Overcapacity in Chinese industry — mainly the result of easy loans and government subsidies — is having an “ever more destructive” effect on both China’s domestic and the global economy, according to a new report by the European Union Chamber of Commerce in China. The report says overcapacity has grown significantly since the government unveiled a stimulus package following the 2009 financial crisis — and is now leading to cutthroat competition within China, holding back the country’s ability to reform, and stoking trade tension with other countries.
As the Chinese government seeks to make its economy more competitive, following a slump in exports over the past year, and a slowdown in its construction and real estate industries, it has made tackling over-capacity a priority — vowing to wipe out unprofitable “zombie firms” in sectors from steel to coal. But the EU Chamber report is skeptical about the chance of success, saying protectionism by local governments has given rise to “serious concerns regarding the central government’s ability to effectively implement coherent and effective policies.” It calls for more radical measures, including greater privatization, to tackle the problem.
The report notes positive attempts in the past, including a pledge in 2013 to allow the market to play a “decisive role” in industries such as cement, steel and shipping. But with the exception of the wind power sector, it says there have been “few real breakthroughs” — with a 2014 budget law that pledged to reduce local government’s abilities to subsidize industry having had limited effect, while “loopholes” mean some local governments are still approving projects that should, in theory, be approved by the central government.
[“Source-ibtimes”]
