Overcapacity poses major risk to China's economy

China's latest figures on industrial activities indicated that the world's second largest economy faced worsening overcapacity despite a slew of measures and repeated warnings from the leadership. Analysts said overcapacity was posing a big, if not the biggest, threat to China's future development, and there was no quick fix. They suggested the country should try to eradicate the roots of industrial overcapacity from within the economic system through further reforms. Chinese industrial businesses saw their profits rise 15.1 percent year on year in October, slowing from 18.4 percent in September, according to figures released on Thursday by the National Bureau of Statistics. Total profits from main operations by industrial companies with annual revenues of more than 20 million yuan (3.26 million U.S. dollars) stood at 566.9 billion yuan in October, up 6 percent year on year, slowing from 7.5 percent in September. Analysts said the two decelerations should be mainly attributed to the ever-growing inventory of industrial companies owing to the overcapacity. The inventory of finished products among industrial companies in China was worth a total of 3.25 trillion yuan (529.6 billion U.S. dollars) by the end of October, an increase of 6.2 percent from a year ago. The inventory has risen for nine consecutive months since February. According to Zhao Xiaoling, a Beijing-based macro economic analyst, the inventory of 959 manufacturing companies listed on the Chinese stock market was worth a record high of 1.14 trillion yuan by the end of the third quarter of 2013, a jump of 61 percent from the end of 2009. "What's the principal contradiction for China's economy? I think it is overcapacity. Future reforms and structural adjustment should focus on this problem, or it will be hard to see results," said Wang Jian, secretary general of the China Society of Macroeconomics, quoted by Xinhua-run Economic Information Daily. According to Wang, it is unclear whether the lasting problem of overcapacity will push China into an economic crisis, but the over-200-year history of capitalist countries showed that there was a natural relationship between overcapacity and economic crises. The manufacturing-based Chinese economy began to suffer overcapacity after the outbreak of the global financial tsunami in 2008, which led to sluggish external demand. China's over-reliance on investment and foreign trade had fueled rapid growth in some sectors before 2008, and when global demand plunged and domestic production costs rose, overcapacity surfaced along with falling profits. Li Wei, director of the Development Research Center, an influential think-tank for China's State Council (cabinet), said the country's economic recovery is not solid enough because of serious structural problems and various risks, one of which was serious overcapacity and slow progress in alleviating it. According to Li, of 3,545 enterprises surveyed recently by the Development Research Center, 71 percent of respondents defined China's overcapacity situation as "very serious" or "relatively serious." The average utilization rate of production capacity of the 3,545 enterprises was at 72 percent, down 0.7 percentage points from a year ago. And 67.7 percent of respondents said their enterprises need more than three years to absorb the excessive production capacity. An annual report by the Development Research Center had ranked overcapacity the first problem and risk for the Chinese economy, Li added. Measures have been taken to tackle the problem as the leadership repeatedly warned against the consequences of worsening overcapacity. President Xi Jinping urged in late July that tackling overcapacity should be prioritized, with more efforts to boost industrial restructuring. Premier Li Keqiang has on many occasions vowed to curb blind expansion and improve capital efficiency, along with energy and resource use to restructure the economy. In October, the State Council issued the Guideline to Tackle Serious Production Overcapacity which lists five primary sectors that have a serious problem -- cement, electrolytic aluminum, sheet glass, shipping and steel. The guideline prescribed measures to battle overcapacity in the five sectors -- new projects are forbidden, projects under construction should be reappraised, illegal capacity should be cleared up, outmoded capacity should be eliminated in an orderly way and efforts should be made on standards and admittance. A report by the State Information Center, another government think-tank, proposed strict enforcement of the guideline and more reforms to eliminate the root causes of overcapacity in the system. It called for deepening reforms in the fiscal and taxation system, financial system, state-owned enterprises, environmental protection system and the pricing mechanism for resource products.