How Chinese overcapacity affects international producers

  • The Chinese government provides cheap loans to its industries (grants, low-interest loans, cheap energy, raw materials, and free land grants), encouraging overcapacity – its output has soared in recent years.
    • Since China joined the WTO in 2001, its aluminium production has risen from 14$ of the global total to 54% in 2016
  • Since businesses are heavily subsidized and regulated, or else outright owned by the state (SOE), this makes them less sensitive to free market changes in demand and supply and less likely to be influenced by falling profits.
  • The European Union Chamber of Commerce complained that more than 60% of China’s aluminium industry had a negative cash flow
  • Zombie companies – companies that only survive in the global marketplace because of huge government privileges and bailouts, a situation which keeps artificially cheap goods in the global market.
    • Millions of Chinese are employed by such companies – thus policies to reduce them negatively impact unemployment
    • Similarly, it is expensive to support millions of unproductive workers and China’s deficit keeps growing
    • Best option: scale back subsidies, privatise more companies, and let industrial production adjust to real global demand.
  • The U.S. Department of Commerce imposed tariffs on steel imports in early 2016 to shield local companies from cheaper competition – in some cases, tariff levels of Chinese steel products are more than 500%.
  • China’s large portion of trade gives it immense influence over the global price, which fell in 2015 when Chinese demand did not keep pace with its gargantuan supply
  • Exporting overcapacity, as opposed to cutting production, is much better for domestic policies given the potential for job losses
  • Without production curbs, analysts at Bank of America Merrill Lynch predict the global aluminium market could be oversupplied by 8% by 2020.
  • Chinese authorities have been issuing official instruction to shut down capacity but there isnt much evidence yet of results – exports of semi-fabricated aluminium have been rising quickly this year. There are worries that some of this is misclassified raw product, processed just enough to avoid China’s 15% export tax, and a sign of excess aluminium capacity spilling onto global markets.

http://www.economist.com/news/finance-and-economics/21723404-risk-donald-trump-has-wrong-solution-how-chinese-overcapacity-hits

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