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November 30, 2009
Massive stimulus-funded expansion despite the worst economic downturn in recent memory is creating a juggernaut of industrial overcapacity in China, according to a study released last week by the European Union Chamber of Commerce in China. The study, prepared with Roland Berger Strategy Consultants, says China’s $586 billion economic stimulus is exacerbating already-serious overcapacity in industrial sectors including steel, cement, refining, chemical, wind energy and plastics and pouring credit into “increasingly questionable projects.”
For example, China’s cement industry’s overcapacity has already reached 300 million metric tons, according to Canadian newspaper the National Post — more than the total annual consumption of the U.S., Japan and India combined. China’s annual steel production capacity is 660 million tons and another 58 million tons’ worth is now being added, according to Charles-Edouard Bouee, an executive with Roland Berger Strategy Consultants. However, only about 500 million tons of Chinese steel, a common breakbulk cargo, were sold last year, the study said.
Chinese industrial overcapacity is holding back sustainable economic development, wasting economic resources and leading to a rise in non-performing loans and environmental problems. According to global news sources, EU Chamber in China President Joerg Wuttke said “Our study shows that the impact of overcapacity is subtle but far reaching, affecting dozens of industries and damaging economic growth not only in China but worldwide. Domestically, excess capacity squeezes profit margins, hampers innovation and prevents the emergence of true local champions, while on the global stage its influence is clearly seen in the rise in trade tensions between China and its major trading partners.”
The study recommends that China move away from a growth model based on industrial investment and ever-increasing exports and suggests China should stimulate domestic consumption and the services sector, consolidate sectors suffering from overcapacity, reform pricing and crack down on local protectionism.
Consumer spending accounts for about 40 percent of China’s gross domestic product, as compared to an estimated 70 percent in the U.S. and 55 percent in Germany and Japan.
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breakbulk cargo,
Chinese industrial over capacity,
European Union Chamber of Commerce in China
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