The European Union Chamber of Commerce in China on Thursday launched a report which examines the impact and influence of industrial overcapacity in China, which it says is “wreaking far-reaching damage on the global economy.”

Overcapacity in China: Causes, Impacts and Recommendations, is the first ever industry-led report on industrial capacity utilization in China and is published in partnership with Roland Berger Strategy Consultants. The sixty-page study offers a detailed analysis of the causes and effects of overcapacity across six key Chinese industries. The study has found that the recent measures taken by the Chinese authorities to curb overcapacity are a positive first step. The European Chamber which has 1,400 member companies, provides a series of recommendations on how this problem can be curbed.

European Chamber president, Joerg Wuttke, said: "Our study shows that the impact of overcapacity is subtle but far reaching, affecting dozens of industries and damaging economic growth not only in China but worldwide. Domestically, excess capacity squeezes profit margins, hampers innovation and prevents the emergence of true local champions, while on the global stage its influence is clearly seen in the rise in trade tensions between China and its major trading partners. This study, then, aims to offer solutions that will benefit not only Chinese companies and Chinese industry in general, but the whole global economic system. When China prospers, we all benefit."

The study concludes that overcapacity is a major factor holding back China's sustainable economic development and traces its impact as a driving force in economic resource waste, a rise in non-performing loans (NPLs) and environmental problems. The study further argues that excess capacity in certain sectors is holding back Chinese innovation by reducing company profits, meaning that less funding is made available for R&D. Moreover, as US and European savings rates rise and imports drop, the study findings show that overcapacity is one of the drivers of the current rise in trade tensions and anti-dumping cases between China and its trade partners.

Based on these findings, Overcapacity in China: Causes, Impacts and Recommendations concludes by offering a number of suggestions on how overcapacity can be curbed by shifting policy emphases and continuing to move away from an investment- and export-led growth model. The study's recommendations include:

1. Stimulating domestic consumption and ensuring that new investment is focused on "smart" investments rather than more investments;
2. Promoting the development of a vibrant services sector - which is less resource- and energy-intensive - by encouraging competition;
3. Encouraging market-driven consolidation in sectors suffering from overcapacity;
4. Reforming pricing mechanisms to create a more balanced cost system for capital, energy and resource inputs
5. Strengthen the authorities of Central government agencies like Ministry of Environmental Protection to implement national law and crack down on local protectionism 

China is the world's biggest steel producer and its steel industry accounts for nearly half of global output. In fact, its output is so large that it matches the combined output of the next four biggest steel makers, namely: Japan, the United States, Russia and India.

The report says it’s “particularly troubling” that more than RMB140 billion was invested in the steel industry in the first half of this year and that 58 million tons of capacity are under construction when global demand may decline 14.9 percent in 2009, the report said. The chamber also warned of “a looming deluge” of extra cement capacity in the economy.

In 2008, China’s cement production accounted for half of global output and was eight times larger than the second-largest producer, India.

China is the world's biggest steel producer and its steel industry accounts for nearly half of global output. In fact, its output is so large that it matches the combined output of the next four biggest steel makers, namely: Japan, the United States, Russia and India.

Charles-Edouard Bouee, Roland Berger Strategy Consultants said: "Industrial overcapacity has a strong impact on companies at every stage of the supply chain and on end users. As demand for China's exports has plummeted in the US and Europe and fixed asset investment has risen sharply in some sectors, the problem of overcapacity has been amplified. For this reason, we believe that this study is a timely and valuable addition to the ongoing discussion about the future direction of China’s economic growth."

"The claim is purely to defend their own interests," Zhou Shijian, senior analyst with the Sino-US Relations Research Center of Tsinghua University, told the China Daily.

"These countries welcome Chinese exports when they cannot produce enough goods for their industrial and consumer needs during a good economy, but then these same countries limit Chinese exports amid an economic recession," he said."It's a double standard."

The newspaper said that from January to September, 19 economies launched 88 probes into Chinese products, involving more than $10 billion in exports, quoting Chinese Ministry of Commerce.

That prompted Yao Jian, the ministry spokesman, to say earlier this month that China has become a major victim of trade protectionism.

In the largest trade dispute, the United States on Tuesday decided to impose anti-subsidy duties as high as nearly 16 percent on Chinese-made steel pipes for the oil industry.

Affecting $2.7 billion worth of goods, it is the largest trade levy imposed by the US on China.

But the chamber president Wuttke believed more trade charges will be launched against China.

"This is only a starting point. I believe more cases against China will happen in 2010, especially starting from the second half,"he said.

Zhou said foreign countries are abusing their rights to keep Chinese exports away.

As a compromise during the World Trade Organization talks, China agreed that WTO members could not recognize its market economy status until 2016. The concession allows trading partners to use a third country, usually India whose manufacturing costs are higher than China's, to evaluate Chinese goods' costs.

"When developed countries need to protect manufacturers at home, they simply launch anti-subsidy or anti-dumping charges and reject Chinese-provided prices,"Zhou said.

Li Wei, analyst from Standard Chartered China, however, allayed Chinese exporters' worries and said the overcapacity will be solved when China's domestic demand goes up.

"The problem is just short term," he said. "It will disappear when the Chinese economy regains momentum."

 English Version;    中文版研究报告.