Mainland sees challenges cranking up production

The mainland faces a daunting challenge rejuvenating its manufacturing sector amid falling exports and serious overcapacity, the Ministry of Industry and Information Technology said yesterday.

'This year will be the most difficult one for the manufacturing industry since the beginning of the new century,' the ministry said in a sombre report, which contrasted starkly with recent upbeat comments from officials and economists. 'Although some positive changes have showed up in the economic development, the foundation [for a recovery] is still not firm.'

In an uncharacteristically bearish report on industrial production, the ministry said domestic demand held the key to a turnaround.

At the end of last year, Li Yizhong (right), the industry and information technology minister, told a conference that 2009 would be 'extremely difficult' because the country intended to maintain a high level of growth of industrial production.

Yesterday's report came as government officials and economists have been beating the drum for economic recovery after the stimulus package started to show an impact on gross domestic product growth.

The equity and property markets have also taken a bullish turn lately as investor optimism improved.

'The ministry's prediction is well-grounded,' said Liu Zhongyuan, the chief economist at Xiangcai Qinan Futures. 'The overcapacity problem is serious and there's no way that an investment-driven growth could be sustained.'

Industrial production grew 5.5 per cent from a year earlier in the first four months, representing the lowest growth in 15 years.

Beijing announced its rejuvenation schemes early this year to buoy 10 ailing sectors including the steelmaking and textile industries, part of its efforts to meet its 8 per cent annual GDP growth target.

The ministry said industrial production was expected to grow 8 per cent in the second quarter, but warned that overseas demand would continue to shrink as the global recession deepened.

Analysts said the 4 trillion yuan (HK$4.54 trillion) investment expansion package would result in a large number of redundant infrastructure projects and soaring bad loans.

'The main concern in the industrial sector is overcapacity exacerbated, to some extent, by the stimulus package,' said Lu Ming, an economics professor at Fudan University.

The Shanghai Composite Index jumped 42.66 per cent this year as investors became convinced that an early recovery is in sight.

Last month, housing prices in the mainland's 70 cities rose 0.4 per cent from March, a sign that the slumbering property sector might be bottoming out.

Mr Liu said the bull run in stock and property markets would be short-lived because the 'structural problem' had yet to be solved.

In the first four months of this year, the raw material industry sector saw production grow 5.3 per cent from a year ago. But analysts said the worst was yet to come for loss-making sectors such as steel, which fell victim to falling market price and overcapacity.