BEIJING — China is producing too much, especially in large sectors like steel and concrete, and its manufacturing overcapacity damages domestic and global economies, according to a new study from the European Union Chamber of Commerce in China.

This story first appeared in the November 30, 2009 issue of WWD. Subscribe Today.

Overcapacity “is a strangely understudied and seldom-examined phenomenon, and one whose influence is even more widely felt in the aftermath of the economic crisis,” the EU Chamber said in its report released Thursday.

The global financial crisis highlighted China’s overcapacity problem, which was mopped up to a large extent in previous years by high demand from the U.S. and Europe. With that demand greatly diminished in the wake of the downturn and savings rates beginning to rise, China’s overproduction across a variety of sectors is now more apparent, the report said.

“The economic crisis has throttled demand for exports from China at a time when even more investment, spurred by the Chinese government’s massive stimulus package, is being pumped by some local decision makers into building new plants and adding unnecessary capacity,” the report said.

Joerg Wuttke, president of the EU Chamber in China, said the issue is of critical importance for China and its trading partners. The impact was seen first in textile and apparel sectors, low-margin manufacturing endeavors the crisis slammed beginning last year. Thousands of factories across the Pearl River Delta were shuttered as orders fell.

“You’ve seen it in Guangdong province,” said Wuttke, speaking at a conference presenting the study. “How many clothing factories and textile factories closed their doors?”

The report explores how China’s rapid urbanization has led to a massive industrial build-up, with construction of too many plants and factories. It looked at six key sectors: steel, aluminum, cement, chemicals, refining and wind power. In each industry, capacity has risen dramatically in recent years. But usage rates dropped significantly last year when the financial crisis took hold.

The study said that while China’s economic stimulus package has benefitted the country by funding new infrastructure projects, it is also at fault for propping up false demand and manufacturing products that are not needed. The overcapacity is problematic in many ways for the Chinese and the world economies, the report said, claiming more investment in production capacity will worsen the problem.

Cities and local governments in China are heavily driven by development that can be seen, Wuttke said, hence there is a strong desire among local governments to have their own steel plants and factories. That kind of territorial-driven development creates domestic protectionism between local jurisdictions, he said, and can lead companies to disregard health, safety and environmental issues in the drive to make money.

The EU Chamber issued several recommendations to China in the report, including stimulating domestic consumption, promoting China’s service sector and encouraging consolidation in overproducing sectors to conserve resources. The business group also suggested reform of pricing mechanisms in sectors such as energy, and stronger enforcement from central government agencies of environmental and other laws.

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