"China's Supply Reform Policies Strengthen... Impact on Steel, Chemicals, and Construction Machinery"

Since last year, China has been implementing a large-scale supply reduction policy. The aim is to avoid U.S. tariff pressure and to improve the efficiency of resource allocation. On July 16, Daol Investment & Securities stated in its report, "Implications of China's Supply Reform," that the intensity of China's supply reform policies is expected to rise another level, and that the resulting production cuts in sectors such as steel, petrochemicals, and construction machinery could also impact the domestic market.

China previously pursued a "supply-side structural reform policy" from 2015 to 2017, ten years ago. This was in response to the massive liquidity released across all industrial sectors following the 2008 global financial crisis, which led to widespread overproduction. The key tasks at the time included resolving industrial supply surpluses, reducing real estate inventories, minimizing corporate financial risks, cutting corporate costs, and expanding effective supply. As a result of these supply reform policies, the steel industry shifted from a large deficit in 2015 to a surplus in 2016, and real estate inventories declined for ten consecutive months.

A similar situation is unfolding nearly a decade later. In November last year, China's Ministry of Finance and State Taxation Administration announced a "reduction of the export tax rebate system." Export companies, which had previously reduced costs through government value-added tax and consumption tax rebates, had been engaging in aggressive low-priced exports. The policy aimed to eliminate this and redirect export volumes to the domestic market. It was also intended to prepare for the anticipated tariff pressure from the Trump administration in the United States.

At the Central Financial and Economic Affairs Commission meeting on July 1, President Xi Jinping mentioned the phenomenon of "neijuan" (intensified internal competition). He pointed out that local governments across industries, including electric vehicles, batteries, and solar power, are causing overproduction, which is undermining the overall industrial competitiveness of the country. If supply reform policies proceed similarly to those in 2015, it is expected that state-owned sectors such as steel and cement will also see production cuts and strengthened regulations.

Kim Jihyun, an analyst at Daol Investment & Securities, said, "The mention of supply reform in July leaves open the possibility that the intensity of these policies could rise another level." Kim added, "The most preferred sectors are steel, petrochemicals, and construction machinery, as discussions of production cuts in these areas could trigger the fastest stock price rebounds. In contrast, for solar power, electric vehicles, and batteries, where global demand and sales volumes are more important, these sectors are lower priorities."