http://www.ftchinese.com/story/001030012/en
Inspired by the blog “Sunnybear” and discussion held in class, I have some bold personal view about the article.
In my view, the main conclusion about China’s economic policy that “the result may well be a crisis in the trading system” is consequently somewhat overvalued.
The article is based on the clash between the rising saving rates in USA, which is the reason of declining USA deficit and the China’s economic policy. However, it is exactly the case in the USA. Since the second quarter of 2008 US savings have declined from 12.7 per cent of GDP to 10.4 per cent of GDP.
In any country, of course including China, it is quite easy to point out capacity in one or some industries–this measure necessarily means that cases may be below and above average.
Therefore, citing only some particular examples cannot reach the conclusion that China is suffering from the problem of overcapacity. This same mistake applies within individual industries. For example, the situation of Chinese chemical sector mentioned in the report is a normal market situation.
Regarding the true over capacity, the Chinese government has clearly stated the necessity of rationalizing this structure. On the other hand, regarding the criticism of China’s “high-savings, high-investment economy”, some econometric theory has proved that investment is a crucial element in economic growth. The case of Singapore has demonstrated that this model of development can achieve higher levels of GDP per capita than the US.
Finally, about the “crisis in the trading system”, it is just the opposite case in Europe. From August 2008 to August 2009, the EU moved from a trade deficit of $26.0bn to a surplus of $1.1bn. This shows a basis for a reduction and not an increase of trade tensions.
Jiayin
Three comments on your article and what we discussed in Class:
1. China is actually in the case of structural overcapacity. That means some industries in China suffer from overcapacity while others can even in undercapacity. But no matter what kind of overcapacity it is, China can suffer from resource-wasting and also risk of crash when the external demand fail to digest the excess amount before the financing chain crack and bank system collapse because of none-performing loan.
2. What are the reasons of this overcapacity? We have discussed a lot in class. I only give some complements here:
(1). Domestic prices of raw materials of those industries are relatively low. China’s government is used to manipulate and control those important products’ price to make them relatively low to guarantee the economic growth, such as oil, coal, electricity and water. This give incentives to investmetn in those industries such as steel, cement, and chemical processing of coal.
(2). Political Factors. Local gevernment officials tend to make significant performence in a short time in order to get promoted. They will do every thing to enhance the local GDP in short run. I think this is a very very very impoartan factor, which cause repeated construction and redundant projects. In my home town, you can see that each time there is a new chief official, there must be many roads under rebuilding even though we all know the previous ones are still in condition.
(3). The undervalue of RMB, which you are very familiar with.
Regarding (1), I wonder if it’s in the economy’s interest to underpriced the commodities since the producers of raw materials may get discouraged to produce up to the optimal level of output. Whereas, if they’re subsidized by the government (whatever local, provincial or national), then this effectively means taxpayer money is kind of misallocated.
Sunny Choi
In addition to Dike, monopoly of the State-owned enterprises in these industries could probably be another reason for the over-capacity. That may explain the controlled low prices of resource and maybe impose more taxes on the resource could be a prescription.
CHENHUI
Karthik from Unclemilton:
Please see the reports and links on UncleMilton for some more info/data.
I feel that there is no doubt that there is over-capacity in China. What is important, as mentioned by the professor, is whether the overcapacity will have an actual demand in the medium/long term. If so, it is not a problem.
But the general agreement among economists/experts is that the overcapacity is too much, and not good for the Chinese economy, and also the world economy.
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yep, rather than debating on whether China has the problem of overcapacity, we’d better analyze and forecast the possible performance of those investment in the future. On one hand, due to current financial crisis, it is more difficult to export our products, and due to our low citizen’s consumption power, we can not rely on domestic demand to solve this problem(but our country is working on it). On the other hand, as Jiayin and Chenhui mentioned, the overcapacity is likely to exist in certain industry, such as utility area, which are mainly controlled by State-owned enterprises. Although the aricle lists figures of capacity utilisation rate as rather low: “aluminium, where the capacity utilisation rate is forecast to be 67 per cent in 2009; windpower, on 70 per cent; steel, on 72 per cent; cement, on 78 per cent; chemicals, on 80 per cent; and refining, on 85 per cent. Yet vast additional capacity is on the way.’ Personally, I believe it is largely because of financial crisis and bad competitions among those domestic state-owned enterprises. It reminds me of the persistant fight between China coal industry and electronic power industry.
Hey Karthik, forgot to leave the name again. It is Fangming here, regards.
To continue my comment in the SunnyBear blog: I still consider this kind of overcapacity a political problem. As what I said in SunnyBear, if the political structure between central government and local ones does not change, the over investment or repeated investment in some hot industries would never stop. However, I also notice that these years, Chinese leaders truly paid a lot of attention to this problem and we can see that the judging and promotion rating system for local officials have changed a lot. One example is, if the score (this is very Chinese stylizd method of selecting officials) of protecting environment is too low for local officials, they will lose the chance to promote. So we can see many steel projects and concrete plants have been stopped in some provinces.
Minxiao