China cutting overcapacity

The Chinese are getting serious about addressing overcapacity that has developed in industry, according to statements released by the state press. This should be seen as a positive development given concerns about a bubble in property and shares and stories of malinvestment related to China’s attempts to reach lofty growth targets.

 China’s State Council said yesterday that in emerging sectors like wind power,  "overcapacity and redundant projects remain prominent because of slow progress in industrial restructuring in some of these sectors."  As a result, regulators were cracking down both on lending to the sector and in direct oversight.

The Financial Times believes the Chinese will have a tougher time reigning in the heavy industrial sectors like steel and cement, which state-owned enterprises dominate. They cite steel production of 470 million tons compared to a capacity of 600 million as an example of the large overcapacity in these sectors.  Cement is even worse, with only 70 percent of capacity utilized.

But, here too, the Chinese are trying to eliminate overcapacity. Two weeks ago they announced a three-year freeze on approval of all new expansion projects in the iron and steel industries. So, while the stimulus campaign in China has allowed the country to hit growth targets, the government are preparing for a more sustainable industrial mix in the future.

The question everyone is asking is whether China can make the leap from an export-led economy dependent on demand in Europe and the United States. I see these moves as an indication the Chinese are at a minimum attempting to make that transition, while still maintaining high levels of economic growth. This will be a multi-year process and it is still early days.

  1. aitrader says

    So lemme see. Just what was that inverse relationship to productivity and unemployment I remember from my butter or guns days at university…?

  2. Anonymous says

    Ed, how do you envision this ‘decoupling’ playing out? How would China grow without consumption demand from the Western hemisphere? Some people say the domestic Chinese market of 1 billion people will support consumption, but where would there purchasing power come from? I guess the question is about which is the cart and which is the horse. The Chinese need money to consume. They get this money through exporting goods to the west. With revenue from the West dwindling, where would the Chinese get the money to purchase their own goods domestically? I’ve been struggling with this question for many months now.

    1. Edward Harrison says

      Kbob, while the Chinese economy depends heavily on exports, much as the
      German or Japanese, there is still a sizable domestic economy not dependent
      on the West. Arguably the problem in China is one of a misallocation of
      resources whereby the Chinese have overinvested in the export sector
      creating significant overcapacity.

      So I don’t see this as a question of where they get the money to consume but
      rather how can the Chinese reallocate investment without suffering a serious
      downturn that engenders social unrest.

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