The problems stem from China’s industrial policies and a vast array of subsidies that allow whole sectors to spring up overnight. Ambitious local officials are keen to lavish government money on what they hope will be success stories that can further their careers.“When you have administrative measures you get huge overcapacity and this country has created overcapacity in a whole lot of areas,” says Hank Paulson, former US Treasury secretary, who often visits China. “It’s not just clean technologies; steel, shipbuilding we can name all the areas.”From chemicals and cement to earthmovers and flatscreen televisions, Chinese industry is awash with excess capacity that is driving down profits inside and outside the country and threatens to further destabilise China’s already shaky growth.It is not a new problem; it was exacerbated by Beijing’s response to the financial crisis in 2008 and continues to worsen despite years of government efforts to curtail it. China produces nearly half of the world’s aluminium and steel and about 60 per cent of the world’s cement but new production is being added rapidly, even as the economy cools.
This points to some of China’s biggest problems. Systemic overcapacity, an economy distorted by production subsidies, local officials making reckless decisions in the hopes of advancing their careers: all of these things suggest that China suffers from hundreds of billions of dollars in bad investments that will never pay for themselves.Indeed, the ratings agencies have noticed. Fitch downgraded China’s long-term currency credit rating in April, and Moody’s quickly followed suit. Yesterday, Charlene Chu, the senior director for Fitch in Beijing, told the Telegraph that China’s “credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem…. [It is] beyond anything we have ever seen before in a large economy.”It’s possible that China will be able to muddle through, or its leaders might be able to manage a soft landing for the ballooning economy, but over time the reasons for concern are multiplying even as overall growth continues to slow. “The next six months,” Chu says, “will be crucial.”