China needs to slow down its industrial expansion

Geoff Dyer
Justin Lau

China officially warned about increased risk of overcapacity in the economy, saying that he could stumble recovery and lead to a spike in bad bank loans. China’s cabinet, called the State Council announced a new plan to deal with overcapacity in seven industries, require attachment to open new aluminum melting furnaces for a period of 3 years and criticized „blind expansion“ in some parts of the aluminum and cement industries . Council’s statement is yet another in a series of warnings from senior Chinese officials and institutions. It outlines measures to limit production of equipment for the green industries of wind and solar energy.
China’s economy revived sharply in recent months because of the investment boom. Much of the increase is allocated to infrastructure, lit by the surge in public spending and lending by state banks.
Over the past 3 months, however, many government officials began to warn publicly that the credit binge could create overcapacity in the heavy industry which led to a new cycle of bad bank loans.
„Some regions act illegally approve violations of regulations or permit the building before permission has been obtained,“ said the State Council of China. In an unusually outspoken statement alleged that no effort to restrict the production will be „difficult to avoid the vicious market competition and to increase benefits for the economy, and this can cause the closure of factories, dismissal for lack of work and jump on the bad banking assets.
The continued overcapacity in industries such as steel and aluminum may aggravate strained trade relations with the United States and Europe because of the risk Chinese factories to land their goods on world markets at low prices. The government fears that the expansion of heavy industry, such as aluminum and cement, which uses much energy, would complicate efforts to achieve energy efficiency standards before the Forum in Copenhagen.
China’s State Council said that the production capacity for wind energy will be two times greater than actually introduced, production will be nearly 10 million kilowatts by next year. The Council reported that new equipment for wind plants can not be approved and that the government will try to prevent him protectionism, whereby local authorities require specific operators to use equipment from the regions themselves.
In addition to the three attachment of investment in new aluminum production State Council of China plans to close more small factories. The statement says that steel capacity of the country last year was 30% more than domestic demand.