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I will probably post this qualification in front of every Chinese economy post I make to avoid misunderstandings. The purpose of this post is not to insult China or predict its downfall. This post identifies some of the imbalances in China's economy and the repercussions of such an imbalance (in this case, a potential trade war and non-performing loans due to lack of profitability). These kinds of articles help answer the question, "if China's system of state capitalism has done so well until now, why are so many calling for reform and rebalancing?"

Needless to say, I set up a US economy sticky in the Americas section, so please feel free to post similar analysis about the United States if you feel identifying such issues will help us fix our own economy. That said:

Pain Spreads From China’s Excess Production - China Real Time Report - WSJ

  • wsj_print.gif
  • July 16, 2014, 10:30 AM HKT
Pain Spreads From China’s Excess Production


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A worker cut steel bars at a steel plant in Ganyu, Jiangsu province.
Reuters
China’s problem with bloated production is ricocheting around the world.

China is producing too much steel, plate glass, chemicals, solar panels and other goods for the domestic market, and usually exports the excess at cut-rate prices. That creates big problems for China’s competitors, who have to cut their prices to compete, slashing profits for everyone. Back in China, producers find cheap loans to keep producing and exporting. That risks inflating China’s credit bubble further – making China’s economy ever-more vulnerable to downturns – and adds even more manufacturing capacity.

There are winners here, of course: consumers, like car and appliance buyers, who may benefit from the lower costs of steel, glass and chemicals used to build consumer goods. But for producers and policymakers, it means tough decisions about how to keep the pain from spreading and putting more companies – and free trade – at risk.

P1-BQ594_OVERCA_NS_20140630120603.jpg

“China is creating a glut of supply and hurting the profitability of the global industry,” says Anthony DeCarvalho, a senior economist at the Organization of Economic Cooperation and Development, referring to the global steel industry. “It also may be displacing more efficient producers” outside China who can’t compete with subsidized Chinese production, he adds, and go bust.

Faced with such a challenge, many nations resort to trade sanctions, tacking huge charges on Chinese imports.

China’s vast excess capacity makes it the biggest target of such sanctions. Global Trade Alert, a trade research group headquartered in London, looked for The Wall Street Journal at six sectors marked by excess capacity in China: steel, aluminum, cement, plate glass, wind turbines and solar energy components. Of all the trade sanctions cases brought since Jan. 2009 in these industries, China was the sanctions-target 75% of the time.

Overall, China was the target of global sanctions about 46% of the time during the same period, Global Trade Alert found. The U.S. was dinged 34% of the time and the European Union 43%. (The numbers add up to more than 100% because trade sanctions often target multiple countries.)

Trade restrictions deepen tensions among trading partners and can, in some cases, lead to trade wars. In the U.S. and other democracies, such restrictions help turn China into the sinister face of globalization, at least in the court of public opinion.

“China continually seeks to evade the trade laws and identify new opportunities to ship dumped and subsidized products into the U.S.,” charges Michael Wessel, a member of Congress’s U.S.-China Economic and Security Review Commission, and a consultant to the U.S. steel industry.

In a statement to The Wall Street Journal, China’s Ministry of Information and Industry Technology said China’s steel exports, including those to the U.S., abide by the World Trade Organization rules. China’s steel overwhelmingly feeds the domestic market, the ministry said, with only 8% of China’s crude steel shipped overseas. “There is no dumping taking place,” the ministry said. (“Dumping” is selling at below-market prices.)

Steel is especially politicized, in part because there are few large multinational steel producers to temper nationalist sentiments in individual countries. According to Global Trade Alert, between 1995 and 2013, 28.5% of all anti-dumping trade cases brought globally involved steel, by far the largest sector hit by such suits. China was the target of 35% of the cases, making it number one by a wide margin.

“Steel is at the center of trade controversy,” says Scott Kennedy, a China specialist at Indiana University.

According to OECD data, the global steel industry can produce 555 million more tons of steel than consumers need. Of that, China accounts for about 37% of the excess capacity.

More In Steel
With so many of the world’s factories running at low, inefficient rates of production, prices and profits have dropped. In China, the average price of steel fell by one-fourth between 2011 and Feb. 2014, according Chinese government statistics, about the same percentage decline as import prices for steel in the U.S.

If anything, the global glut may get deeper. That’s because other nations, including India, Vietnam, Iran and Saudi Arabia have followed China’s example of trying to build big national steel industries.

Even so, China’s production increases still dwarf any other nation. Between 2012 and 2015, China should account for about 40% of the world’s increased steel-making capacity, the OECD estimates, despite Beijing’s efforts to scale back excess production.

The OECD is trying to get a handle on the overcapacity issue, especially in defining more precisely what counts as excess. But the OECD can’t force nations to make adjustments to their industrial production.

That likely means more frustration ahead.

“A lot of policy makers and steel producers say China doesn’t have any competitive advantage in the raw materials” used to make steel, says Mr. DeCarvalho, the OECD economist. “Their companies aren’t making money. So why do we see more investment in plans in China?”
 
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China is producing too much steel, plate glass, chemicals, solar panels and other goods for the domestic market, and usually exports the excess at cut-rate prices.

I've been following this topic always, it's true China has overproduced raw materials, State Council also has promulgate regulations to restrict excess production capacity. It's due to the boom of real estate. Now real estate market chills, the material demand is not that high. So China is exporting infrastructure projects to India, Africa and some European countries, to avoid loss and earn an return. China will also restart to build more railway and highway, to "consume" the over capacity.
 
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Growth unaffected by restructuring

By Xin Zhiming (chinadaily.com.cn) Updated: 2014-07-16 10:38

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Missing its whole-year growth target, the Chinese economy still proved resilient after it expanded by 7.4 percent year-on-year in the first half of this year.

The growth, which is at par with the first-quarter reading, has been achieved against the backdrop of the country's ongoing economic restructuring - which has had an inevitable adverse effect on growth - and its refusal to rely on large-scale stimulus programs to generate growth. In other words, the country has made a successful first step in shaking off the old growth pattern built on easy monetary expansion and unrestrained stimulus.

Admittedly, China is yet to be fully weaned off any stimulus given the unfavorable domestic and international economic climate. It has had to take a slew of mini-stimulus measures to combat the economic slowdown caused by the depressing property market and weak international demand. It has increased investment in infrastructure and rebuilding of shanty towns, cut taxes for small enterprises, lowered the threshold for private companies to enter some previously monopolized sectors and reduced reserve requirement rates for financial institutions servicing small and rural enterprises.

Alongside those small-scale stimulus measures, China has moderately eased its monetary and fiscal stance, as reflected in the significant increases in new yuan loans and government spending in June. The banks made 1.08 trillion yuan ($174 billion) of new yuan loans in June, much more than the market has expected. The country's fiscal expenditure surged by 26.1 percent year-on-year while its fiscal revenues rose by only 8.8 percent in the same month.

As it takes stimulus measures to shore up the slowing economy, China has refrained from intervening with the market to shore up the economy. Although the property sector is slowing down, for example, it has been resolved to allow the market forces to play a decisive role in the price corrections of the industry.

In line with such a market-oriented stance, the central government has significantly reduced its administrative power in approving business-related projects, which is set to improve the easiness of doing business in China.

It has also made more efforts to protect intellectual property rights and encourage corporate innovation and technological upgrading, which helps China's drive to make its economy more innovation- and technology-driven.

While such measures targeted at long-term growth sustainability inevitably weaken short-term growth momentum, the June data show that China is capable of striking a balance between restructuring and maintaining stable growth.

Neither the first-half GDP growth of 7.4 percent or the first-quarter reading of 7.5 percent is exceptional. But as Premier Li Keqiang has said, it is acceptable so long as it does not deviate too far from the country's growth target of 7.5 percent for this year.

With growth stabilized, policymakers will have more room to tackle the challenge of deleveraging and restructuring.

With the economic fundamentals yet to improve substantially, however, policymakers could meet a bigger challenge in the second half, when the weakening real estate sector could constitute a heavier drag on China's growth prospects. Policymakers should continue to walk on the tightrope and get well-prepared for contingencies.

If they do not want to resort to large-scale stimulus to keep the economy going, then they must take more forceful measures to reduce the financial burdens of the corporate sector. They can help guide down the general interest rates of loans and continue to cut taxes so that the enterprises can become more resilient when the overall economy sours as a result of the real estate woes.

Growth unaffected by restructuring - Business - Chinadaily.com.cn
 
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LeveragedBuyout's standard qualification: The purpose of this post is not to insult China or predict its downfall. This post identifies some of the imbalances in China's economy and the repercussions of such imbalances. These kinds of articles help answer the question, "if China's system of state capitalism has done so well until now, why are so many calling for reform and rebalancing?"

Needless to say, I set up a US economy sticky in the Americas section, so please feel free to post similar analysis about the United States if you feel identifying such issues will help us fix our own economy. That said:

Guest post: China has the world’s best consumer story – beyondbrics - Blogs - FT.com

Guest post: China has the world’s best consumer story
Jul 16, 2014 5:25pmby guest writer
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By Andy Rothman, Matthews International Capital Management

Statistics announced on Wednesday do much to challenge the view that sub-par Chinese consumer spending is to blame for the sluggish rebalancing of the world’s second largest economy away from an over-reliance on investment. For too long this opinion has obscured the crucial truth that China is actually host to the world’s best consumer story.

Real retail sales rose 10.7 per cent in June and 10.8 per cent in the first half of this year, compared to the year earlier period. The strong momentum of this spending springs from solid foundations, with real urban household disposable income rising 7.1 per cent, up from 6.5 per cent a year ago.

The first half numbers build on a strong consumer performance since 2011, since when China’s annual increase in consumer spending has outstripped that of the US, Germany and Japan in both value and percentage terms (see chart).


Source: Matthews International Capital Management

There was also evidence in Wednesday’s statistics that China’s rebalancing is underway (see chart), with consumer spending contributing a greater share (54.4 per cent) to GDP growth than investment (48.5 per cent). Net exports were a -2.9 per cent drag.


Source: Matthews International Capital Management

Dimensions of the consumer boomA glance at some of the detail of the consumer boom adds depth to the theme. Sales of laptops, for example, rose 7.1 per cent last year by value. That was down from a 24.5 per cent growth rate in 2007, as almost every aspect of the Chinese economy is growing more slowly, in part because the base has grown so large. But Chinese bought 24.4m laptops last year, more than double the 10m sold at the faster growth rate six years earlier.

By comparison, 17m laptops were sold last year in the U.S., and sales by value fell 11.8 per cent.

Apparel sales rose 8.2 per cent last year in China, to 36.6bn units. In contrast, apparel sales in the U.S. rose 2.2 per cent last year to 17.1bn units. Chinese consumers bought 64.2 million air conditioners last year, up in value by 11 per cent, while air conditioner sales in the U.S. rose 7.7 per cent to 7.8m units.

So why does China’s consumer spending get a bad press?Analysts who worry about consumption in China do not pay much attention to the data described. They focus instead on the low share of household consumption in GDP, and worry how far the economy can be “rebalanced” towards consumption. But this is to miss important messages in the data.

The reason that household consumption is a small share of China’s GDP is not because consumption is weak. On the contrary, as we have just outlined, Chinese consumers have experienced dramatic income growth and have been spending freely.

Private consumption is a small share of GDP because the Communist Party has over the past decade dramatically ramped up its spending on public infrastructure. Infrastructure has accounted for about one-third of overall investment, which has grown even faster than consumption and has been the lead driver of GDP growth.

By building out in one decade the modern infrastructure that the U.S. took a century to create, the Party pushed GDP growth up into double digits, with most of that growth coming from investment, squeezing out the share of GDP (or GDP growth) that could come from private consumption.

In other words, the “problem” was not due to weak household consumption: it was because fixed-asset investment (FAI) boomed as the Party built basic infrastructure, manufacturers modernized and construction of privately-owned urban housing was permitted for the first time. FAI rose at an average annual pace of 25.8% from 2003-11, compared to a 12.5% rate from 1995-02.

So, will rebalancing continue?For those waiting for a sustainable “rebalancing” process to begin, that day has arrived. China’s transition away from investment-led growth is already underway: after rising at a roughly 25 per cent pace for nine years through 2011, FAI growth has been slowing, and this year is likely to increase by about 16-18 per cent. This slower year on year FAI growth is inevitable, as so much as already been built and the base has become so large, meaning that GDP growth will also continue to decelerate, from 10.4 per cent in 2010 to 7.7 per cent in 2012 and 2013, to our forecast of 7-7.5 per cent this year and 5-6 per cent in 2020.



Source: Matthews International Capital Management
With GDP growth and FAI both slowing while consumption remains robust, the investment share of GDP will begin to decline and the consumption share will rise. But for investors, there is no reason to wait for that process to play out. China is already a fantastic consumption story.
 
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LeveragedBuyout's standard qualification: The purpose of this post is not to insult China or predict its downfall. This post identifies some of the imbalances in China's economy and the repercussions of such imbalances. These kinds of articles help answer the question, "if China's system of state capitalism has done so well until now, why are so many calling for reform and rebalancing?"
Needless to say, I set up a US economy sticky in the Americas section, so please feel free to post similar analysis about the United States if you feel identifying such issues will help us fix our own economy. That said:

The economy growth of China is always accompanied by continuous top level design and experimental reform . The process of development is exactly the process of reform. Welcome to post China economy related news! Feel free to discuss! :tup:

The first half numbers build on a strong consumer performance since 2011, since when China’s annual increase in consumer spending has outstripped that of the US, Germany and Japan in both value and percentage terms (see chart).

Why Japan's consumption drops drastically? What happened in 2013...

By building out in one decade the modern infrastructure that the U.S. took a century to create, the Party pushed GDP growth up into double digits, with most of that growth coming from investment, squeezing out the share of GDP (or GDP growth) that could come from private consumption.

The US economy performs in a laissez faire environment along with the fluctuations of economic cycle, the market adapts itself to this boom, recession, recovery cycle. China is different, one of the government's primary responsibility is to carry out economy plan, if the governor is unable to maintain a good record of fiscal revenue, infrastructure built or GDP growth, he can't get promoted. That's the important reason we push investment so high, but now public debt is rising, China's calling for structural reform.

Anyway, thanks to the infrastructure, the cost of freight is lowered, the inventory turnover gets higher, the operating cycle is shortened, the expense reduced.

The reason that household consumption is a small share of China’s GDP is not because consumption is weak. On the contrary, as we have just outlined, Chinese consumers have experienced dramatic income growth and have been spending freely

In China, quite a few people buy apartment for investment, even if it's for consuming, it's still risky to pour all money on a single fixed asset. The more you spent on housing, the less available for other consumption. I would rather apply for an auto mortgage than home loan. The installment payment every month is a heavy burden for common Chinese.
 
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The economy growth of China is always accompanied by continuous top level design and experimental reform . The process of development is exactly the process of reform. Welcome to post China economy related news! Feel free to discuss! :tup:

Thanks for your kind words. Some Chinese users seem to have misunderstood my intent, but a lot of them are now on my ignore list anyway, so perhaps the disclaimer isn't necessary.



Why Japan's consumption drops drastically? What happened in 2013...

Not sure. It might be because of the dramatic depreciation of the yen, which caused imports to become more expensive, and thus significantly reduced consumption. @Nihonjin1051 , what are your thoughts on this?



The US economy performs in a laissez faire environment along with the fluctuations of economic cycle, the market adapts itself to this boom, recession, recovery cycle. China is different, one of the government's primary responsibility is to carry out economy plan, if the governor is unable to maintain a good record of fiscal revenue, infrastructure built or GDP growth, he can't get promoted. That's the important reason we push investment so high, but now public debt is rising, China's calling for structural reform.

Anyway, thanks to the infrastructure, the cost of freight is lowered, the inventory turnover gets higher, the operating cycle is shortened, the expense reduced.



In China, quite a few people buy apartment for investment, even if it's for consuming, it's still risky to pour all money on a single fixed asset. The more you spent on housing, the less available for other consumption. I would rather apply for an auto mortgage than home loan. The installment payment every month is a heavy burden for common Chinese.

No doubt about it, the CCP has done a superb job by focusing on infrastructure investment, both reducing friction costs and also raising the potential growth rate of GDP. It's natural for that level of investment to decline, now that most of it has been built out.

Housing definitely remains a risk, but the PBOC seems to have it under control.
 
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The majority of imports are commodities (especially energy). food, machinery, chemicals.

If foreign imports became drastically expensive because of depreciation i can understand household would spend less on buying imported food yet the graph shows a heavy decrease in consumption. Does that mean Japanese companies would order less machineries/chemicals? I think Japanese tax also increased perhaps it contributed to the massive decline in consumption.
 
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Not sure. It might be because of the dramatic depreciation of the yen, which caused imports to become more expensive, and thus significantly reduced consumption. @Nihonjin1051 , what are your thoughts on this?

Hi @LeveragedBuyout and @Edison Chen ,

The 2013 fiscal year actually saw a modest increase in Japan's consumption, but the introduction of Abe's proposal to increase the consumption tax in 2013 may have a minor affect in consumer buying. The plan is to raise consumer taxes by 5 percentage points. I personally believe that this may have an adverse effect, something that the Government wants to avoid, which is a lower inflation rate.

Tho there are projections that indicate a target increase in private consumption; i remain rather weary. I am against any tax increases, be it on corporations and for the individual citizen.

Here is a projection graph by Credit Suisse's:
vat-exh-4-2.png




And let's take a look at the VAT tax burden:
vat-exh-6-2.png


The Elephant in Japan’s Room: The Consumption Tax | The Financialist


@LeveragedBuyout , what is your view on corporate taxes, consumption taxes?
 
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If foreign imports became drastically expensive because of depreciation i can understand household would spend less on buying imported food yet the graph shows a heavy decrease in consumption. Does that mean Japanese companies would order less machineries/chemicals? I think Japanese tax also increased perhaps it contributed to the massive decline in consumption.

I believe the VAT increase came into effect this year, which usually results in consumers bringing forward purchases, so I think the VAT increase probably supported consumption in 2013, not suppressed it.

Yes to your question: rising prices means less consumption, so Japanese companies would be equally affected and consume less energy/machinery/chemicals, just as households would spend less on energy and food.

Hi @LeveragedBuyout and @Edison Chen ,

The 2013 fiscal year actually saw a modest increase in Japan's consumption, but the introduction of Abe's proposal to increase the consumption tax in 2013 may have a minor affect in consumer buying. The plan is to raise consumer taxes by 5 percentage points. I personally believe that this may have an adverse effect, something that the Government wants to avoid, which is a lower inflation rate.

Tho there are projections that indicate a target increase in private consumption; i remain rather weary. I am against any tax increases, be it on corporations and for the individual citizen.

Here is a projection graph by Credit Suisse's:
vat-exh-4-2.png




And let's take a look at the VAT tax burden:
vat-exh-6-2.png


The Elephant in Japan’s Room: The Consumption Tax | The Financialist


@LeveragedBuyout , what is your view on corporate taxes, consumption taxes?

I am against corporate taxes, but support consumption taxes. Corporations simply pass through their taxes to the consumers as price increases, so despite the schemes of the left, raising corporate taxes hurts consumers at least as much as raising personal income taxes.

I support consumption taxes because the burden of government should fall on the users of government. You should know, when you consume food, that part of the price you are paying is due to FDA regulation. When you buy gasoline, you should know that part of the price you pay goes to highway and road maintenance. And so forth. That is why many on the right support a national sales tax in place of an income tax, because an income tax disintermediates the user from the value that the tax pays for, while a sales tax binds the two together.
 
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No doubt about it, the CCP has done a superb job by focusing on infrastructure investment, both reducing friction costs and also raising the potential growth rate of GDP. It's natural for that level of investment to decline, now that most of it has been built out.

Housing definitely remains a risk, but the PBOC seems to have it under control.
I see housing as not a risk, here's why. If you were to look at Beijing and Shanghai prices, I mean really look at it, it's a lot cheaper and I mean a lot cheaper than comparable properties in the US, and Japan.

The problem is Chinese earnings are considerably less than those counter parts, I can see the continue increase in housing price to eventually eclipse even the US, but by then the average Chinese will earn considerably more than today's Chinese.


In terms of infrastructure, most has not been built, the drive for better and more is just getting started.
 
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I see housing as not a risk, here's why. If you were to look at Beijing and Shanghai prices, I mean really look at it, it's a lot cheaper and I mean a lot cheaper than comparable properties in the US, and Japan.

The problem is Chinese earnings are considerably less than those counter parts, I can see the continue increase in housing price to eventually eclipse even the US, but by then the average Chinese will earn considerably more than today's Chinese.


In terms of infrastructure, most has not been built, the drive for better and more is just getting started.

Beijing and Shanghai prices are already approaching the cost of the West. Shanghai is already the 10th most expensive city in the world, and Beijing is the 11th:

2014 Cost of living survey

As far as the housing concern, it doesn't necessarily have to result in a crash. What is concerning is the vacancy rate, which is an indication that much of the construction is based on speculation, not real demand:

1 in 5 Homes in China Is Empty, Survey Finds - China Real Time Report - WSJ

Finally, while I'm sure there's much more infrastructure to be built, especially in the west of China, it's hard to argue that it's just getting started after 30+ years of investment.
 
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Beijing and Shanghai prices are already approaching the cost of the West. Shanghai is already the 10th most expensive city in the world, and Beijing is the 11th:

2014 Cost of living survey

As far as the housing concern, it doesn't necessarily have to result in a crash. What is concerning is the vacancy rate, which is an indication that much of the construction is based on speculation, not real demand:

1 in 5 Homes in China Is Empty, Survey Finds - China Real Time Report - WSJ

Finally, while I'm sure there's much more infrastructure to be built, especially in the west of China, it's hard to argue that it's just getting started after 30+ years of investment.
It's approaching, but not yet there, it's about three four time more expensive in say Manhattan than Shanghai. Even HK is way more expensive.

Prices will continue to rise, as well prestige, and with it goes income. There's still 200 million people yet to move into the cities, so plenty to go.

China is a think ahead, plan economy, no other way can we make Shanghai so great, so quickly. Take Mumbai, even if the growth is the same, but the fact that new construction needed haven't started yet, would take at least 10 years to reach current Shanghai levels. If nothing goes wrong.


"ghost towns" exist, but other than a few badly planned ones, others are filing up. Where do you think the people moving to the cities are living? You see these statistics and you think Chinese people moving to the cities, what cities? If not these previously empty places.

But yea, Chinese people like to buy houses as investments so there is also that.


Oh it's just getting started, do you work out? When you just start, you are really just building up your stamina, as your stamina builds up and you start to exercise more, then the six pack comes in.

Same deal here, China needed investments to build up the country, it's only now can we double our HSR, build way more and better air ports, update and build roads, parks and all that.

China per capita is still very much a third world country.
 
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