Growing Capacity Glut in China

Interesting chart from the Wall Street Journal showing the production glut building in China. Quoting from the article, "According to China's industry ministry, as of this month about 30% of the nation's aluminum production capacity is idle, as is 20% of cement and plate-glass capacity and 70% of semiconductor production....China also has auto-sector concerns. The country has the capacity to produce about 12 million automobiles a year, but only 9.37 million were sold in 2008."

The chart to the right is particularly troubling since it suggests that China is investing more as a share of its economy than Japan or South Korea did even at the peak of their industrialization. China's leaders also appear to lack the political will to force the closure of unneeded plants, not unlike US leaders who seem unwilling to force a dramatic capacity reset in our automotive industry.

While China's consumer economy is structurally more sound than that of the United States, its heavy reliance on exports to the developed world and growing excess capacity, will likely restrain economic growth in the near-term. The government's 4 trillion yuan investment program has been well-received by the market, with China's local stock market up approximately 30% year-to-date, but without a pickup in the global economy, it would seem that the stimulus program could further widen China's output gap. Finally, lets hope the excess capacity doesn't spark a trade war with other countries striving to keep their domestic plants operating.