Overcapacity coupled with weakening demand sees the number of loss-making Chinese firms surge

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The number of loss-making industrial firms in China is growing — rapidly.

According to Westpac’s senior international economist Huw Mackay — otherwise known as the “Phat Dragon” — overcapacity across certain heavy industries are taking a toll on small, inefficient, ill-considered and ill-advised firms at the higher end of the production cost curve which, in turn, is impacting the profitability of others.

Here’s a chart showing how the number of loss making firms have been accelerating since the beginning of 2013.

It’s a telling chart. The number of loss-making firms is accelerating fast across several sectors, particularly among steelmakers.

Mackay believes “two years of deepening PPI (producer prices) deflation and decelerating demand for intermediate inputs and producer goods” have contributed to the number of loss-making firms increasing which, if he is correct, has the potential to see capital expenditure across these industries contract in the “not too distant future”.

With economic growth falling to a six-year low in the first quarter of 2015 this will see pressure placed on policymakers to boost output elsewhere.

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