HONG KONG — China’s exports of steel are soaring. But that is not a good sign for the economy.
China has far more steel mills than it needs, a problem made worse by the country’s shrinking housing market, the most voracious consumer of the metal. Domestic steel prices have collapsed. Thousands of workers have been laid off as mills have scaled back or closed.
With scant demand at home, those mills still in business have turned to foreigners as buyers of last resort. China shipped a record 100 million metric tons of steel overseas in the 12 months to the end of February, a 55 percent increase from the previous 12 months.
“It’s true that companies have dumped steel globally last year,” said Louis Kuijs, the chief economist for greater China at the Royal Bank of Scotland, based in Hong Kong. “I’m sure they are happy that at least somebody is buying it, but I don’t think that this is a strategy that Beijing wants to follow.”
The country’s traditional drivers of growth — manufacturing, real estate, local government infrastructure spending — are now among the biggest threats to China’s economy.
A slowdown in those areas is expected, and even baked into the country’s economic outlook. But economists and analysts say the net effect could be more painful than China and its leaders are ready to handle.
While Beijing has emphasized reorienting the economy toward consumer spending and market-driven development, its policy goals around jobs, growth and inflation are still greatly dependent on heavy industry and manufacturing. But the health of industries like steel, railways or housing construction is highly interconnected, and stress in one can put pressure on the others.
Figures released Wednesday showed industrial production increasing at its slowest pace since 2008, rising 6.8 percent in the first two months of the year compared with a year ago. The slowdown is being compounded by falling commodity prices, with the producer price index declining a further 4.8 percent last month from a year earlier, its steepest fall since 2009. Land purchases by developers plunged by nearly one-third.
“If you look at what companies are suffering the most in China, it is heavy industry,” Mr. Kuijs said.
So far, China’s leaders have remained publicly sanguine. In a speech last week, Premier Li Keqiang lowered the official growth target for this year to about 7 percent, which would be the country’s slowest expansion in a quarter-century. He drove home the importance of reducing China’s reliance on traditional industry and credit-fueled investment, replacing them with consumer demand as a pillar of the economy.
“In expanding consumption, we need to ensure that every drop of spending builds to create a mighty river, so that the potential contained in an ocean of private consumers will be channeled into a powerful force driving economic growth,” Mr. Li said.
Policy changes, meanwhile, illustrate a more urgent approach. Last month the central bank cut interest rates for the second time since November, and also freed up money for loans by reducing the amount of cash that banks are required to keep on reserve. And China’s leaders have sounded a new note of caution about the impact on job creation.
China added 13.2 million urban jobs last year, surpassing its target of 10 million. But the number of newly created positions fell in the first two months compared with a year ago, Yin Weimin, the minister of human resources and social security, told reporters Tuesday in Beijing on the sidelines of the weeklong annual meeting of the party-appointed national legislature.
“Against a backdrop of slower economic growth, increasing downward pressure on the economy and of industrial restructuring, this year’s employment situation will be even more complex and grim,” Mr. Yin said, declining to provide specific figures on the number of jobs added so far this year.
The upheaval in China’s traditional economy is already being felt by workers like Chen Huabin.
For years, Mr. Chen worked in export sales at a privately owned steel plant in Yangzhou, a city in eastern Jiangsu Province. Mr. Chen, 35, said the plant’s operations expanded dramatically from 2003 to 2009, growing from 150 employees to 1,800.
“At that time, the boss was really confident of the market and decided to invest all the profits to build more facilities,” Mr. Chen said in a recent interview. “It was also easy to get a loan. So we had been expanding blindly.”
Then, after years of rapid expansion, the steel industry got whipsawed by a wave of challenges. The global financial crisis crushed demand at home, and anti-dumping tariffs imposed by the United States and Europe further shrank the market for Chinese mills.
Mr. Chen quit in late 2013. He switched sides, setting up his own business that helps companies from the Middle East and Southeast Asia buy steel from China.
“Now it’s a buyer’s market, and I need to take advantage of this,” he said. “So I changed my role.”
The effects of such industrial changes ripple outward through the economy. For example, as housing prices fall, developers curtail projects under construction. Fewer new high-rises means factories churn out less steel, cement and glass — and what they do produce, they sell more cheaply. Activity then slows at the mines and quarries that provide the raw materials for these industrial goods, affecting mining companies from western China to Western Australia.
“The near-term dilemma is that the slowdown in the traditional sectors is happening very quickly, in the real estate market or manufacturing sectors,” said Haibin Zhu, the chief China economist at J.P. Morgan in Hong Kong. “It will take time for new sectors to be developed and to eventually substitute the pillar industries.”
Until that happens, the deceleration could worsen. For example, infrastructure investment in China is largely funded by local governments. But continuing fiscal reforms are likely to make it harder for city and provincial governments to borrow this year. At the same time, the weakening real estate market is likely to slow the pace of land sales to developers — another key source of cash for local governments. Mr. Zhu said he expected local government revenue from land sales to fall as much as 30 percent this year.
Such reforms could undermine infrastructure construction, which has long been a priority of the leadership in Beijing. Under a national initiative called “one belt one road,” the government is spending billions on new rail, road and port infrastructure. The goal is to improve China’s overland ties to Western Europe with an economic “belt” through Central Asia, as well as links to Southeast Asia through a “maritime Silk Road.”
Chinese leaders say that would provide a major boost to the economy by improving transportation links for both freight and passengers. The infrastructure upgrades alone will create hundreds of thousands of construction jobs.
But closer inspection of the economics behind this huge buildout raises questions about how much it would help. Consider rail, where Mr. Li, the premier, said last week that the government intends to spend 800 billion renminbi, or about $130 billion, this year on new lines.
Around 60 percent of all rail freight traffic in China comes from transporting coal. The amount of rail freight fell about 11 percent in December and 9 percent in January compared with a year earlier — the steepest decline since the financial crisis. The slump is partly tied to fewer shipments of coking coal, which is mainly used in the beleaguered steel industry.
The slowdown comes at a vulnerable time for China’s rail industry, which is already facing overcapacity and is heavily indebted. China Railway Corporation, the main rail operator that was spun out of the Ministry of Railways in 2013, had total debt at the end of September of 3.5 trillion renminbi, or about $567 billion — up 26 percent from the end of 2012.
China’s economy and financial system remain dominated by the state, and the government can always nurture short-term growth by flooding the economy with credit. In the meantime, the state news media is trying to stoke enthusiasm and confidence in the economy.
After several years of castigating officials who seek promotion by focusing on gross domestic product growth at the expense of social issues or the environment, Communist Party-controlled news outlets have changed course.
“Not relying only on G.D.P.,” said one such commentary that was widely circulated on official media websites last month, “doesn’t mean getting rid of G.D.P.”