Global overcapacity


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

Overcapacity is excess of capacity to produce goods or provide a service over the level of demand. Global overcapacity means that industries are producing more than global demand. Or it may mean that firms are operating at 50% capacity, leaving factories idle for periods of the time.
One of the major difficulties in determining the level of overcapacity is the calculation process. The report states that to calculate the extent of overcapacity, an accurate measure of capacity is necessary. However, the common method of calculating overcapacity by using nominal capacity is likely to yield exaggerated figures.

China's Overcapacity Problem

China's economic slowdown has been at the front of the business news for several months and has largely been blamed for the collapse in commodity prices and the concerns about future economic growth.  A recent examination of China's economic issues by the European Union Chamber of Commerce in China looks at one of the nation's key economic problems; overcapacity.
Overcapacity is defined as the difference between production capacity and actual production.  China has had an overcapacity problem for some time largely as a result of the lingering negative impacts of the Great Recession.  At the same time as stimulus investment was growing in China, leading to the building of new manufacturing facilities, the demand for Chinese exports was dropping.
This overcapacity can mainly be attributed to three factors:

(i) Rapid urbanization

 1% of China’s population moves each year from rural areas into urban ones. The major housing development that results from this migration creates massive domestic demand for construction machinery, building materials, steel, cement, and chemical products.

(ii) High savings

 The Chinese have a high savings rate, partly because of the lack of social security, but also because of the limited investment choices available to households, stringent capital controls, and policies that systematically transfer income from the household sector to producers, thus exacerbating the gap between production and consumption. This abundance of capital has led to abundant domestic funding and low interest rates. China’s national savings rate stands at 53.2% of GDP today. This extremely high savings rate has two major sources: household savings and corporate savings.

(iii) Low input prices

 Input prices are low mostly because government policies stimulate the secondary sector, especially heavy industry.
The primary victim of China’s overcapacity is the Chinese economy itself. However, it is not the only victim. Since industries in other regions of the world are also affected by the extra capacity in China’s system, the global economy in turn suffers as tensions between China and its trading partners increases.
China’s overcapacity in heavy industries is wreaking “far-reaching” damage on the global economy, with steel production “completely untethered” from market demand, the European Union Chamber of Commerce said.


Sunday, 10th Apr 2016, 12:47:17 AM

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