No more protection

More and more private steel companies are threatened with bankruptcy. China's economy grew more slowly this past year. Demand in all sectors is stagnant. But it's the steel industry in particular, which has profited from the construction boom in recent years, that is suffering. For a long time now there's been massive overcapacity in this sector, and that's now more apparent than ever. Highsee Iron and Steel Group, one of the biggest steel manufacturers in Shanxi province, is just one of many such enterprises currently seeking an investor to service its debts.

For years China's steel works were running to capacity. Last year the country's biggest foundries produced 1.8 million tons of raw steel every day - far more than the market was able to take. Record production became overcapacity. In 2014 prices fell more drastically than they had in 20 years. As such, it doesn't come as a surprise now that not all of the companies are going to survive. That's the nature of supply and demand. The government is now in the tricky position of having to decide who to support in this difficult situation and who they'll allow to go under. At any rate, the days when the Chinese government helped everyone, to make sure there wouldn't be any unrest, are over. That's true not only for the steel industry but also for other branches such as solar, real estate, or even finance.

No imminent crash

Zhejiang Xingrun, a real estate company in eastern China that slipped into bankruptcy in 2014, is just one of an increasing number of examples that demonstrate the new political line. It doesn't, however, represent a harbinger of a crash, as is frequently predicted in the Western media. In the past, the state has always stepped in during emergencies and paid the credit owed, but this company was simply handed over to the free market. And it's not just Chinese companies with Chinese creditors that are affected, but also those with debts abroad.

Those with foreign debts include the Kaisa Group in the south of China, which last year was still a successful property developer, but was recently unable to service its debt of more than $51 million (45.23 million euros) with HSBC. If Kaisa is still insolvent at the end of the month, it will become the first Chinese real estate company that is also unable to repay its foreign debts. This would be the first default in China on a foreign corporate bond. Previously the bankruptcy of the Shanghai Chaori Solar Energy Science and Technology Co. was the first domestic default on a bond in China.

Nightmare scenario as leverage

The companies that are no longer being helped out by the state are meant to serve as a warning to the others: If you don't manage your business prudently, you could be next. But it's a threat that doesn't quite hold water. Because before it comes to panic buying and a landslide of deferrals, the state will help.

That's why the affected firms are practically falling over themselves with predictions of what might happen if they don't get any assistance. They're also using the media to carry these nightmare scenarios to Beijing, but the federal government is less flexible than ever. Those who are no longer competitively viable won't be artificially kept alive. The closed season of socialism is over.

DW columnist Frank Sieren has lived in Beijing for 20 years.