China's overcapacity hits whole world, EU business study finds

Nov 26, 2009, 9:54 GMT

   Beijing - China's industrial overcapacity is affecting economic growth in dozens of industries across the world and is diluting the Chinese government's efforts to create more sustainable economic development, a European Union business group said in a report on Thursday.

   The report by the EU Chamber of Commerce in China said overcapacity was a 'major factor holding back China's sustainable economic development,' pointing to waste of resources, a rise in non-performing loans, and environmental problems.

   With rising savings rates and falling imports in the United States and Europe, overcapacity was 'one of the drivers of the current rise in trade tensions and anti-dumping cases between China and its trade partners,' the group said in summary of the report.

   The Chinese government had taken a 'positive first step' towards curbing overcapacity but needed to move further away from growth reliant on investment and exports, said the report, which was based on information from the chamber's 1,400 member companies and co-produced with Roland Berger Strategy Consultants.

   'Our study shows that the impact of overcapacity is subtle but far reaching, affecting dozens of industries and damaging economic growth not only in China but worldwide,' Joerg Wuttke, president of the EU Chamber, said in a statement.

   'Domestically, excess capacity squeezes profit margins, hampers innovation and prevents the emergence of true local champions, while on the global stage its influence is clearly seen in the rise in trade tensions between China and its major trading partners,' Wuttke said.

   He said the report aimed to give 'solutions that will benefit not only Chinese companies and Chinese industry in general, but the whole global economic system.'

   'When China prospers, we all benefit,' Wuttke said.

   Recommendations in the report included further stimulation of China's domestic consumption and ensuring that new investment was properly focussed.

   The Chinese government should also promote service industries, reform pricing mechanisms, improve law enforcement, and encourage 'market-driven consolidation in sectors suffering from overcapacity,' the report said.