The European Union Chamber of Commerce is warning that massive Chinese over-production in multiple industries could lead to a flood of excess products around the world. Such excess production could undercut developed-nation producers by pushing down prices.
This could trigger a substantial increase in calls for protectionism from both the U.S. and Europe, especially if the Chinese economy slowed down substantially and forced Chinese companies to find more foreign buyers.
WSJ: “The Chinese stimulus package has poured credit into increasingly questionable projects and will almost certainly increase direct and indirect subsidies to investment and manufacturing,” the report says. “China’s growth model requires that external demand – the European Union and the United States – be able to absorb the overcapacity it produces,” a prospect that is increasingly unlikely given the weak economic recovery in the developed countries. The chamber urged the U.S. and EU to help China change its policies to prevent a damaging eruption in trade disputes, which are already on the rise.
China’s government has also increasingly focused on the risks from the boom in bank loans and public-works projects. In recent months Beijing has announced restrictions on new investment on sectors it has identified as having excess capacity, and regulators have quietly moved to cool down the surge in bank lending.
“In many sectors the problems of excess capacity and redundant construction are still very serious, and in some areas they are even worsening,” China’s State Council said in a September statement. “It is not only traditional industries like steel and cement that are blindly expanding, but also new industries like wind-power equipment and polycrystalline silicon.”