China's overcapacity crisis can spur growth through overseas expansion
He Yafei suggests how to turn China's problem of excess capacity in manufacturing into an opportunity for growth- by encouraging its firms to 'go out' in search of foreign customers
The Communist Party's recent third plenum outlined the strategy and road map for comprehensive reforms to meet China's pressing challenges. One such challenge is to resolve industrial overcapacity and implement the "going out" strategy for Chinese enterprises. The solution is to combine the two elements to create a new thrust in the metamorphosis of China's economic development.
The excess capacity has been caused by China's fundamental economic readjustments against the global economy. With the ensuing knock-on effects of the global financial crisis manifesting in the economic stagnation of advanced nations, coupled with the slowdown in China's domestic demand, industrial overcapacity, accumulated over several decades, has been brought into sharp relief.
This phase of overcapacity will be long, and painful to overcome. Many factors are at work, such as the peaking of demand for traditional heavy industrial goods, falling returns for industrial and infrastructural investments, deficiency in industrial policies and vicious regional competition.
China's overcapacity is mainly seen in the traditional manufacturing sector that is both energy-intensive and highly polluting. Take 2012 for example; China's production-to-capacity ratios in iron and steel, cement, aluminium, sheet glass and shipbuilding were 72 per cent, 73.7 per cent, 71.9 per cent, 73.1 per cent and 75 per cent respectively.
Now is the time for Chinese state-owned and private enterprises to act without delay
This has resulted in a steep drop in profits, the accumulation of debt and near bankruptcy for many companies. If left unchecked, it could lead to bad loans piling up for banks, harming the ecosystem, and bankruptcy for whole sectors of industries that would, in turn, affect the transformation of the growth model and the improvement of people's livelihoods. It could even destabilise society.