China curb on factory overcapacity shows strength of recovery

Written by Bloomberg | Updated: Aug 29 2009, 04:12am hrs
Chinese Premier Wen Jiabaos curbs on steel and cement production show the government is confident the economy is now strong enough to tackle industrial overcapacity created by record lending this year.

The fact that policy makers decided to make the adjustment now signals they deem investment strength and growth momentum outside of these areas already strong enough to withstand this move, said Helen Qiao, an economist at Goldman Sachs Group Inc in Hong Kong.

Chinas State Council on Wednesday called on authorities to resolutely curb overcapacity as the economy is still in a critical period. The restraints on steel and cement output, as well as parts of the coal, glass and power industries, come as Chinese economic growth rebounded to 7.9% in the second quarter and Japan, France and Germany exited recession.

Its a timely move, said Tomo Kinoshita, an economist at Nomura Holdings Inc in Hong Kong. They are already suffering from an overcapacity but if they dont stop now, the problem is going to worsen.

Chinas benchmark Shanghai Composite Index has gained 62% this year. The gauge fell 0.4% on Thursday, after gaining 1.8% on Wednesday.

Asian stocks declined after China said it would curb some industrial output, with the MSCI Asia Pacific Index losing 0.8% to 112.66 as of 2:05 pm in Tokyo, set for its lowest since August 21. Fixed-asset investment in China increased 33.5% in the first half as local banks made a record $1.1 trillion of new loans in the first six months. That fueled growth in steel production to record levels in July, leading to a 12% drop in Chinas benchmark steel prices in the two weeks ended August 21. The China Iron & Steel Association said last month that the risk of a market glut is piling up.

Chinas 4 trillion yuan ($585 billion) stimulus package is aiding the economy, with manufacturing exhibiting signs of recovery, the State Council, the nations cabinet, said on Wednesday after a meeting chaired by Premier Wen. Authorities should guide the healthy development of industries through the coordinated use of industrial, environmental, land and financial policies, it said. Controls on stock and bond sales by companies in targeted sectors will be strengthened, according to the State Councils statement.

Rio Tinto Group, BHP Billiton Ltd. and other commodities companies fell on concern Chinas curbs would cut demand for their ore. Rio Tinto, which got 19 % of its sales in China last year, fell 2.8% in Sydney trading. BHP Billiton, the worlds biggest mining company, declined 1.2%.

China is the worlds biggest producer of steel, with the nations output last year exceeding the combined total of Japan, the US, Russia and India, the next four biggest makers, according to the World Steel Association. In the first seven months, China accounted for almost half of global output.

Cement production in China accounted for half the worlds output last year, making it more than eight times bigger than closest rival India, according to the US Geological Survey. The country is also the biggest coal producer and consumer, accounting for 43% of global demand last year, according to BP Plc. Many countries, such as Australia, have been seeing significant increases in Chinese imports of raw commodities, said Joseph Tan, chief Asia economist at Credit Suisse Group AG in Singapore. If the demand is coming from industries that have been over-investing and the government is now signaling concerns over over-capacity, then demand for raw materials will likely fall in the next months.