Overcapacity to be Curbed

The China stimulus package has been something to behold. Massive compared to other countries and a massive distortion.

Whilst is may have saved the global economy (in the short term) it is/has stored up a whole lot of trouble. Bubbles in the stock market and property market to name the obvious ones. Actually they are not technical bubbles, simply rises that are not supported by economic fundamentals.

Today the FT reports on the overcapacity of the industrial sector. Basically firms that should have gone bust didn’t leading to more inefficient firms than there should be (although a lot more people in jobs that there would have been).

Also of relevance given Copenhagen is that the stimulus package meant the survival of highly polluting firms that would otherwise have gone under leading to higher emissions than would otherwise have been the case. These are the sectors that should be targeted (although they can also be large employers).

These jobs will be lost eventually – how China manages this will be interesting to watch.

China moves to curb industrial capacity [FT]

China on Wednesday announced details of plans to curb severe overcapacity in industrial production that has been made worse by the country’s Rmb4,000bn ($585bn) stimulus package.

The State Council, China’s cabinet, said in a strongly worded statement that highly polluting sectors including steel, coke, cement and plate glass must cut capacity, while silicon and wind power producers should pursue more orderly development.

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The details came after the State Council first said in late August that it would ask local authorities to “resolutely [curb] overcapacity and redundant construction”, after the country’s massive stimulus measures and excess bank lending led to unbridled expansions.

It said industrial overcapacity could cause intense competition and derail the country’s economic recovery if no action was taken.

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Originally published at China Economics Blog and reproduced here with the author’s permission.