Will China's Manufacturing Overcapacity Kill Global Growth?

Some recent hard-hitting articles in the Financial Times cast a stark spotlight on the state of Chinese manufacturing.

The first looks at the impact of the surge in shipbuilding that we have reported on before, but from the side of shipping lines and freight rates. The massive overcapacity in the shipping sector has nearly bought some major lines to their knees, heralded in slow shipping as a tactic to reduce costs, and seen dozens of vessels mothballed in the hope of better times to come.

The other side of the coin we don’t so often see is the impact on shipbuilders themselves. The boom in building led to a boom in construction of shipbuilding capacity, mostly in China. This epitomizes the asset investment-led growth of Chinese manufacturing over the last decade and is an example of the how overcapacity is hitting a wide range of Chinese manufacturing.

Source: Financial Times

The article picks on China Rongsheng as an example; as orders have dried up and buyers fail to pay, the manufacturing company is facing ruin, yet is being propped up by local government. Net debt is now said to be 162% of shareholders’ funds, up from 129% in 2011. Overdue receivables have surged 68 times over that period to Rmb 1.2 billion.

But the manufacturing firm is just one of many, many examples of overcapacity in both heavy and light industry in China.

Fixed asset investment has grown 12-fold over the past decade and is estimated to exceed Rmb 18 trillion ($3 trillion) this year. China Confidential, quoted in the article, notes that more than three-quarters of companies in China’s heavy industries face serious overcapacity.

China’s overcapacity is, unfortunately, not just a problem for China alone.

Continued in Part Two.

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