One of the frequent, and frequently accurate, criticisms of China’s brand of capitalism is that its governing and regulating bodies are hypocritical: ministries pledge to enforce export quotas, or labor standards, or pollution control measures, and yet there is rarely any documented or demonstrable proof that such things have happened. Export volumes grow, labor conditions remain the same, and pollution continues unchecked.

One of these instances has been the central government’s 2005 pledge to contain the unprecedented capacity expansion in China’s domestic steel industry. At that time, China's National Development and Reform Commission mandated that the country's various producers would be combined so that two steelmaking organizations would have capacities of 30 million metric tons/year (each) to serve the domestic market. Other specialty and regional organizations would be allowed, but the government planners directed the industry to ensure that its 10 largest steelmakers would supply 50% of the nation’s needs by 2010, and 70% by 2020.

Moreover, the 2005 plan indicated the government would pick which producers would be allowed to expand and develop based on their revenue potential, and where those expansions may happen. It even went so far as to “recommend” capacities for blast furnaces, basic oxygen furnaces, and electric arc furnaces, and it set guidelines for sourcing raw materials.

According to expectation, not much changed from 2005 through 2007. China’s domestic industry produced 489 million metric tons of raw steel in 2007, a rise of 15.7% over 2006 according to the International Iron & Steel Institute. (That growth rate slowed, however, from 2005 and 2004, in both of which years China increased its raw steel output by more than 25%.)

This week, however, came the news of an arranged marriage between the country’s sixth- and seventh-largest steelmakers, Jinan Iron and Steel and Laiwu Steel Group, along with Shandong Metallurgical Industry Corp., a specialty steel producer and processor. The new company will be state-owned (no surprise), and with 31.6 million metric tons/year of capacity it will edge into the Top 10 largest steelmakers in the world.

Last week, the government approved a merger of Wuhan Iron & Steel and Liuzhou Iron & Steel, and it approved Baoshan Iron & Steel’s takeover of Guangzhou Iron & Steel and Shaoguan Iron & Steel, two smaller companies that will add about 8 million metric tons/year to Baosteel’s total, bringing it into the 30-million metric tons/year range.

All this will probably be taken as good news outside of China, where the long-running anxiety has been that the explosive growth of capacity there will lead inevitably to uncontrolled steel exports. These changes give the impression that there is some long-range planning going on, at least.

But, it’s far from perfect. Each of these mergers was approved with the bargain that the companies involved would begin to build greenfield capacity. (There are numerous such plans underway, incidentally, all part of yet another agenda — to combat pollution and overcrowding in China’s coastal cities.)

Another agenda item fulfilled by these mandated changes is that it continues to deflect efforts by foreign steelmakers to invest in China’s domestic industry. Laiwu, for example, had been trying to accept an investment from ArcelorMittal for more than two years. Now, more of China domestic steel capacity comes under state control, and the threat of surplus exports evolves from being a market-driven possibility to a potential government strategy.

The message is that even by fulfilling its promises, the Chinese government cannot be expected to uphold free-market capitalist principals. That would leave too much to chance.