China’s industrial overcapacity is hurting the global economy.According to the European Union Chamber of Commerce ,this overcapacity will cause trade tensions and will raise the risk of loans default
According to a study conducted by the chamber of commerce and Roland Berger Strategy Consultants,The stimulus packages are empiring the overcapacity, especially in the steel, aluminum and cement industries.
China is recovering from the global recession.This is possible because of the great amounts spent on stimulating the economy but those spendings dont take into consideration the fact that the global demand is still very fragile and that the risk of loan defaults and friction of commerce is still very high.
According to the Chamber, the stimulus packages are being oriented toward suspicious projects knowing that we still dont know the firms involved nor their plans.All those difficulties and obstacles are being manifestated in the form of an ascending trade tension between the involved parties.
U.S. and chinese political decision makers will meet soon to discuss all these points for a better outcome.
30 measures were recommended by the Chamber to control overcapacity.These measures includes the appreciation of the yuan and a decrease in the subventions for chinese firms.
The Chamber of commerce also proposed a reduction of subventions on energy prices , a raise in interest rates, an increase in dividend payments by state-owned enterprises, and an increase in spending on health care and social security.All these measures aim to stimulate the consumption and to decrease savings.
China’s commerce ministry didnt comment yet on these issues.
China has already approved on plans in order to control its industrial expansion particularly in industries including steel, cement and glass. Several Measures were introduced to limit land supply to sectors with excess capacity.But all these measures seems to be just not working.
According to a European Union Trade Commissioner Catherine Ashton, China’s excess capacity may desiquilibrate international markets so it’s not only a chinese issue but a global one.This is explained by the fact that when the chineese offer exceed the chinese demand, the excess goods will go to other markets and these markets are knowing a slow demand because of the actual crisis.
According to a chinese responsible at China central bank,this problem is not just an overcapacity problem but it also causes bad loans to emerge and inefficient investments to arise.This means that the long term effects of China’s overcapacity are becoming more pronunciated.
This assessment remaines an open subject of discussion.For some experts this approach might be extremistic because when the demand for chinese products will fall, the chinese production will adjust accordingly.This is the law of a free market.
The Increased trade tensions between China and the U.S. comes from many reasons.One main reason is the high unemployment in the U.S.The 2-digit Unemployment is causing tension to reduce americain exports from China.
According to the Chamber,China’s own economy will suffer most from the excess capacity problem. Companies will have less profits.This induce less ressources to invest in research and development.Alternatively, firms will search to reduce their costs and one evident way to do it is to reduce their labor force or to reduce wages.In both cases, the consumption and demand will be negatively affected.China is knowing growth and expansion but most importantly,are these conditions permanent and do they guarantee viability and sustainibility?
According to the report,China’s lending was mainly oriented toward state-owned enterprises. As a result,investments in fixed-asset considerably increased.
One major risk of this excess capacity is the risk of loan defaults.Immediate actions should be taken in order to prevent such a crisis.Another risk is the risk of capital loss due to intensive lending by banks.
Global demand may decrease at any time during this year and the Chinese stimulus bill is being executed especially in the ciment industry and in millions of dollars.This is conceived as a very serious manner.
