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STEEL TRAP

After the mandated closure of its steel plants, a county near Beijing took desperate measures to stave off financial crisis that saw it censured from the top

By Xie Ying , Chen Weishan Updated Apr.1

The decommissioned Xinli Steel Company plant, Bazhou, Hebei Province, May 21, 2019

A county about 100 kilometers south of Beijing drew nationwide attention in late December, 2021 after central authorities criticized its government for slapping 67.2 million yuan (US$9.9m) in blatant fines on local businesses, no matter how small.  

“I only own a little street stall, but they made me pay 20,000 yuan (US$2,941.2),” Bazhou County resident Zhao Jun told NewsChina. “It actually doesn’t matter how big your stall is, if you’re open, you have to pay.”  

According to the statement released on December 27, 2021 by the General Office of the State Council, departments in Bazhou County, Hebei Province illegally penalized local businesses in order to hit annual revenue targets.  

In September 2021, Bazhou government began including non-tax revenue in performance reviews for its departments. Under pressure to bring in more money, officials started handing out fines either on trumped up charges or for no reason at all.  

According to the State Council statement, Bazhou took in a total of 67.2 million yuan (US$9.9m) in fines between October 1 and December 6, 2021, 11 times its total from January to September that year. In November alone, Bazhou collected 47.2 million yuan (US$6.9m).  

The statement called the fines “a facade, profit-driven and illegal” and rebuked the county for “heavily infringing on the interests and rights of local enterprises, destroying the local business environment, weakening the Party and the government’s public credibility and bringing shame on the Party and the government.”  

The office ordered Bazhou to refund all “illegal and unreasonable fines.”  

Bazhou’s band-aid approach to raise cash was spurred by a sluggish real estate market – a major source of government revenue – and the ordered closure of its steel plants to comply with air pollution restrictions around the capital.  

Just one week after the State Council statement, Bazhou government cut spending and suspended projects deemed inefficient uses of capital. However, experts warned that Bazhou’s fiscal woes will continue until the government attracts new industries to fill its coffers. 

A Fine Mess
Bazhou’s penalty spree saw 2,547 enterprises and small businesses in 15 towns fined an average 26,400 yuan (US$3,882).  

Several stall owners who declined to be named told NewsChina that most street stalls were fined. Among businesses spared were those temporarily closed for a provincial wastewater project.  

Business owners complained about the fines. “I heard that someone in Dongyangzhuang Town appealed to higher authorities,” a stall owner who requested anonymity told NewsChina.  
“Nearly every household in Dongyangzhuang runs or works in a small factory that makes daily necessities like mops or metal hardware,” he said.  

Once, a village in Dongyangzhuang fined local enterprises either 5,000 yuan (US$735.3) or 10,000 yuan (US$1,470.6), depending on size, the State Council said in the statement.  
The statement revealed that Dongyangzhuang set 14-millionyuan (US$2.1m) target for fines from October to December 2021 across 20 villages in its jurisdiction. 
 
In November 2021, the town issued 4.6 million yuan (US$676,470) in fines, 945 times the town’s monthly average between January and September 2021.  

Similar abuses occurred in other towns. Many enterprises and businesses were not even given a receipt, the statement said.  

“Most of the fines were either in the name of fire safety or for no reason at all,” an insider connected to Bazhou government told NewsChina on condition of anonymity. “As most local enterprises were already operating to environmental codes, fire safety was the most frequently used excuse for the government to issue fines,” he said.  

Central authorities are investigating Bazhou’s abuses, including those beyond the fourth quarter of 2021. 

County in Crisis 
“They are broke,” the anonymous insider said about Bazhou’s financial strain.  

In China, taxes make up the lion’s share of local government revenue, while non-tax government funds mainly come from land sales to developers.  

Official data showed that Bazhou’s budget revenue was reduced to 2.9 billion yuan (US$426.5m) at the end of 2021, 82 million yuan (US$12.1m) less than that was estimated at the beginning of 2021. More than 40 percent of the budget revenue in the first half of that year came from non-tax sources, mainly fines and land sales, which was not sustainable, Bazhou finance bureau director Meng Xianguo said in a budget report.  

Budget government funds from land sales decreased more dramatically, from 5.5 billion yuan (US$808.8m) set at the beginning of 2021 to 624 million yuan (US$91.8m) in December 2021. 

Facing the huge shortfall, Bazhou scrambled to slash its expenditure in 2021 by over 2.5 billion yuan (US$367.6m).  

“Some city projects in the 2021 budget that had yet to withdraw their funds were cut, which left some contractors unpaid,” a Bazhou government official told NewsChina. “But we couldn’t force cuts on ‘three safeguards’ projects and the provincial wastewater management project, which is approaching deadline.”  

“Three safeguards” is a central government designation used for projects that aim to secure salaries, economic growth and livelihoods, and the provincial wastewater project is designed to separate rain runoff and prevent wastewater from polluting nearby rivers.  

“If we had a looser budget, the [wastewater] project would not have gotten so close to deadline,” he added, revealing that in first half of 2021, Bazhou government spent 2.45 billion yuan (US$360.3m) on “three safeguards” projects and key livelihood projects.  

Other interviewed officials also acknowledged the strained budget, saying Bazhou was once counted among the top-10 wealthiest counties in Hebei, but now it lags far behind.

Real Estate Woes 
When adjusting the county’s budget revenue in December 2021, Meng Xianguo, according to his bureau’s fiscal report, attributed Bazhou government’s lack of funds to the economic slowdown, a sluggish real estate market and a policy that postponed payment of land transfer fees from businesses during the pandemic.  

Apartments in Bazhou’s downtown areas sell for about 10,000 yuan (US$1,470) per square meter on average, nearly half during the market’s peak in 2017.  

“Property in Bazhou’s development zone now goes for 5,000-6,000 yuan (US$735-880) per square meter, the same price as when it first hit the market in 2016,” a local real estate agent who declined to reveal his name told NewsChina.  

He claimed developer speculation drove Bazhou’s housing price rises in 2017 after Xiong’an New Area, a strategic pilot zone that is around 20 kilometers from Bazhou, was included in the development of the Beijing-Tianjin-Hebei regional city cluster.  

For example, in 2017, China Fortune Land Development (CFLD), a listed investment firm engaged in promoting industrial clusters in urban areas, advertised Bazhou real estate in department stores and supermarkets in Beijing.  

��At that time, four shuttle buses were taking potential buyers from Beijing to see new apartments in Bazhou every week,” he said. “But when CFLD got caught in debt, the market cooled.”  

A real blow to the local economy came when the central government required buyers to have paid three consecutive years of taxes or social insurance in Bazhou to curb speculation, locking out nonresidents. However, the county’s 700,000 permanent residents were not enough to keep the real estate sector afloat.  

Bazhou’s real estate market woes deepened when land in the western part of the county was rezoned as a “control area” and required provincial government approval for use.  

“Beijing buyers had largely fueled rising prices in previous years, but after the restrictions, the number of buyers plunged. Locally, demand from first-time buyers was low and the upgrade market was not very big,” the anonymous insider with connections to Bazhou government told NewsChina.  

“The restrictions came right when the Bazhou market was heating up. If they had come earlier before the speculative frenzy, it would not have so heavily influenced the local economy,” said the anonymous real estate agent.

Choked by Smog 
Bazhou officials are urgently looking for a new pillar industry to replace steel after provincial authorities ordered it to shut its two steel plants in 2017 to comply with emissions restrictions. Previously, Bazhou’s PM2.5 index often exceeded 500, a sign of very serious particulate pollution and poor air quality.  

“At its peak, Qianjin [steel plant] paid 600-700 million yuan (US$88.2m-102.9m) in taxes annually, an amount that even 100 new enterprises couldn’t cover,” the Bazhou government insider said.  

According to the insider, Hebei demanded that all steel plants close in the city of Langfang, where Bazhou County is located, by the end of 2019. Bazhou complied in 2017, the first county in Langfang to do so.  

“If the two plants had closed two years later, the government would have had at least 2 billion yuan (US$294.1m) more in tax revenue and would not have been caught in the current financial crisis,” the insider said.  

“The government was definitely reluctant to shut down the plants, but it was an order,” a town-level official in Bazhou, also requesting anonymity, told NewsChina.  

“Bazhou’s steel industry did not suffer from overcapacity. In fact, steel was often in short supply,” a Bazhou steel industry insider told NewsChina. “Running at full capacity, the two plants produced nine million tons of steel each year, but Bazhou’s annual total steel consumption was 20 million tons. You’d often see trucks delivering factory-fresh steel to local businesses that make steel tubes and pipes.” Bazhou is home to around 70 percent of the country’s total metal and glass furniture factories, the industry insider said.  

The plant closures hit the local furniture industry as well, since they had to ship steel in at higher prices. “Closing the steel mills means closing many other businesses in the industrial chain, which led to many losing their jobs. It was really not easy for the government to subtract that steel capacity without causing social unrest,” the town official said.  

Although local furniture enterprises, according to the town official, did not leave Bazhou following the plant closures immediately, the increased operation costs ate into profits.  

“The two steel plants spurred a complete steel industrial chain in Bazhou that helped create low value-added enterprises downstream. Without the steel plants, we can’t cut those low value-added enterprises easily, but rather have to upgrade them through mergers and acquisitions,” he said.  

The government is trying to bring in new industries like food processing, which came to Bazhou with aid from CFLD. But few come close to generating the tax revenue that steel did.  

“Before the 2017 shutdowns, Qianjin plant made 8 million yuan (US$1.3m) in profit each day,” the insider with Bazhou government connections said.  

The approval process for provincial-level key projects takes at least three years, the insider said, making it even more of a challenge for Bazhou to fill the void of its steel plants.  

“Bazhou needs more time,” he said.  

Despite the tightened real estate restrictions, Bazhou hopes Xiong’an New Area will bring more opportunities. According to State Council plans approved in 2019, Xiong’an New Area is to take over Beijing’s sectors beyond political functions to help the capital become a cultural, international exchange and technological innovation center.  

If traditional State-owned enterprises (SOE) relocate to Xiong’an as expected, Bazhou officials hope the county will attract more residents, talent and branches of SOEs.  

“As a satellite area, we should actively integrate ourselves into the capital’s development,” read Bazhou government’s industrial plan included in its 14th Five-Year Plan (2021-2025) released on November 30, 2021. “This is what the synergetic development of Beijing, Tianjin and Hebei requires, and Bazhou has to face reality,” it read.
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