Spending Plan Risks Industry Overcapacity

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Mar. 23 – China’s focus on economic growth and investment risks worsening the nation’s overcapacity in industries with global markets unlikely to be  able to buy the extra supply, according to economists.

China will need to boost consumption at home to absorb the excess supply as overcapacity may overtake actual demand.

The stimulus plan is also being used to divert capacity for steel and other construction materials by increasing public works. Moreover, Beijing is encouraging Chinese companies to purchase overseas gas plants and mining projects with the promise of lending funds from China’s biggest banks.

“We think it’s unavoidable that this stimulus plan will create some excess capacity,” Hu Yifan, chief global economist for Citic Securities in Hong Kong told WSJ.

This will also lead to idle Chinese factories forced to ship their surplus overseas, thus sparking import curbs. “China is now already plagued by overcapacity in some industries. To add more investment now, just to get some companies going, might threaten the industrial base years from now,” Joerg Wuttke, president of the European Union Chamber of Commerce in China told WSJ.

China’s industry ministry reports this month that an estimated 30 percent of the nation’s aluminum production capacity is idle, as well as 20 percent of cement and plate-glass capacity and 70 percent of semiconductor production. Last year, the country’s crude steel-making capacity amounted to 660 million tons although production only reached 500 million tons.

Some analysts warn that because of the global slowdown, overcapacity for the future will not always be a bad thing since idle factories can be used again when the economy picks up. In a slowing world economy it is not surprising for supply to overtake demand as everyone tries to scale back.

Overall, China has been aggressive in expanding industry because of its past annual double-digit GDP growth driven by massive export demand. China may need to rethink this strategy in the years to come as the United States and its other global markets scale back on buying and start saving more.

Recently, China released a series of plans for heavy industries that aims at “curbing the expansion of industries with excess production capacity, and speeding up the phase-out of backward production capacity.”