By chief economist Shen Minggao and staff reporter Li Qiyan
From Caijing Online

Manufacturers in China are now confronted with dramatically slacking demand.  

Overseas markets, which absorbs the majority of Chinese products, have been cutting orders since November – not only the major buyers of the G3, the storm eye of the current global crisis, but more so emerging economies, where deep troubles are only beginning.

The weakened demand is mirrored in idle capacity. Fourth quarter of 2008 had seen negative 7.1 percent growth in electricity consumption, compared to the year prior. Experts said that growth was negative 8 percent in January, even after taking into account the Spring Festival holidays.

Downstream industries, such as textiles and chemical fibers, have been leading the contraction starting early last year. Upstream industries, including nonferrous metal and transportation equipment, followed quickly, retrenching electricity consumption by over 20 percent.

Using less electricity means less production. Therefore, January’s industrial value added is very likely to fall from December, which probably means negative GDP growth as well.

Boost Ten Major Industries

In the battle against the economic slowdown, China has designed stimulus plans for ten manufacturing industries: textile, light industry, electronics and information, logistics, automobile, shipbuilding, machinery, steel, nonferrous metals and petrochemicals.

The industries suffering most from over-capacity are:

·          Steel – An official from the China Iron & Steel Association said that by the end of last year, there was excess capacity of 160 million tons, or 25 percent of the total, in the steel industry.

·          Shipbuilding – Much in line with the rest of the world, China’s new orders have fallen behind deliveries since October, a situation not seen in more than five years.

·          Petrochemical – The apparent petrol consumption (production plus imports minus exports) has decreased year-on-year since November, while inventories have piled up by 47.3 percent in 2008 compared with a year ago.

·          Electronics & information – A pillar export industry, the electronics and information industry used 60 percent of its capacity for export production. Turnover in this industry shrank by 0.1 percent and 2.4 percent in November and December year-on-year, a strong sign of over-capacity as the fourth quarter is traditionally the peak season.

As both international and domestic demand weakens, many factories find that they don’t need as much capacity as they have, and have to downsize their payrolls or cut wages, making life harder for workers.

However, the ten stimulus plans seem to have neglected the key problem entirely. Instead of clearing excess, outdated inventory, the expansionary measures in the plans might lead to even more inventory buildup as they create an illusion of beefed-up demand.

The good news is that a sluggish market could allow for industry consolidation, which would improve an industry’s efficiency as a whole. Such consolidations should be carried out through market competition, free from government intervention. However, policies, such as a favorable tax regime and financial support, are needed to help businesses weather the painful process.

Still, the most important factor in ensuring the success of these policies is a strong domestic market. Without that, the ten industry stimulus plans as well as the 4 trillion yuan investment package announced last year might well be another “bubble blower.”

Full article in Chinese: http://www.caijing.com.cn/2009-03-02/110075468.html