BEIJING • We were wrong. We must change.

Heilongjiang governor Lu Hao, a rising political star in China, seemed a pale shadow of his usual confident self when he made this rare public admission on the sidelines of China's annual legislative session early last week.

Senior Chinese officials seldom admit so plainly to erring.

But Mr Lu was forced to acknowledge that he had understated problems at failing state-owned Longmay Mining Group, after holding it up previously as an example of how China can restructure its economy without neglecting workers.

"Not a single month of salary was unpaid, not a single penny," he had told reporters only days earlier.

His boast brought thousands of angry Longmay coal miners in Heilongjiang's Shuangyashan city onto the streets. Chanting that they had not been paid for months, the workers paraded banners that read "We must live, we must eat" and "Lu Hao tells lies with his eyes wide open".

The protests ended only after the local authorities agreed to stump up two months' pay.

"I spoke wrongly," said Mr Lu, whose political future is now being called into question. "Mistakes must be fixed and, after they are, you have to work hard to solve the problems and thoroughly absorb the lessons."



Workers at a mine owned by Longmay Mining Group in Shuangyashan, Heilongjiang province. Thousands of Longmay miners who said they had not been paid took to the streets earlier this month after the Heilongjiang governor told reporters that no miner working for the state-owned group was owed back pay. PHOTO: REUTERS





Heilongjiang Governor Lu Hao



Shuangyashan has become a byword for exactly what China hopes to avoid as it embarks on the urgent goal of economic reform this year.

Growth, economic reform and social stability have emerged as key themes after the annual National People's Congress (NPC) session wrapped up last Wednesday, overtaking issues that dominated the agenda in preceding years, such as pollution and fighting corruption.

No one doubts the importance that China places on the three themes, which all contribute to the overarching - and politically crucial - aim of building a "moderately prosperous society" by 2020.

Economists had been warning about rising debt and overcapacity problems in sectors such as steel, coal, glass, cement and aluminium, which are at risk of triggering a wave of firm closures and bad loans.

Over the next five years, the government wants to slash steel capacity by up to 150 million tonnes and coal capacity by 500 million tonnes.

LEARNING FROM MISTAKES I spoke wrongly. Mistakes must be fixed and, after they are, you have to work hard to solve the problems and thoroughly absorb the lessons. HEILONGJIANG GOVERNOR LU HAO whose political future is now being called into question.

It is a task described as "monumental" by some Chinese commentators, considering that the proposed cut in steel production is more than the total capacity of the world's No. 2 producer, Japan.

Reforming these two sectors alone will see 1.8 million people retrenched in China, the government said, with some reports even claiming that the number could hit six million.

Longmay, one of Heilongjiang's largest employers, announced last September that 100,000 jobs would go.

Yet Chinese leaders who addressed this issue at the NPC session all sounded upbeat, saying they were better prepared now than in the late 1990s, when restructuring saw 28 million workers laid off.

If anything, the Shuangyashan protests have highlighted the complexities and risks of balancing reform, growth and social stability.

For starters, economists have pointed out that it is counterproductive to set a growth target while trying to implement reforms, which will necessarily retard growth.

"Targeting at least 6.5 per cent... gives less room in the short term for structural reforms," notes Dr Wang Xiaolu, deputy director of the National Economic Research Institute.

At the same time, provinces tasked with implementing reforms are probably the ones facing the most difficulty in carrying them out. For while the central government has set aside at least 100 billion yuan (S$21 billion) to resettle retrenched workers, local governments and companies have been told that they must foot part of the bill.

That is looking like a major challenge for the provinces that are most affected by overcapacity. North-eastern Heilongjiang, Jilin and Liaoning are registering some of the lowest growth rates in China, saddling them with a dwindling revenue base that hurts their ability to reduce overcapacity.

As for absorbing job losses, it is uncertain if the creation of 13 million urban jobs last year and the 8.1 per cent growth in the service sector in the first two months of this year - as cited by Premier Li Keqiang - will be enough to cushion the pain of job losses in China's rust belt.

"Even developed countries are having trouble increasing service sector jobs in regions that lost mining and manufacturing jobs 20 to 30 years ago," says East Asian economic expert Ramon Pacheco Pardo from King's College London.

He expects only low-skilled service jobs in restaurant, transportation or customer service sectors to lighten the burden, rather than jobs requiring higher skills in the more innovative, high-tech sectors China is pushing.

It would appear that something has to give, but Premier Li Keqiang has firmly stated that "reform and development are not contradictory" and played down the prospect of mass unrest.

There are, however, foreboding signs. According to Hong Kong-based China Labour Bulletin, China recorded 2,700 strikes last year - double the number in 2014 - as economic headwinds led to layoffs and pay cuts.

Following the Shuangyashan protests, steel workers in Jilin and miners in Shaanxi also demonstrated over unpaid wages, Chinese media reported.

Mr Lu's apology shows that China's leaders know that the stakes are high. For now, at least, it appears that they do not wish to consider the prospect of failure.