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Official Newspaper Blames Local Govts for Overcapacity Which Threats Chinese Economy

01-23 14:40 Caijing
The People's Daily warned that the persistent obstinacy may lead to a systematically economic collapse in the country without control.

A Chinese ruling party's mouthpiece newspaper has blamed local governments for the country's excess capacity problem which has long plagued the world's second-biggest economy, and warned that the persistent obstinacy may lead to a systematically economic collapse in the country without control.

The People's Daily said in a commentary published Wednesday that overcapacity now extends to emerging industries, and is becoming an increasingly big obstacle to the economy's recovery.

"With overcapacity becoming more prevalent, the economy has been puffed up by low-level redundancy constructions, leading to…vicious competition and plummeting returns of companies," it said, "Systematically economic risks and crisis could occur" if the momentum is not arrested.

Government push

Local governments have played a significant role in the process, it added, as officials rush blindly to promote any grandiose project, capitalizing on recent lending binge with scant regard for efficiency.

Overcapacity has remained a problem for the past 30 years despite repeated efforts taken by the central government in policy-making including restrictions on financing and industry access, the newspaper said, citing Chief Economist Li Xunlei with Shanghai-based Haitong Securities Co.

According to Li, troubled investments led by local governments are the primary cause of the problem. The photovoltaic industry, for example, was made a key development priority in nearly all the 31 provinces and regions across China, he said, whose capacity in 2012 was at 63 percent of global production.

Mergers and restructuring in major industries

The commentary came after the Ministry of Industry and Information Technology (MIIT) announced guidelines of encouraging mergers and restructuring in major industries including auto, steel and iron, rare earths, IT and medicinal sector.

Mergers and restructuring are important forces behind China's economic upgradation and transformation, the statement said.

"Overcapacity is not entirely triggered by market factors," Zhu Hongren, spokesman and chief engineer with the MIIT told a Wednesday's press conference, "It is closely linked with the current system and mechanism, the development model and management styles."

Overcapacity extends to emerging industries

2012 has seen over 160 million tonnes of excess capacity in steel and iron industry, and more than 300 million tonnes in cement, statistics show, amid a slowing economy and weakening demand in foreign countries. Meanwhile, the capacity utilization in non-ferrous metal fell to around 65 percent from 90 percent in 2007.

"Especially in recent few years, the overcapacity problem has become prominent, with some new features," said Li Wei, director at the Development Research Council. He reckons that the problem will be long-lasting, and extends to emerging industries, such as PV and wind equipment manufacturing.

Crude steel output is expected to hit 1.12 billion tonnes by 2015, compared with a peak forecast of 750-800 million tonnes in demand, said Li. In PV industry whose capacity utilization is below 60 percent, new demands nationwide could be met by productions at five top makers in China.

Feng Fei, secretary at industry research center with the DRC compared the current overcapacity problem to that in Asia financial crisis more than a decade ago, but added more industries are suffering from the problem now and in some industries, the overcapacity is in "absolute terms" rather than comparative terms, according to the People's Daily.

Local governments' use of administrative measures when boosting capacity has distorted investment behaviors, he added.

 

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