Submitted by Dr Peter Vine
From The Times (UK)
October 1, 2009
Beijing moves to halt growth as supply starts to outstrip demand
Leo Lewis, Asia Business Correspondent
The Government of China has launched an attack on overcapacity in its heavy industries with a series of stinging curbs on new factories, smelting plants and port-building projects.
The government crackdown, unleashed a day before the country enters a ten-day holiday to celebrate the communist revolution, comes amid rising fears that China’s economy may be blundering into a destructive boom-bust cycle.
In a stark admission yesterday that the recent state-backed investment binge may be swelling out of control, Beijing warned that banks and jobs were being jeopardised by “chaotic over-expansion” in a range of sectors.
Despite the apparent buoyancy of the economy, and its lightning scramble out of the global financial crisis, deep sensitivities remain. For political reasons, Beijing is eager to keep GDP growth above the level of 8 per cent supposedly required to maintain social stability and job creation. But there are fears that huge imbalances between production capacity and actual demand could lead to price wars, corporate failures and severe setbacks for the country’s stellar expansion trajectory.
The government statement included a direct swipe at provincial authorities and what it identified as slack controls on spending and deliberate flouting of planning guidelines. “Some regions act illegally, give approvals in violation of regulations or allow building before approval is granted,” said a message on the Chinese Cabinet’s website.
Under the terms of Wednesday’s onslaught against industry, the building of new steel plants and the expansion of existing facilities were slapped with indefinite bans. Similar restrictions were placed on any impending plans for cement, glass and coke factories. China will not allow any new aluminium smelting plants to be built before 2012, said the official statement, and no new docks are to be built anywhere in the country over the same period.
China’s State Council calculates that the impact of this year’s 140 billion yuan (£13 billion) investment spree in steel mills will be to lift overall national production capacity some 40 per cent above the country’s entire annual demand. The same dynamics reportedly apply to cement.
Heavy polluters took the full force of the government hammer-blow, but even industries with exposure to the so-called “green” economy were not spared. Producers of polysilicon, the raw material for making solar panels, and makers of wind turbines were also told their activities would be far more tightly regulated. “Backward” industries will be forced to raise their game and meet higher efficiency standards.
In the absence of such controls, said the statement from the Chinese Cabinet, “it will be hard to prevent vicious market competition and to increase economic benefits, and this could result in facility closures, layoffs and increases in banks’ bad assets.”
The draconian move follows more than six months of record-breaking bank lending and the disbursement of 4 trillion yuan in government stimulus money. Cumulative new bank lending in the first half of 2009 amounted to more than $1.1 trillion, and some argue that a substantial proportion of this found its way towards the property and stock markets and is fuelling a bubble that may also prove unsustainable. The astronomical levels of corporate investment, warn senior economists, place the booming Chinese economy at increased risk of a sudden collapse in growth.
At the very least, the unprecedented flood of liquidity is expected to create a bad loan crisis in large parts of corporate China, which may eventually force state-owned banks to write off billions.
Paul Sheard, chief global economist at Nomura, warned in a note to investors that the high contribution of investment to China’s GDP figures poses potentially serious challenges to growth. “By offsetting the export-led downturn by spurring domestic demand,” he explained, “China is doing its bit for the long-awaited ‘global rebalancing’ ”. He added that because the economy was investment-inten- sive to start with, engineering a surge in infrastructure, and hinterland-focused, spending is making it even more so. That raises the longer-term risk of growth being hit by an investment-led slump.
