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China and the Global Economic Crisis of Industrial Overcapacity

Economics / China Economy Oct 09, 2012 - 09:12 AM GMT

By: Andrew_McKillop

Economics

Best Financial Markets Analysis ArticleEARLY MATURITY
This term now has a special meaning. Not only OECD economies, and especially their leading industrial manufacturing sectors, but also these sectors in the Emerging economies are downsizing at an accelerating pace. After the shrink in industrial and manufacturing activity, in the mature or "post mature" OECD economies, comes the downsizing of the entire economy which in Europe, especially in the PIIGS, is now the rule and a new "tradition". Any other way is now an eccentric hope, and outside the PIIGS an increasing number of other EU27 economies are moving to net shrinkage, including the UK and France.


The playact of the global economy somehow being recession-proof has been repeated so many times, stage whisper style since 2008, that finding out this is a myth comes as a "surprise". The myth was that because of China and India, Brazil and Russia (the BRICs), or possibly only China and India, and then only China, growth would hold up.

Economic growth in emerging and developing East Asia, excluding Japan and India, is now on a sharp downtrend, even using the overgenerous PPP (purchasing power parity) corrected figures of major finance institutions, which do not fully account the local results of massive globalization - increasingly uniform prices for the same goods or services, worldwide. Using World Bank forecasts, regional growth in East Asia will be 7.2 percent in 2012, down from 8.3 percent in 2011 and also down from the May 2012 year forecast of 7.6 percent, by the  Washington-based institution. It describes the slowdown in China as “significant,” but Japan and India face similar except worse problems of slowdown, shown by a flurry of indicators, notably their ballooning trade deficits and India's rising capital account deficit.

Nothing prevents this from being "only the beginning", as Brazil already shows: its economy stalled in late 2011. Since then it has hovered at extreme low growth rates for each quarter, that show the so-called "emerging market growth engines" are not immune to global slowdown. For the most recent quarter, Brazil's economy as measured by inflation adjusted GDP was at zero-percent growth, as weakness concentrated in the industrial sector spreads  to Brazil’s once vibrant consumer economy.

LEADING SECTORS - LEADING THE DECLINE
Shares of China's state of the art solar cell producer Trina Solar have been falling for a long time, declining more than 85% since midyear 2009. Its rival Suntech Power has seen its shares fall by 98% compared with their peak in 2007. All other major Chinese solar firms are also in deep trouble. According to the EU ProSun lobby group sponsored by SolarWorld of Germany which defends European and therefore mostly German solar producers, massive subsidies and state intervention have driven China's overcapacity in solar power panels and systems to more than 20 times total Chinese national market demand for these panels, and close to two times the total of world demand. ProSun also alleged that 90% of Chinese production "had to be exported" and that Beijing used subsidies to keep its solar manufacturers in the global export business. In 2011, export sales to Europe, the world’s largest solar market were $27 billion, about 33% of total Chinese solar production and 7% of all Chinese exports to the European Union.

There is really no other solution, here, than massive downsizing - but delaying the inevitable whatever the consequences further down the line - has been the Chinese response, exactly like that of US, Europe, Japanese, Indian and other manufacturers, of all traded goods, whether produced by leading sectors which then decline, or simply by declining sectors. Chinese solar manufacturers know they will face crippling trade sanctions and WTO penalties, but have firstly started buying their bankrupt  European former competitors. Guangdong Aiko Solar this summer bought Scheuten Solar of the Netherlands, and Hanwha SolarOne plans to buy Germany’s Q-Cells, at one time the world's largest producer of solar panels, now in receivership. 

Knowing this is not enough and with typical technocratic brutality, the powerful National Development and Reform Commission (NDRC) says it wants to see two-thirds of all panel makers quit the business.  Only about 5 of the largest producers, all of them presently unprofitable will be allowed to survive. Early action has seen Suntech Power shutting down an estimated 25% - 33% of its capacity, with Trina Solar reported to be engaging similar cuts to its capacity in coming months.

This "only" concerns China's solar power industry, which even 18 months ago was still forecasting "double digit annual growth" for the rest of the decade. China's car industry faces very similar overcapacity problems - the same problems as its Asian, European and US carmaking rivals. Overcapacity is the new scourge of the globalized economy.

Growth of output and sales of the Chinese car industry have slowed dramatically in recent years after astounding growth averaging about 19% per year for a decade. China in 2009 overtook the United States to become the world's largest auto market in terms of production and sales. Sales continued to surge in 2010, jumping more than 32% to 18.06 million units. However, sales growth imploded to only 2.4% in 2011. With a slowing economy and the expiration of state subsidies and incentives for car purchases, the betting for 2012 is net contraction.

The effective supremo in charge of China's automobile industry, Su Bo, the vice minister of Industry and Information Technology has repeatedly said that China's carmakers must or "should" target the luxury car making segment, claiming that the near total absence of national manufacturers in this segment shows "long-term dependence on overseas technologies and brands (which) may further weaken Chinese companies". In fact this shows that Chinese carmakers target exactly the same goals as nearly all carmakers, worldwide, except possibly Germany's small elite band of high-end car producers: volume and growth of output. For Chinese producers, as elsewhere, this results in overcapacity and the scrabble for new (or bigger) subsidies and bailouts from hard-pressed governments.

World carmaking capacity, in recent years, massively expanded because of China and to a lesser extent India, Brazil, Russia and other emerging economies. Capacity is likely now above 80 million cars per year, and still growing. World total car sales, according to ACEA, were 59 million in 2011. Sales in 2012 will likely be less. Due to ongoing investment programs, world carmaking capacity could or might continue growing a little, but the inevitable decline is coming.

SOCIALIZED ECONOMY, GLOBAL GOVERNANCE OR CHAOS?
Increasingly dire problems of industrial overcapacity, worldwide, extend far beyond sectors such as carmaking, solar power, windpower, cellphones, computers and related "leading edge and high tech" sectors. Overcapacity in basic industries such as coalmining, iron ore, steel, aluminium, other metals and minerals, cement and concrete is the rule rather than exception - one exception being the world's farming and food producing industries, where global capacity is certainly not oversized.

Totally unrelated to the sterile ideological "debate" on political, ethical or moral values and the economy, governments of all political hues have made a kneejerk response to the crisis of overcapacity. The total for government hand-outs, bailouts, subsidies and sales support - only to the car industries of the US and Europe since 2008 - stand at more than $150 billion. Car industry CEOs, although they may gurgle free market slogans do not refuse public money - for the simple reason they would be out of business forever, without the government money. This changes nothing regarding the underlying problem of pursuing production strategies that can be totally de-linked from reality, and become even more so when times are tough.

At the highest possible level of "global governance" including UN chiefs, heads of state of the G20 group, central banking chiefs and CEOs of the world's largest corporations the only public (if not private) response is to pursue semi-Keynesian QE policies designed to "kickstart" the global economy back into growth. In turn this growth, if it happened, would "mop up" the production overcapacity. Evidently the longer that growth does not return the larger the overcapacity that will build, or the more capacity that will have to be cut. Likewise and only concerning the finance sector - where overcapacity is stupendous - restoring growth by any means is its only possible salvation.

This chaos recipe default solution, where hyperinflation followed by hyperdeflation are the real threats, is what we could expect from current world leaderships, both political and economic, who despite creating the post-2008 crisis had no inkling it would happen, refused to take real avoiding action when it happened, and continue the exact same policies which produced the ramifying set of linked crises that we have since 2008. For the industrial economy, this concerns rampant overcapacity: as noted above concerning China's solar industry crisis, the sector was so inflated capacity-wise it attained two times the world's total demand for panels and cells, in a total period of less than 15 years.

For technocrats and optimists this could seem a Malthusian problem in reverse: production capacity can be doubled, quadrupled and octupled in rapid order and unrelated to actual needs for the produced goods and ability of the economy, society and environment to absorb them. Industrial wealth of the Chinese model and type is only an early 21st century version of the same process in 19th and 20th century Europe, USA and Japan. As long as human population goes on growing and remains mostly poor or very poor, this line of dumb thinking continues, there will be no problem.

From as early as 1929 we had the inevitable finance and banking sector blowout this process always produces, downsizing and shrinking the economy and social anticipations in the correction phase, and then triggering the political and geopolitical collateral damage we must expect from this chaotic process. On present betting, neither "socially responsible government" nor "global governance" can be expected to produce any lasting solutions, pushing the real analysis down to technology, resource and industrial fundamentals.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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