.

It has taken several decades to turn around many areas in the formally industrialised northern parts of England and Scotland, and even today, some of these towns and cities lag well behind the relatively well-to-do south of England, which is anchored by London’s financial industry.

CHINA RUST BELT?

The last thing China will want to do is create blighted towns and cities with high unemployment and social unrest.

This means any move to curb coal by limiting its use in industry and power generation will have to be accompanied by massive investment in alternative industries.

In other words, the further Xi goes down the path of Thatcher, the more it will cost to mitigate the adverse social and economic impacts of such a move.

It remains to be seen just how far Xi is prepared to go, and this decision may have a profound impact on the amount of commodities China imports.

Obviously coal imports are most at risk, but if steel mills are shuttered, then iron ore imports may also suffer, or at least change in nature.

Currently many Chinese blast furnaces use iron ore fines as feedstock, using a process called sintering.

While this is economical, it’s also more polluting than using iron lump or pellets to make crude steel.

It’s conceivable that China will enforce the use of higher quality iron ore fines, or more lump and pellet, in steel mills in an effort to lower pollution.

Mark Lyons, global head of iron ore and steel at Citigroup, told the Global Iron Ore & Steel Forecast conference in Perth this week that China appears to have a choice between what he termed Path A and Path B.

Path A is a continuation of the policies of the past years, namely using fiscal and monetary stimulus to boost the economy through construction and infrastructure programmes.

Path B is to accelerate the change to a consumer-led economy and withdraw support for heavy, polluting industries.

Lyons said his view was that Beijing is currently tending more toward Path B.

While this does appear to be the case currently, it’s also likely that the resolve of Xi and his government will be tested more and more the further they go down Path B. (Editing by Richard Pullin)

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