LeveragedBuyout
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I will probably post this qualification in front of every Chinese economy post I make to avoid misunderstandings. The purpose of this post is not to insult China or predict its downfall. This post identifies some of the imbalances in China's economy and the repercussions of such an imbalance (in this case, a potential trade war and non-performing loans due to lack of profitability). These kinds of articles help answer the question, "if China's system of state capitalism has done so well until now, why are so many calling for reform and rebalancing?"
Needless to say, I set up a US economy sticky in the Americas section, so please feel free to post similar analysis about the United States if you feel identifying such issues will help us fix our own economy. That said:
Pain Spreads From China’s Excess Production - China Real Time Report - WSJ
A worker cut steel bars at a steel plant in Ganyu, Jiangsu province.
Reuters
China’s problem with bloated production is ricocheting around the world.
China is producing too much steel, plate glass, chemicals, solar panels and other goods for the domestic market, and usually exports the excess at cut-rate prices. That creates big problems for China’s competitors, who have to cut their prices to compete, slashing profits for everyone. Back in China, producers find cheap loans to keep producing and exporting. That risks inflating China’s credit bubble further – making China’s economy ever-more vulnerable to downturns – and adds even more manufacturing capacity.
There are winners here, of course: consumers, like car and appliance buyers, who may benefit from the lower costs of steel, glass and chemicals used to build consumer goods. But for producers and policymakers, it means tough decisions about how to keep the pain from spreading and putting more companies – and free trade – at risk.
“China is creating a glut of supply and hurting the profitability of the global industry,” says Anthony DeCarvalho, a senior economist at the Organization of Economic Cooperation and Development, referring to the global steel industry. “It also may be displacing more efficient producers” outside China who can’t compete with subsidized Chinese production, he adds, and go bust.
Faced with such a challenge, many nations resort to trade sanctions, tacking huge charges on Chinese imports.
China’s vast excess capacity makes it the biggest target of such sanctions. Global Trade Alert, a trade research group headquartered in London, looked for The Wall Street Journal at six sectors marked by excess capacity in China: steel, aluminum, cement, plate glass, wind turbines and solar energy components. Of all the trade sanctions cases brought since Jan. 2009 in these industries, China was the sanctions-target 75% of the time.
Overall, China was the target of global sanctions about 46% of the time during the same period, Global Trade Alert found. The U.S. was dinged 34% of the time and the European Union 43%. (The numbers add up to more than 100% because trade sanctions often target multiple countries.)
Trade restrictions deepen tensions among trading partners and can, in some cases, lead to trade wars. In the U.S. and other democracies, such restrictions help turn China into the sinister face of globalization, at least in the court of public opinion.
“China continually seeks to evade the trade laws and identify new opportunities to ship dumped and subsidized products into the U.S.,” charges Michael Wessel, a member of Congress’s U.S.-China Economic and Security Review Commission, and a consultant to the U.S. steel industry.
In a statement to The Wall Street Journal, China’s Ministry of Information and Industry Technology said China’s steel exports, including those to the U.S., abide by the World Trade Organization rules. China’s steel overwhelmingly feeds the domestic market, the ministry said, with only 8% of China’s crude steel shipped overseas. “There is no dumping taking place,” the ministry said. (“Dumping” is selling at below-market prices.)
Steel is especially politicized, in part because there are few large multinational steel producers to temper nationalist sentiments in individual countries. According to Global Trade Alert, between 1995 and 2013, 28.5% of all anti-dumping trade cases brought globally involved steel, by far the largest sector hit by such suits. China was the target of 35% of the cases, making it number one by a wide margin.
“Steel is at the center of trade controversy,” says Scott Kennedy, a China specialist at Indiana University.
According to OECD data, the global steel industry can produce 555 million more tons of steel than consumers need. Of that, China accounts for about 37% of the excess capacity.
More In Steel
If anything, the global glut may get deeper. That’s because other nations, including India, Vietnam, Iran and Saudi Arabia have followed China’s example of trying to build big national steel industries.
Even so, China’s production increases still dwarf any other nation. Between 2012 and 2015, China should account for about 40% of the world’s increased steel-making capacity, the OECD estimates, despite Beijing’s efforts to scale back excess production.
The OECD is trying to get a handle on the overcapacity issue, especially in defining more precisely what counts as excess. But the OECD can’t force nations to make adjustments to their industrial production.
That likely means more frustration ahead.
“A lot of policy makers and steel producers say China doesn’t have any competitive advantage in the raw materials” used to make steel, says Mr. DeCarvalho, the OECD economist. “Their companies aren’t making money. So why do we see more investment in plans in China?”
Needless to say, I set up a US economy sticky in the Americas section, so please feel free to post similar analysis about the United States if you feel identifying such issues will help us fix our own economy. That said:
Pain Spreads From China’s Excess Production - China Real Time Report - WSJ
- July 16, 2014, 10:30 AM HKT
A worker cut steel bars at a steel plant in Ganyu, Jiangsu province.
Reuters
China’s problem with bloated production is ricocheting around the world.
China is producing too much steel, plate glass, chemicals, solar panels and other goods for the domestic market, and usually exports the excess at cut-rate prices. That creates big problems for China’s competitors, who have to cut their prices to compete, slashing profits for everyone. Back in China, producers find cheap loans to keep producing and exporting. That risks inflating China’s credit bubble further – making China’s economy ever-more vulnerable to downturns – and adds even more manufacturing capacity.
There are winners here, of course: consumers, like car and appliance buyers, who may benefit from the lower costs of steel, glass and chemicals used to build consumer goods. But for producers and policymakers, it means tough decisions about how to keep the pain from spreading and putting more companies – and free trade – at risk.
“China is creating a glut of supply and hurting the profitability of the global industry,” says Anthony DeCarvalho, a senior economist at the Organization of Economic Cooperation and Development, referring to the global steel industry. “It also may be displacing more efficient producers” outside China who can’t compete with subsidized Chinese production, he adds, and go bust.
Faced with such a challenge, many nations resort to trade sanctions, tacking huge charges on Chinese imports.
China’s vast excess capacity makes it the biggest target of such sanctions. Global Trade Alert, a trade research group headquartered in London, looked for The Wall Street Journal at six sectors marked by excess capacity in China: steel, aluminum, cement, plate glass, wind turbines and solar energy components. Of all the trade sanctions cases brought since Jan. 2009 in these industries, China was the sanctions-target 75% of the time.
Overall, China was the target of global sanctions about 46% of the time during the same period, Global Trade Alert found. The U.S. was dinged 34% of the time and the European Union 43%. (The numbers add up to more than 100% because trade sanctions often target multiple countries.)
Trade restrictions deepen tensions among trading partners and can, in some cases, lead to trade wars. In the U.S. and other democracies, such restrictions help turn China into the sinister face of globalization, at least in the court of public opinion.
“China continually seeks to evade the trade laws and identify new opportunities to ship dumped and subsidized products into the U.S.,” charges Michael Wessel, a member of Congress’s U.S.-China Economic and Security Review Commission, and a consultant to the U.S. steel industry.
In a statement to The Wall Street Journal, China’s Ministry of Information and Industry Technology said China’s steel exports, including those to the U.S., abide by the World Trade Organization rules. China’s steel overwhelmingly feeds the domestic market, the ministry said, with only 8% of China’s crude steel shipped overseas. “There is no dumping taking place,” the ministry said. (“Dumping” is selling at below-market prices.)
Steel is especially politicized, in part because there are few large multinational steel producers to temper nationalist sentiments in individual countries. According to Global Trade Alert, between 1995 and 2013, 28.5% of all anti-dumping trade cases brought globally involved steel, by far the largest sector hit by such suits. China was the target of 35% of the cases, making it number one by a wide margin.
“Steel is at the center of trade controversy,” says Scott Kennedy, a China specialist at Indiana University.
According to OECD data, the global steel industry can produce 555 million more tons of steel than consumers need. Of that, China accounts for about 37% of the excess capacity.
More In Steel
- China Considers Opening Up Its Steel Industry to Foreign Control
- Electricity, Steel Hint at Economic Uptick in China
- China Iron-Ore Imports Breaking Records Even as Steel Output Slows
- Beijing Lays Siege to China’s Steel Output
- 5 Things to Watch in China's Resources Sector in 2014
If anything, the global glut may get deeper. That’s because other nations, including India, Vietnam, Iran and Saudi Arabia have followed China’s example of trying to build big national steel industries.
Even so, China’s production increases still dwarf any other nation. Between 2012 and 2015, China should account for about 40% of the world’s increased steel-making capacity, the OECD estimates, despite Beijing’s efforts to scale back excess production.
The OECD is trying to get a handle on the overcapacity issue, especially in defining more precisely what counts as excess. But the OECD can’t force nations to make adjustments to their industrial production.
That likely means more frustration ahead.
“A lot of policy makers and steel producers say China doesn’t have any competitive advantage in the raw materials” used to make steel, says Mr. DeCarvalho, the OECD economist. “Their companies aren’t making money. So why do we see more investment in plans in China?”
