China’s Overcapacity “Wreaking Far-Reaching Damage On Global Economy”

Overproduction in China’s key industries is damaging both its economic sustainability and foreign trade relations, a new report has warned, urging that now is the time for big reforms.

China’s overcapacity in its heavy industries is wreaking “far-reaching” damage on the global economy, with steel production “completely untethered” from market demand, according to a report from the European Union Chamber of Commerce in China released on Monday.

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“Overcapacity has been a blight on China’s industrial landscape for many years now, affecting dozens of industries and wreaking far-reaching damage on the global economy in general, and China’s economic growth in particular,” the report said.

The Chamber first issued a warning of China’s overcapacity phenomenon back in 2009, the same year that Chinese officials released a statement noting that many of its industries were “blindly expanding.”

To no avail, since then, the new report finds that overcapacity has only worsened as Beijing struggles to implement reforms and overcome the resistance of growth-obsessed local governments, the report said.

Here is more from Reuters:

“China is always enticing industries to grow. The system breeds overcapacity,” said Joerg Wuttke, president of the chamber.

With regional governments still chasing growth, there are insufficient incentives to close down failing firms, which are also treated leniently by local banks and environmental regulators, the report said.

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“China released the mother of all credit avalanches, hence the double-digit growth and making decision makers more complacent – they thought they could outgrow the previous overcapacity problem,” he said.

With demand slowing and prices collapsing, China’s bloated industries are facing mounting debts and heavy losses, and Beijing no longer has the “deep pockets” required to bail out struggling firms with fresh stimulus measures, Wuttke said.

China’s heavy industries, from cement to paper production, are plagued by such inefficient expansion, said the report.

“In just two years – 2011 and 2012 – China produced as much cement as the U.S. did during the entire 20th century,” the report highlights.

China is producing twice as much steel as the next four largest producers — Japan, India, the U.S., and Russia — combined.

Although China accounts for half of global steel production,  growth in China continues to ebb, with domestic demand slowing and gross domestic product falling below 7 percent — the weakest in a quarter century — many Chinese steel firms are losing money.

To counter this, Beijing recently announced plans to cut steel production by as much as 150 million tonnes over the next five years. As a result, an estimated 400,000 steelworkers in China will lose their jobs.