NY Times
November 27, 2009 China Seen Facing Protectionist Backlash Next Year By REUTERS BEIJING China faces a protectionist backlash next year because its manufacturers are saddled with overcapacity and are disposing of its excess output on world markets, the European Union Chamber of Commerce in China said Thursday. Jörg Wuttke, the head of the business group, said it would take about 12 months to prepare a case alleging dumping, the practice of selling goods for less than it costs to produce them. This lead time would indicate to me that in the second half of 2010, there will be far more dumping cases against China, unfortunately, Mr. Wuttke said. He was speaking at the introduction of a study into industrial overcapacity in China, a longstanding situation that the chamber believes has grown more serious as a result of the global financial meltdown and Beijings aggressive response to it. The crisis has throttled demand for exports from China at a time when even more investment, in the form of the Chinese governments massive stimulus package, is being pumped into building new plants and adding unnecessary capacity, the report said. As a result, the problem is actually getting worse in many industries, it said. In a survey of the chambers members, 56 percent of respondents identified local government policies aimed at luring investment as the main macroeconomic reason for overcapacity; loose lending was the second most frequently cited cause. Mr. Wuttke welcomed efforts by the central government to curb new capacity but said it was often powerless in the face of local governments that craved new factories for the tax revenue and jobs they could generate and that have done everything to keep existing plants from going under. Local protectionism kicks in, Mr. Wuttke said. So even if Beijing sees a problem and wants to tackle it, they are very often derailed by local politics. Apart from generating trade friction, rampant overcapacity would weigh on foreign direct investment into China. Why would you invest if that market is already oversupplied? he asked. By wasting resources and eroding profits, overcapacity deters research and development and encourages companies to cut corners on health and safety standards as well as environmental protection. Further, the creation of unneeded capacity raises the risk of nonperforming loans for banks that finance the investment. It also generates trade tension as producers sell their surplus production overseas at cut-rate prices, the study said. The State Council, Chinas cabinet, recently singled out the iron and steel, cement, electrolytic aluminum, glass, coal, chemical, polysilicon and wind power equipment sectors as the worst offenders when it came to overcapacity and announced steps to rein in their expansion. The chamber applauded the cabinets actions but said the fundamental answer was to shift from investment-led and export-led growth and to focus more on domestic consumption and services. The report made a series of recommendations that amounted to a root-and-branch overhaul of Chinas economic model. The recommendations included the redistribution of national income from companies to households. It said state-owned enterprises should disgorge dividends for the government to spend on social security, health and education instead of plowing profits back into fresh investment. It also recommended a sharp reduction in corporate capital expenditure in coming years. In addition, the report said that China should remove subsidies for energy and other inputs, which are provided indirectly by households. Claiming that the manufacturing sector has become addicted to these subsidies, it recommended increasing resource and environmental charges. Reuters
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