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Tom Holland

When China announced a massive stimulus programme in late 2008, the intention was to boost economic growth in the short term by investing in the infrastructure needed to underpin long-term development.
What actually happened turned out to be rather different.
Although a great deal of money did indeed pour into infrastructure investment, far more ended up flowing into new factories, steel mills, office buildings and shipyards, many of them surplus to requirements.

As a result, China's economy is today suffering from an excess of industrial capacity so great that its elimination will suppress growth for years to come.
Back in November 2008, Beijing reacted to the collapse of global demand following the implosion of Lehman Brothers by announcing a 4 trillion yuan (HK$5 trillion) stimulus package.

	The city of Tangshan boasts a greater steelmaking capacity than the whole of Germany
Of that, almost half was meant to be spent on roads, railways, power lines and the like, with another 1 trillion yuan going into reconstruction following the Sichuan earthquake and much of the rest earmarked for building low-cost housing.
In the event, the programme turned out to be worth far, far more than 4 trillion yuan. As China's banks opened their credit taps in support of Beijing's stimulus efforts, state-owned companies across the country rushed to borrow as much as they could to fund an enormous build-up in new capacity.
Between 2009 and 2012, China's investment grew by almost 3 trillion yuan each year. A good deal of the extra did go into infrastructure. But at least as much went into the property market, while the biggest share - around a third of all investment - was pumped into new manufacturing capacity.
The build-up was unprecedented in global history. Glass-making capacity, for example, grew by 50 per cent. Following the investment binge, China now has 1,650 shipyards, while the city of Tangshan in Hebei boasts a greater steel-making capacity than the whole of Germany.
Not surprisingly, much of this new capacity is now sitting idle. Last year, China could have produced 2.9 billion tonnes of cement. There was demand only for 2.1 billion tonnes.
As a result, says Francis Cheung, head of China strategy at brokerage house CLSA, only 78 per cent of China's total industrial capacity is actually operating today, a level comparable with utilisation rates during the demand slump in 2008.
Worse, with companies still borrowing and investing, capacity utilisation is set to fall further over the next couple of years, says Cheung, approaching dangerously close to the 70 per cent level at which the Ministry of Industry and Information Technology warns there is a rising risk of corporate insolvencies (see the first chart).
Things can't continue. Excess capacity has already plunged the industrial sector into deflation, with the producer price index in negative territory since March last year, pushing up the real size of corporate debts.
Meanwhile, investment is losing traction, with four yuan of capital now needed to produce each yuan of economic growth (see the second chart).
The only option is to close surplus plants. But Cheung says official attempts to eliminate excess capacity through mergers or by enforcing energy efficiency and pollution standards lack the political muscle to be effective.
Altogether, he reckons Chinese manufacturing industry needs to shut down capacity and write off investments worth 1.5 trillion yuan; a move that would double the banking sector's bad-loan ratio and weigh heavily on future growth.
At the moment, however, it's doubtful whether the central authorities in Beijing have the political stomach for forcing through such unpalatable measures in the face of opposition from local governments.
"To deal with the problem will take strong leadership," Cheung warns.
tom.holland@scmp.com


China's excess of industrial capacity nears danger level

Business

Opinion

The only option for Beijing is to close surplus plants, but it's doubtful the leadership has the political stomach for forcing through tough measures


When China announced a massive stimulus programme in late 2008, the intention was to boost economic growth in the short term by investing in the infrastructure needed to underpin long-term development.


Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


Column

Monitor

.css-1m2rp1p{color:#34b8b5;}Monitor | China's excess of industrial capacity nears danger level

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}The only option for Beijing is to close surplus plants, but it's doubtful the leadership has the political stomach for forcing through tough measures

Monitor | China's excess of industrial capacity nears danger level

The only option for Beijing is to close surplus plants, but it's doubtful the leadership has the political stomach for forcing through tough measures