China Economy

Beijing may slow overcapacity cuts as they spark surge in prices, analysts say

Government thought likely to reconsider speed and scale at which it is retiring obsolete capacity

PUBLISHED : Saturday, 19 November, 2016, 8:23pm
UPDATED : Sunday, 20 November, 2016, 10:31pm

Beijing could fine tune and slow the pace and scale at which it is retiring obsolete overcapacity as curbs on output backfire with surging commodities prices, economists said at a forum in Shanghai on Saturday.

Guo Lei, chief macro analyst of GF Securities, said on the sidelines of a forum in Shanghai that Beijing is likely to reconsider the pace and scale of its overcapacity-slashing initiatives during the coming central economic work conference to tackle surging commodities prices.

“The drive to curb output has played its role in quickly helping end a 54-month factory-gate deflation, yet it also backfired by shoring up coal prices,” he said.

Beijing wants to cut the capacity of coal and steel in its supply-side reform to restructure its economy and trim reliance on heavy industries. Coal output decreased 10.7 per cent in the first 10 months, according to statistics data. The closure of mills, however, helped spark a rare price rally. The benchmark steam coal price at Qinhuangdao, the country’s major coal port, has doubled from a year ago.

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Yan Se, senior economist at Standard Chartered Bank China, said he expects Beijing to fine tune its handling of the issue as many local governments’ curbs on coal capacity are “too simple and rude”.

The top economic planner had ordered that large coal mines operate on fewer days, but was later forced to encourage output when the squeezed supply failed to meet demand pickup and led to a price rally. The government is often “a step slower” in responding to the market, economists said.

“The over-reliance on administrative measures has led to a scenario of an overly busy government and an overly chaotic market as the government’s steps have worsened the imbalance rather than curing it,” Yan said.

“China does need to cut overcapacity yet we have seen too many ‘lazy policies’ that actually make the industry less effective by slashing some high-efficiency private production yet keeping some state-owned enterprises floating, as local governments tend to lean towards state firms for the sake of job creation and sustainability,” he said on the sidelines of the forum held by

He said China had to accept the reality that it would have to rely on coal as a main energy source and the government focus should be shifted to propel higher efficiency and technology upgrading through producing cleaner coal rather than simply asking for a “one-size-fits-all” capacity cut across the industry.

Yu Bin, a fellow of the Development Research Centre of the State Council, said at the forum that China is still under pressure in seeking new growth momentum as an economic recovery propelled by infrastructure can’t be sustainable.

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Infrastructure investment, hugely supported by fiscal expenditure, grew about 20 per cent in the first 10 months of this year, yet fiscal revenue only grew 5.9 per cent in the same period.

Yu also said an income growth that lags behind consumption growth would eventually pinch retail growth, a sector that has been a main support of economic growth as momentum in investment and exports waned.

China’s retail sales grew 9.8 per cent in the first three quarters, while income growth lagged behind at 6.3 per cent in the same period.