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It’s high time China arrests overcapacity

Unrestrained growth has a price. The case in point is China’s overcapacity in heavy industries whose over-proportional development is causing damage to its own and the global economy, even as Beijing struggles to regulate and reform its industries.
The hardest hit is China’s steel industry, which manufactures more than the next four largest producers combined — Japan, India, the US, and Russia. Hence such massive production would make it harder for China to find new markets to sell.
Worse still, the overcapacity has also encroached on the cement production, equaling the amount produced in the United States during the entire 20th Century.
This overcapacity has cast a shadow on the markets. Brussels has launched new anti-dumping probes into Chinese steel imports, as producers in both Europe and Asia struggle with global prices that have plummeted in the face of oversupply.
“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 recent European Union Chamber of Commerce’s report said.
This development led to trade tensions between the world’s second-largest economy and developed countries, accusing it of dumping their markets. But the irony is, China is not benefiting from the oversupply. Its steel firms are also losing money, and Beijing has announced plans to cut output by as much as 150 million tonnes over the next five years.
Yet, there is a belief that the current economic policies taken by China to address this issue are rather inadequate and would not yield required fruits.
China accounts for half of global steel production but internal demand has slowed sharply along with economic growth, forcing it to look overseas. Its steel exports soared 20 percent in 2015, according to Chinese Customs data.
Though overcapacity is not new in China, it has awfully surpassed 30 per cent in sectors such as iron and steel, glass, cement, aluminium, solar panel, and power generation equipment, triggering loan defaults by companies that have borrowed and then watched their profits fall.
It is believed that vicious competition among local governments to achieve high GDP growth has stoked uncontrolled production. They attract new manufacturing facilities by offering all kinds of financial subsidies such as tax
holidays and rent-free use of government land.
Another factor is that China’s growth in recent years has been propelled by a massive investment splurge, much of which has gone towards building things—trains, bridges, high-rises, and new factories—all of which use rebar and other steel products.
“Future reforms and structural adjustment should focus on this problem, or it will be hard to see results,” Wang Jian, secretary general of the China
Society of Macroeconomics said.
Despite the fact that factories are running at an average of 72 percent of capacity, down 0.7 percentage points from 12 months ago, about 68 percent of companies said they would need more than three years to work through their overcapacity.
Beijing eyes Central Asia and the Middle East markets to sell its excess
production as part of President Xi Jinping’s ‘One Belt One Road plan’, a move seen as a revival of ancient Silk Road trade routes. Yet, sceptics say those
markets are not big enough to absorb China’s overcapacity.
To handle this problem, Chinese officials called on local governments to take specific measures to curb production in 18 industries.
Without cutting back the overcapacity, the oversupply could blunt China’s competitive edge, as it continues to dump the markets with products beyond demand.

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