Industrial Overcapacity in China

One of the other potential problems for the Chinese economy is industrial overcapacity. There are a lot of resources beign stockpiled in China at the moment and while this has led to the maintenance of demand for Austrlain resources, eventually the have to be used up through either domestic or international demand.

Adjusting to this overcapacity is now apparently an important goal of the Chinese govt.
According to a Reuters' report in the NYT:

China's cabinet has laid out detailed plans to curb overcapacity in industries such as steel, aluminium, cement and wind power, warning that the country's economic recovery could otherwise be hampered.
In a reiteration of existing policy targets, the State Council said meeting the government's long-standing goal of reducing overcapacity was urgent because the result of inaction would be factory closures, job losses and rising bad bank loans.
"What especially requires our attention is that it is not only traditional industries such as steel and cement that suffer from productive overcapacity and are still blindly expanding," it said in a notice posted late on Tuesday on www.gov.cn.

Part of the reason for the continuing expansion is of course another state directive for the banking sector to increase lending to stimulate the economy.

All of this will have significant implications for the Australian coal sector.

"There is 58 million tonnes of crude steel capacity under construction, most of which is illegitimate. Crude steel capacity could exceed 700 million tonnes and overcapacity will intensify if curbs are not implemented in time," it said.The cabinet said it would no longer approve or support any new steel projects or any expansion in existing projects.Analysts said the immediate casualty of the clamp-down could be Australia's coking coal sector, whereby exports to China have surged more than 10-fold from a year ago to reach 14 million tonnes in the first eight months of this year."

The policy would support our view that the surge in China's coal imports over the past few months will be short-lived. From an Australian perspective, we could be seeing some degree of a pullback over the coming months," said Clyde Henderson, a coal analyst at Wood Mackenzie consultancy in Sydney.

Overall analysts argue that demand elsewhere will pick up compensating for declining Chinese demand.

"But still, many other steelmakers elsewhere are now looking to restart their capacity, so that will compensate for softer demand in China."

Despite the climate change problems of coal, it's likely to be important for a long time yet.

Another major economic figure bearish about the short-term prospects for China and Asia is Stephen Roach. (But like me optimistic about the medium to longer-term).

His most recent book is reviewed in the Financial Times by David Pilling:

In The Next Asia, a collection of essays on the region’s place in the world, Roach could not fairly be described as bearish. “Don’t get me wrong,” he says at one point in a typically down-to-earth interjection. “I am a long-standing optimist on Asia.”


But he does challenge, and in forthright terms, any notion that the world can go back to business as usual. If Asia, particularly China, thinks that it can simply wait for the west to recover before merrily recommencing its export-dependent growth strategy, it is kidding itself, he argues. Only if it can rebalance its economy towards greater domestic consumption will it fulfil its enormous promise. “It may be premature to crack open the champagne. The Asian century is hardly as preordained as most seem to believe.”

So far, Roach has been disappointed by the Asian, particularly the Chinese, response. In the section on Chinese rebalancing, he concludes: “There are worrisome signs that China just doesn’t get it, that it is clinging to antiquated policy and economic growth strategies that presuppose a classic snapback in global demand.” He cites as evidence the make-up of the $585bn two-year stimulus package that, he says, is biased towards old-fashioned infrastructure projects and too light on pro-consumption measures such as bolstering national health insurance, the absence of which encourages people to make precautionary savings.

He welcomes China’s willingness to engage more actively in debate about the global financial system. But for Roach, Beijing’s emphasis on the US deficit and on seeking alternatives, such as special drawing rights, to the dollar as a reserve currency betrays a complacency towards its own problems. China’s massive holdings of US Treasuries, he contends, are the flip side of America’s: they reveal a dependence on exports and the need to recycle foreign currency reserves abroad for fear of putting upward pressure on the renminbi.

For those students in 1003IBA this latter point relates to those global imbalances I'm so keen for you to understand!!