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Chinese industrial overcapacity posing a major threat to global economy

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February 23
2:58 AM 2016

Overcapacity in Chinese industry may affect the domestic market and global economy in a more negative way than ever. Easily available loans and government subsidies are resulting in industrial overcapacity in the world's second largest economy. China needs more radical measures including greater privatization to streamline the domestic industry.

European Union Chamber of Commerce in China has come out with a new report on the domestic industry. The latest report has cautioned about the possible destructive effect of industrial overcapacity on the domestic front and global economy as well. Industrial overcapacity is reducing the government's ability to implement reform process. 

A report by International Business Times observes the alarmingly increasing capacity in Chinese industry since the government started providing stimulus packages from the days of 2008 financial crisis. This overcapacity situation is creating a cut-throat competition in China's domestic market. 

China's foreign trade with other countries is also undergoing immense pressure due to overcapacity in industry. After witnessing a major slump in exports during 2015, the Chinese government is planning to transform its economy into more competitive. The real estate and construction sectors are also recording slowdown. 

In several industry verticals, China is registering overcapacity situation. Steel production in China is totally untethered from market demand. Over 60 percent of aluminum industry is suffering from negative cash flows. Adding to this, cement production capacity reached to the level of the US during entire 20th century, as reported by Daily Nation.

The dragon country is considering to wipe out unprofitable giants in steel, coal and other segments. Considering the protective measures by local governments, it's not that easy to get rid of unprofitable companies, observes the report. The Chamber has called for radical changes including greater privatization process to bring back the industrial activity to growth path. 

South China Morning Post (SCMP) further adds that overcapacity in Chinese industry would complicate European Union (EU). For Europe, it'll be difficult to say 'Yes' in voting for granting 'Market Economy' status to China. The report forecasts more job losses in Europe in the days to come. A Western business lobby is holding a view that China has failed to achieve transformation by implementing economy reforms. Concerns in EU are growing that it was losing jobs to China.

Several regions and provinces in China have been competing and conflicting interests that hinder the uniform implementation of reform process. The report further stated that local governments are against closure of unprofitable smaller companies. Instead, they're encouraged to merge and expand further. Chinese steel production is more than double than the combined capacity of the US, Japan, India and Russia.

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