Friday, August 14, 2015

Investment in Overcapacity, Consumption of Depleted Resources.

China Daily quoted Tianyong Guo, head of the Chinese Banking Industry Research Center at the Central University of Finance and Economics in Beijing, as saying: “A great amount of capital has enteredthe equity market and squeezed capital for investment and consumption, resulting in insufficient investment in the real economy and a contraction in demand.”

The authors’ observation was: “[T]raditional sectors such as steel, cement and power industries are struggling with difficulties such as overcapacity, rising costs, and depleted natural resources.”

If the pillars of the Chinese real economy (i.e. steel, cement, and power generation) are experiencing overcapacity, why invest in more capacity? If natural resources are being depleted, why should demand expand further?

Another question to ask is what is driving costs higher? According to the front-page article on the Business Section of the China Daily on July 28th, interest payments of industrial companies dropped 6.2% after three cuts in benchmark interest rates. Commodity prices have also been falling consistently. The only other major cost would be labor. Are industrial companies expanding their workforces to offset layoffs in other sectors of the economy? Is the Chinese labor market worse that it appears?