OCTOBER 6, 2009, 4:11 P.M. ET
China's Overcapacity Worries
By ANDREW PEAPLE
China's leadership has been celebrating 60 years of the People's Republic. But there are signs it's not quite convinced of the economic course it has engineered.
Just before the Oct. 1 festivities, China's State Council slipped out plans to slash overcapacity in several key industries, including aluminum, steel and cement, as well as wind power.
Bloomberg News
The announcement was little noticed, but it points to the central dilemma facing China's economic planners: while monetary and fiscal stimulus have combined to support the country's growth levels around the 8% annual target this year, they've also helped deepen excesses.
According to the government's own figures, some industries are awash with capacity. If, for example, all of China's planned cement projects were actually launched, annual output would rise to 2.7 billion tons per year, against domestic demand of only 1.6 billion tons, the state council said.
Beijing is clearly aware of the problem, warning the excess capacity issue would lead to declining profits and, in turn, company closures and unemployment. The signs are already there: Chinese industrial company profits were down 10.6% on year to the end of August, with state-owned industrial companies -- major beneficiaries of the stimulus efforts to date -- seeing profits off 25.2%.
The evidence underscores the discrepancy between caution at home and overseas optimism about China's future expansion and its ability to support the global economy. It also shows the challenge Beijing faces in keeping growth steady next year and beyond.
Chinese Premier Wen Jiabao recently warned the pick-up in growth this year "remains unstable, unconsolidated, and imbalanced."
Optimists, looking ahead, suggest a recovery in exports and rising household consumption will keep the Chinese economy buoyant.
If those supporting factors don't come quickly, there'll be pressure to supplement the fiscal stimulus, especially with the Chinese government -- on the surface at least -- enjoying relatively low debt levels. Squaring that with the overcapacity issue will then become a knottier challenge.
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