by , Stuart Burns on JULY 18, 2016

Jean-Claude Juncker, president of the European Commission, is reported by the London Telegraph to have warned China that the country’s chances of gaining market economy status are directly related to its steel exports.

In a speech in China, Juncker is reported to have said “I do not want to dramatize this issue… but there is a clear link between the steel overcapacity of China and the market economy status for China.”

Steel Overcapacity Through the Years

China makes more than half of the world’s1.6 billion metric tons of steel but it’s suffering from slowing domestic demand and has turned to exports to dispose of its surplus. In the first quarter of the year Chinese steel exports to the European Union rose 28%, driving prices down by more than 30% according to some reports.

Beijing wants to shut down unprofitable steel production, but the provinces are merely reclassifying the mills and giving them new loans.

Although China has made conciliatory comments, Chinese Foreign Minister Wang Yi said this week the E.U. and China were forming a bilateral mechanism to review, discuss and deal with overcapacity in the steel industry. Beijing may have it’s work cut out for it if it actually wants to force through closures. The government has been trying it reign in excess capacity for some time, restricting credit and urging provinces to close older polluting plants but a recent Reuters article suggests provincial governments are doing anything but cooperating.

As part of China’s economic efficiency goals, the State Council earlier this year set capacity reduction targets for regional and central government enterprises in such sectors as steel, coking coal and cement, while China’s banks have been ordered to slash lending to loss-making and delinquent corporate borrowers. But provincial governments have quietly been urging their local banks to keep the taps open, and to even offer further loans to pay off old non-performing ones in order to keep steel and coal companies open.

Provincial Protests

In Henan, Reuters reports the provincial government has asked local bankers to help companies in coal, steel, metals and construction materials to switch industry classification so they don’t fall into categories covered by lending restrictions set by banks’ headquarters, according to a document published on the Henan government’s website in May.

Provincial governments are in an awkward position. They are charged with maintaining employment and prosperity, but also directed to close plants deemed unnecessary. For the time being, they appear to be responding to local pressures rather than Beijing. It will be interesting to see if the E.U.’s stark warnings add any impetus to the process, Beijing desperately wants recognition as a market economy, and may be prepared to get tough with industry in order to achieve it. Whether that will come soon enough for the E.U.’s beleaguered steel industry is another matter.