China's stimulus spending fuels massive overexpansion could lead to protectionist measures from overseas markets

27-Nov-09
China's stimulus spending has fueled massive overexpansion in industrial capacity that could drive a surge in low-priced exports amid weak global demand, possibly igniting a protectionist backlash abroad, as per the European Union Chamber of Commerce in China. The stimulus helped to boost China's economic growth in the latest quarter to 8.9%. It is pumping money into the economy mostly through building airports and other public works projects, which has driven expansion. Industries including steel, cement and plastics are "still blindly expanding" despite the worst global slump since the 1930s, as investment H1-09 jumped 40% from a year ago levels. Hence massive overcapacity is anticipated shortly. Chinese leaders have issued similar warnings about chaotic overinvestment and are trying to curb spending in steel, cement and other industries. But the existing overcapacity could force producers to slash prices to export surplus goods, possibly fueling demands abroad for foreign leaders to protect jobs at a time of high unemployment. This constant export pressure coming out of China leads to possibly more protectionism in the future. Hence an upsurge in anti-dumping cases filed against Chinese companies is expected next year. Economists and business groups have warned that Beijing's 4 trillion yuan ($586 bln) stimulus could lead to overinvestment. On its part, the Chinese government says that since September it has rejected 47 proposed industrial projects with a total price tag of 191 bln yuan (US$28 bln) in industries including steel, glass and cement, and about 339 projects totaling 1.7 trillion yuan (US$252 bln) in investment were approved. The European chamber stressed that it saw the stimulus as a success but said Beijing should do more to boost demand for Chinese goods at home by encouraging its own consumers to spend more. It said authorities should divert investment away from manufacturing and into job-creating service industries. China's consumer spending is the lowest among major countries as a share of its gross domestic product at just 40%, compared with at least 55% in Japan, Germany and India. In steel, China's annual production capacity is 660 mln tons and mills are adding another 58 mln tons, even though they sold less than 500 mln tons of steel last year, according to Charles-Edouard Bouee, Asia president for Roland Berger Strategy Consultants, which conducted the study. The Asian giant faces similar problems in aluminum, cement, plastics, refining and production of wind power equipment. In petrochemicals, China imports much of its needs from other Asian countries but is building its own production facilities, which will cause "major regional overcapacity, impacting Japan and Korea.
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