As you might have noticed, China’s economic miracle has turned into a nightmare – and it’s dragging the entire world into one big, bad dream characterized by a deeply entrenched disinflationary impulse occasioned by the country’s acute overcapacity problem.

That’s not as complicated as it sounds. Put simply: China levered up massively (in part through the country’s sprawling shadow banking complex) following the crash and used that leverage to invest not only in industry, but even in urban monuments for the sake of urban monuments (the now famous Chinese “ghost cities”).

But that’s all changed now. The global economy never recovered from the crisis. Global demand slumped and never truly recovered to pre crisis levels. In a related, but even more disturbing fact for China, global trade growth has advanced more slowly than global output for three years running. Before this recent stretch, the last time that was the case was 1985.

This has had a devastating effect on Chinese industry. In short: it’s dying. Take the commodities space for instance, where Macquarie recently reminded us that “more than half of cumulative debt was EBIT-uncovered in 2014.”

The problem, of course, is that China has to figure out a way to transition away from an economic model tethered to investment and industry and towards a model that thrives off consumption and services. That’s going to mean shutting down uneconomic producers and allowing for defaults, an outcome which not only threatens banks’ make-believe NPL figures, but social stability as well. Take what we said about the steel industry in January, for instance:

Xinhua reports that as part of China’s proposed excess capacity production curtailments the country’s steel production slash will translate into the loss of jobs for up to 400,000 workers, estimated Li Xinchuang, head of China Metallurgical Industry Planning and Research Institute. Li said more people will be affected in the upstream and downstream industries. According to some estimates just like every banker job in New York “feeds” up to three downstream jobs, so in China every worker  in the steel industry helps support between 2 to 3 additional job.s Which means, 400,000 primary layoffs would mean a total job loss number anywhere between 1.2 and 1.6 million jobs!

 

As a reminder, previously China had announced that it would cut steel production capacity by 100 to 150 million tonnes, while coal production will be reduced by “a relatively large amount,” according to a statement released Sunday by the State Council. We have yet to get an estimate of how many coal jobs will be lost.

 

The reason we were, and remain, skeptical about China ever following through on this production curtailment is precisely the massive layoffs that will result: layoffs which would enflame an already tenuous employment situation because as we showed recently, the number of worker strikes in China has gone parabolic in the past year, soaring to a record high over 2,700 in 2015, more than double the previous year’s total.

 

Through it all, the Politburo has tried to put on a brave face.

Early last month for instance, National Development and Reform Commission Chairman Xu Shaoshi said China is readying steps to eliminate excess industrial capacity and shutter unprofitable “zombie companies.”

He admitted that will mean rising joblessness. “Beijing’s attempts to curb overcapacity will increase unemployment in provinces with high output of steel and coal,” Reuters wrote, recounting Xu’s comments at a briefing. “Job losses in provinces such as Shanxi, Heilongjiang and Hebei will rise.”

Xu didn’t say what the government planned to do to ameliorate the coming wave of job losses, but did say Beijing would not let joblessness plunge the country into social unrest. “Now the problems are worse than they were two years ago but the government has the ability to cope,” he insisted.

Bloomberg is out with a new photo essay that would seem to throw that contention into question. Below, find stark images and excerpts from “Death and Despair in China’s Rustbelt,” which you’re encouraged to read in its entirety.

*  *  *

From Bloomberg

In a snow-covered valley in northeast China, an hour from the North Korean border, a street with brightly-painted apartment blocks hides a story of fear and anger as dangerous to the country as its rollercoaster stock market or sliding currency.

The frozen alluvial river plain that was once at the forefront of the Communist Party’s first attempt to build a modern economy, has now fallen behind, leaving a valley of brutal murder, protests, anger, suicide and regret.  

This is the city of Tonghua in China’s rustbelt, where a desperate handful of steelworkers has gathered each week outside the management office of their mill in freezing temperatures to demand months of wages they say they’re owed. The answer, according to interviews with workers and residents, is always the same: there is no money.

This is the last vestige of protests that once drew thousands, and which, one fateful day nearly seven years ago, ended with a manager being beaten to death.

Typically overstaffed, inefficient and heavily indebted, they offer President Xi Jinping a stark warning of what the country could face if the millions of workers who depend on these lumbering corporations should get thrown out of work with nothing to fall back on.

The country’s leaders have vowed to reduce excess industrial capacity and labor in state enterprises even as they battle the slowest economic growth in a quarter of a century. China will eliminate up to 150 million metric tons of steel-making capacity in the next five years, the State Council said after a Jan. 22 meeting.

Eliminating that amount of steel capacity could lead to 400,000-500,000 job cuts and may fuel social instability, Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute, said in an Internet message.

“The steel mill during its heyday was hellish and streets were stifled by thick fumes,” said Zhang Dongwei, who runs a transport and logistics business in the city. “There was a flotilla of trains constantly coming in with coal and iron ore and going out with steel wire and bars.”

Lines of those trains sat rusting in the sun under a glittering white coat of the winter’s first snowfall in November, idled by the shift in China’s economy.

But China’s decade-long building boom was about to stall as the world slid into an economic crisis. From a peak in June 2008, prices of Chinese steel fell by about half within five months. 

*  *  *

There’s much, more more in the full Bloomberg article including the dramatic story of “Wang the Audacious” and Chen Guojun. Because they clearly put quite a bit of time into crafting the narrative, we’ll leave it to Bloomberg to recount the tale and simply note that more of what befell Chen is likely in the cards once China begins executing the “zombies” (so to speak) and laying off more workers. 

We will close with one last excerpt just to leave you enticed: 

Chen Guojun, a Jianlong executive, went to the coking plant to encourage people to return to work. It was a fatal miscalculation. Blocked by protesters, police and paramedics were unable to reach him in time, the people said. By the time they found Chen, he had been beaten to death. 

Full story from Bloomberg here