Five to six million state workers in China could lose their jobs over the next two to three years as Beijing buckles down to address industrial overcapacity and weed out inefficiency amid broader efforts to restructure the country's economy, reliable sources have said.

Speaking on condition of anonymity, sources close to China's leadership told Reuters that the Chinese government has allotted some $23 billion to cover the layoffs in the country's coal and steel sectors alone.

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Experts say the overall dollar figure is likely to grow as the government assumes responsibility for the massive debt left behind by inefficient state-owned-enterprises (SOEs) and as workplace closures begin to expand to other industries.

Production Cuts

Chinese minister of human resources and social security Yin Weimin said on Monday that China expects to layoff around 1.8 million workers in its coal and steel industries, but he did not specify a timeframe.

The central government has set aside more than $15 billion to deal directly with the layoffs that are expected over the next two years alone, China's Industry Vice Minister Feng Fei said last week.

"They have proposed this dedicated fund only to pay the workers," Xu Zhongbo, head of Beijing Metal Consulting, told Reuters. "But there is no money for the bad debts, and if the bad debts are too big the banks will have problems and there will be panic." 

The sources said some of the companies about to be shut down will have to pay off bank borrowings and the debts they owe other enterprises to avoid crippling the country's state-owned banks with a mountain of non-performing loans.

China's state-owned enterprises provided jobs for 37 million people in 2013, according to Reuters.  The sector accounted for 40 percent of the country's industrial output and half of its bank lending that same year. 

Connected Issues

Bankers and investors had earlier anticipated painful but necessary reforms to China's SOE sector, which has long been blamed for the country's excess production and mounting debt.  Dealing with the unwieldy sector will be the single most important step towards restructuring China's economy, say experts.

"SOE reform, debt, overcapacity and 'zombie companies' are deeply connected issues," Jianguang Shen, an economist at Mizuho Securities Asia in Hong Kong, told the Financial Times recently. "For private companies in overcapacity industries, after several years of losses there's no way to continue.  The owner will shut them down or sell them off, but at SOEs, they can keep getting bank loans or government support."

Beijing has already completed plans to cut the country's crude steel production by as much as 150 million tons in the next two years.  The government intends to slash 500 million tons of China's excess coal output during the same timeframe.

Yang Weimin, a deputy director at the Office of the Central Leading Group for Financial and Economic Affairs, has said the next two years will be crucial in the national effort to reduce debt and shut down state-run factories that churn out unneeded goods.

"If we miss the window of opportunity, we would suffer severe consequences," Yang told a gathering of national policymakers recently. 

TagsChina economy, China Job Cuts, China Economic Reconstruction