China’s surplus capacity

“In China's current development model, household income is taxed to support corporate profits. Corporations now generate more than half of China's huge savings. Since consumption tends to grow more slowly than GDP, excess capacity can only be used up via yet more investment or exports. This year, economic crisis has made the latter impossible. But China desperately needs to expand its exports once again. The result may well be a crisis in the trading system.

China's trading partners have to engage with the rising giant. They must explain that they cannot – and will not – absorb the surplus capacity its heavily distorted model of development is creating. But they can point out that this pattern also damages the standards of living of ordinary Chinese. China has to shift income from its corporations to its households and spending from investment to consumption. What is needed for that is a massive structural reform. This must start now. Indeed, it may already be too late.”

"The cost of China's excess capacity", Financial Times (30 November 2009).

http://www.ft.com/cms/s/0/a75ade98-dd14-11de-ad60-00144feabdc0.html

LW: China continues to promote savings and investment at the expense of consumption. As a consequence, domestic demand is low and there is unused capacity throughout the economy. This policy is costly for the Chinese people and threatens producers in the rest of the world. Consider steel, for example. At the end of 2008, Chinese plants were capable of producing 660 million tonnes of steel, but demand was only 470 million tonnes. The difference of 190 million tonnes was nearly as large as the entire output of the European Union in 2008. (www.eurofer.org/index.php/eng/Facts-Figures/Figures/EU-Crude-steel-production ) Despite this low 72% rate of capacity utilisation, investments are underway to add an additional 58 million tonnes of capacity.

DOW: As mentioned in a post on the RSG Faculty Blog, and as was discussed earlier at a Regent Forum, huge global imbalances threaten the stability of the world economy, with China and the United States at the center of the problem. It was emphasized that difficult adjustments were required on the part of both countries if patterns of production, consumption, employment, and trade were to be made consistent with a stable foundation for long-term growth in these countries and the wider world. Unfortunately, as indicated here and in the other blog post nothing has been done in the way of an adjustment to more sustainable growth. The Financial Times may well be correct when it says it may already be too late for China to avoid a significant downturn, and if China’s economy turns down the rest of the world will likely follow.

Thanks to Larry Willmore for this Tdj.