Group: Chinese overinvestment could strain trade

By JOE McDONALD

posted: 48 MINUTES AGO

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BEIJING -China's stimulus spending has fueled massive overexpansion in industrial capacity that could drive a surge in low-priced exports amid weak global demand, possibly igniting a protectionist backlash abroad, a European business group warned Thursday.

Industries including steel, cement and plastics are "still blindly expanding" despite the worst global slump since the 1930s, the European Union Chamber of Commerce in China said in a report.

Investment in the first half jumped 40 percent from a year earlier, "so probably there is going to be big overcapacity around the corner," the group's president, Joerg Wuttke, said at a news conference.

Chinese leaders have issued similar warnings about chaotic overinvestment and are trying to curb spending in steel, cement and other industries. But Wuttke said existing overcapacity could force producers to slash prices to export surplus goods, possibly fueling demands abroad for foreign leaders to protect jobs at a time of high unemployment.

"This constant export pressure coming out of China leads to possibly more protectionism in the future," Wuttke said. He said he expects to see an upsurge in anti-dumping cases filed against Chinese companies next year.

Economists and business groups have warned that Beijing's 4 trillion yuan ($586 billion) stimulus could lead to overinvestment. It is pumping money into the economy mostly through building airports and other public works projects, which has driven expansion at steel mills and other construction-related industries.

The stimulus helped to boost China's economic growth in the latest quarter to 8.9 percent over a year earlier.

China's yawning trade surpluses have long been a strain on ties with Washington, and European tempers are also rising. The United States has imposed anti-dumping duties on imports of Chinese-made tires and pipes that it said benefit from improper subsidies.

Chinese exports fell 13.8 percent in October to $110.8 billion from a year earlier but its politically volatile trade surplus was still a hefty $24 billion.

The government says that since September it has rejected 47 proposed industrial projects with a total price tag of 191 billion yuan ($28 billion) in industries including steel, glass and cement. It said 339 projects totaling 1.7 trillion yuan ($252 billion) in investment were approved.

The European chamber stressed that it saw the stimulus as a success but said Beijing should do more to boost demand for Chinese goods at home by encouraging its own consumers to spend more. It said authorities should divert investment away from manufacturing and into job-creating service industries.

China's consumer spending is the lowest among major countries as a share of its gross domestic product at just 40 percent, compared with at least 55 percent in Japan, Germany and India, the group said.

In steel, China's annual production capacity is 660 million tons and mills are adding another 58 million tons, even though they sold less than 500 million tons of steel last year, according to Charles-Edouard Bouee, Asia president for Roland Berger Strategy Consultants, which conducted the study.

China faces similar problems in aluminum, cement, plastics, refining and production of wind power equipment, the group said.

In petrochemicals, China imports much of its needs from other Asian countries but is building its own production facilities, which will cause "major regional overcapacity, impacting Japan and Korea," Wuttke said.

The European chamber represents some 1,400 companies.

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European Union Chamber of Commerce in China: http://www.euccc.com.cn

2009-11-26 04:26:18