globalEDGE Blog: Chinese Overproduction Intensifies Economic Slowdown

Chinese Overproduction Intensifies Economic Slowdown

Over the past two decades, China's economic growth has averaged 9.5% and national income has been doubling every eight years. This significant growth can be attributed to China's timely shift from a largely agrarian society to industrial production. However, expansion cannot last forever. The amount of raw materials being produced in China is continuing to increase, but demand for these materials is decreasing. Decreasing demand has contributed to the initial slow-down following China's rapid expansion, but if production itself is not moderated, China's economy could suffer greater consequences.

Despite government-ordered shutdowns, China's steel output rose 1.7% to 66.94 million metric tons in September, according to data from the National Bureau of Statistics. Overcapacity is not a new concept to China's economy, as they have been dealing with it for decades. Nonetheless, the government continues to funnel capital into exhausted industries such as steel and glass-making. In recent years, steel produced from China has surpassed the steel production of India, Russia, Japan, and the United States combined. As a result, several foreign governments have imposed tariffs on some Chinese steel products. European steel workers have voiced their opinions as well, protesting the import of Chinese steel altogether. The president of the European Union Chamber of Commerce in China, Joerg Wuttke, commented that "without sustained effort to address it now, overcapacity may well seriously impede the effectiveness of China's economic reform agenda." With global frictions growing, both producers and partners stand to suffer the negative consequences of an over-productive economy.

Chinese officials are addressing the concerns, pledging to cut production in several over-productive industries. The European Union Chamber of Commerce in China offered suggestions such as cutting capital expenditures in some industries and imposing value-added taxes as alternative sources of revenue for local governments. Moreover, Chinese officials have called on other countries being affected by China's over-production, saying that overcapacity is a global issue.