Can the Belt and Road Strategy solve the problem of iron and steel production overcapacity in China? A study based on TVP–VAR–DMA

NI Zhongxin1 LU Xing1 XUE Wenjun2

(1.School of economics, Shanghai University)
(2.Department of economics, Florida International University, USA)

【Abstract】This article studies the main factors affecting demand for Chinese steel and uses Small, Medium, and Large TVP-VAR models as well as TVP-VARDMA and TVP-VAR-DMS models to forecast demand for Chinese steel. The results show that the TVP-VAR-DMA model adapts quickly to gradual and sudden economic changes in China and greatly improves the accuracy of current predictions. The prediction results from our study show that based on IMF predictions of the GDP growth of various countries and the condition that the Chinese steel production capacity would be capped, the Belt and Road strategy would be able to solve the problem of Chinese steel production overcapacity. The prediction results also show that Chinese demand for crude steel will increase by about 14.6 million tons between 2015 and 2020. In 2020, crude steel overcapacity will only be about 48 million tons. In order to completely solve the overcapacity problem, the Chinese government should further expand the Belt and Road strategy into international steel markets, strengthen the market’s ability to allocate resources and reduce the growth of production capacity of low-level steel products.

【Keywords】 the Belt and Road Strategy; steel demand prediction; overcapacity; TVP–VAR-DMA; TVP-VAR-DMS;

【DOI】

【Funds】 Shanghai Pujiang Program (10PJC050) Innovation Program of Shanghai Municipal Education Commission(13ZS063)

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    [1]. (1) Wind Info shows that in 2012, 2013 and 2014 the productivity of crude steel in China is 0.995, 1.082 and 1.16 billion tons and the production utilization rate is 72%, 72% and 70.69% respectively. The production utilization rate (that is, the ratio of real output to potential productivity) is a standard accepted internationally and it is normal to maintain around 80%. If it exceeds 85%, the production capacity is insufficient; if it is below 75%, the production capacity is heavily excessive. [^Back]

    [2]. (2) General Office of the State Council and Guofa No.38 (2009) and Guofa No.7 (2010). Report of the State Council on September 29, 2009 shows that in 2008, China’s crude steel productivity was 0.66 billion tons while the demand was only 0.5 billion tons. [^Back]

    [3]. (3) The “Silk Road Economic Belt” and the “21st Century Maritime Silk Road” (the Belt and Road) were put forward by Chinese President Xi Jinping during his overseas visits in Central Asia and Association of Southeast Asian Nations in 2013. [^Back]

    [4]. (4) Most scholars believe that λ∈[0.97,1] . [^Back]

    [5]. (5) In this article, we consider the endogeneity between the demand for steel, price and supply and build TVP-VAR models in three dimensions. [^Back]

    [6]. (6) In this article selecting the apparent consumption of steel as the proxy variable for the demand for steel will reach the same conclusion as the apparent consumption of crude steel, so limited by space we only give the empirical results of the demand for crude steel here. The apparent consumption refers to the sum of output and net import. [^Back]

    [7]. (7) Here, the three economies’ GDP are all summed and denominated by dollar. [^Back]

    [8]. (8) The Belt and Road factors refers to that the GDP of Indonesia, the Philippines, Thailand, Singapore, Malaysia, Sri Lanka, Hungary, Russia, Vietnam, India, South Korea, France, Germany and Belgium are all summed and denominated by dollar. [^Back]

    [9]. (9) Limited by space, here we only show the empirical results under h=1; others are similar. [^Back]

    [10]. (10)MAFE=T-h-1τ|y t+h0+1∑Tτ=τ-ŷt+h|, MSFE=T-h-1, where T-h-τ0+1 is the length of forecast, τ0 represents 2004Q1, h is the forward predictive step (h=1, 2 and 4). yt+h is the real value and ŷt+h is the forecast. [^Back]

    [11]. (11) We used kappa=0.94, 0.96, 0.98 and alpa=0.95, 0.99, 1 to make 9 different forecasts. Due to the limitation of space, Table 2 to 5 only give the major forecasting results, but they are consistent with the conclusion of the whole test. [^Back]

    [12]. (12) Limited by space, Table 6 only shows the main results of DM test, but they are consistent with the conclusion of the whole test. [^Back]

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This Article

ISSN:1002-4670

CN: 11-1692/F

Vol , No. 03, Pages 161-174

March 2016

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Article Outline

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Abstract

  • Introduction
  • 1 Literature Review
  • 2 Model Introduction and Data Description
  • 3 Empirical Analysis and Results
  • 4 Conclusions and Policy Implication
  • Footnote

    References