Bookmark and Share

Chinese government cracks in sustaining its unsustainable industrial overcapacity

0 Comment

China’s Industrial Overcapacity

The Chinese economy always had a huge problem of industrial overcapacity, due to the state directed policies and central planning. Artificial suppression of interest rates had allowed companies to fund themselves using cheap loans. This has led to a situation of chronic overcapacity in a number of industries such as steel, coal, shipbuilding, solar panel manufacturing, aluminum etc. Local governments had further encouraged overcapacity, by giving huge subsidies in the form of free land and cheap utilities. They had done this to increase the GDP growth, as well as increase employment in their regions. With this model coming under strain post 2008, the Chinese government had unleased a massive credit boom, which kept sustaining this unsustainable model. But this model is now showing cracks, as the world is unable to absorb the large growing Chinse supply. Even China which itself was a large consumer of commodities such as coal, iron ore, copper etc. is not being able to do so, given that the Chinese economy is slowing down.

The strains are already being felt all over the world, with most commodity exporting economies such as Venezuela, Brazil, Russia and others going into the economic meltdown phase. While developed countries such as Australia and Canada have managed to better face the economic headwinds, they too have been affected by major job losses and a decline in GDP growth.

Now China is also facing a huge issue, as it tries to change this unsustainable investment led GDP growth model to a more consumption focused one. But it is not being able to do so successfully, as it would lead to massive pain for its population particularly the large blue collar work force that is employed in these massive steel and other industrial facilities. Already massive protests are being seen amongst coal mining workers, who are facing retrenchment in the millions from China’s bloated coal sector. One of China’s largest coal SOE’s plans to fire 400,000 workers, while China’s government is saying that it will to have fire around 10 million workers from its steel industry.


Thousands of miners in China’s coal-rich north have gone on strike over months of unpaid wages and fears that government calls to restructure their state-owned employer will lead to mass layoffs. Video obtained by AFP Monday showed protesters marching through the streets of Shuangyashan city in Heilongjiang province, venting their frustration at Longmay Mining Holding Group, the biggest coal firm in northeast China.

It is not certain how these fired workers would find a living, given an anemic growth being seen in China. There are no large industries which can absorb this semi-skilled work force. There is growing unrest amongst workers and despite the government’s heavy handed use of force, these protests are unlikely to die down. They can only increase as many of the debt laden companies fail to pay the workers, while others shut down. China’s use of its failed monetary policy will also not work. It is already leading to a reheating of the Tier 1 city real estate markets, which are already in a huge bubble. I don’t think this will end well.


Alarm that parts of China’s housing market are overheating, raised at the ongoing annual parliament meeting, highlights concern about unregulated, online-based financing that can fuel a property bubble.

Officials vowed to crack down on players in the property business illegally lending home-buyers the money to make down payments.

The Beijing meeting is taking place at a time of particular concern about frenzied purchases in Shanghai, where home-prices in January soared 17.5 cent from a year earlier. Those in the southern industrial city of Shenzhen rocketed 51.9 per cent.


Sneha Shah

I am Sneha, the Editor-in-chief for the Blog. We would be glad to receive suggestions, inputs & comments on GWI from you guys to keep it going! You can contact me for consultancy/trade inquires by writing an email to

No Responses so far | Have Your Say!