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 yesterdayt.gif 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 believest.gif 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.

Originally published at Credit Writedowns and reproduced here with the author’s permission.