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

PUBLISHED : Tuesday, 07 January, 2014, 12:10pm
UPDATED : Wednesday, 08 January, 2014, 2:55pm

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.

The Chinese government, guided by the principles laid out at the third plenum, has put forward guidelines for its resolution. The most important thing is to turn the challenge into an opportunity by "moving out" this overcapacity on the basis of its development strategy abroad and foreign policy. In so doing, China will share her developmental dividends with other developing nations for common prosperity.

To succeed, China needs to take a co-ordinated, innovative and co-operative approach to produce a synergy of common interests for the countries concerned. The following are some suggestions for this endeavour.

First, China's neighbourhood. According to a China Financial Corporation report, the next few years will see an infrastructure construction boom in Southeast Asia, with Indonesia, Thailand and others having publicised their mid-to-long-term plans. Total investment is projected to be US$1.5 trillion between 2011 and 2020. Chinese companies enjoy advantages in high-speed railways, highways, ports construction and energy production.

Moreover, China attaches importance to its economic connectivity with the Association of Southeast Asian Nations and has promised policy and financial support to Chinese companies. It will benefit both Asean and China if this strategy is successfully implemented.

In the short term, benefits will be derived from infrastructure construction. Medium-term benefits will accrue from expanded trade opportunities. Long-term dividends will be reaped from greater economic growth based on sound infrastructure in Asean countries.

Second, iron and steel. The imbalance in the distribution of global capacity exists in juxtaposition with huge market potential in Southeast and Central Asia, and Africa. Chinese companies must seize the opportunities created by China's policy to build a "new silk road on the sea" and "economic belt of the silk road" by joining the China-Africa co-operation initiative and upgrading the China-Asean free trade agreement by providing assistance and setting up joint ventures, processing and distribution zones. Iron and steel are indispensible in infrastructure building.

Third, the chemical industry, with phosphate fertiliser as an example. One country's overcapacity can meet another country's needs. In 2009, China produced nearly 14 million tonnes of phosphate fertiliser. That may be too much for domestic consumption. Meanwhile, Vietnam and the Philippines lack sufficient supply of phosphate. This overcapacity can be absorbed at one stroke, to the benefit of all.

Fourth, shipbuilding. People familiar with the industry estimate that the current global demand stands at around 800 million deadweight tonnage, while China has a production capacity of about 1.2 billion tonnage. No doubt there is some overcapacity. The government's plan for the industry is to support qualified companies for overseas mergers and acquisitions. This shows the way out for Chinese shipbuilders - engage in overseas M&As, joint ventures and direct purchases to become giant companies that span both upstream and downstream operations.

Fifth, Africa. It is the most promising continent for world economic growth in the 21st century. Many African countries have achieved around 5 per cent growth in the past five years and this is expected to continue. Such stellar performances have attracted global attention and investment. Large chunks of Africa's population have emerged as middle-income consumers.

China, in addition to its advantage in infrastructure construction, is strong in producing consumer goods such as electronics, textiles and others. This position is reinforced by the government's offer of financial support from the China-Africa Development Fund as well as its long years of friendly relations with Africa.

Finally, there are the measures by China's financial sector to smooth the transfer of overcapacity overseas. The China Banking Regulatory Commission has issued directives for Chinese banks to assist in addressing overcapacity in a number of ways, including by expanding green credit, supporting efficient expansion of demand, and supporting the "go out" strategy and overseas M&As.

Banks have been asked to provide such companies with domestic insurance and overseas credit, more credit both in renminbi and foreign exchange, trade finance and international insurance, as appropriate, thus also facilitating the export of Chinese equipment, products and services, together with Chinese standards.

Now is the time for Chinese state-owned and private enterprises to act without delay. They should closely study the investment environment abroad as well as domestic policies to find the right plans to succeed. It's also possible to join hands in "going out" for better results. A "win-win" future awaits us.

He Yafei is vice minister of the Overseas Chinese Affairs Office of the State Council