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China: Huge volume of FAI equals to development?

Eunice Ouyang

Editor,SteelOrbis China

A stimulus package estimated at RMB 4 trillion ($570 billion) initiated by Premier Wen Jiabao in 2008 has become an object of public denunciation as it has been a trigger to stimulate a rapid inflation, despite some economists mentioned this package successfully help China avoid a global recession. Through spending such a big package in 10 major areas, including low-income housing, rural infrastructure, water, electricity, transportation, the environment, technological innovation and rebuilding from several disasters, most notably the May 12 earthquake happened in Wenchuan, Sichuan province, China really enjoyed a “golden age” when developed countries suffered from economic crisis. However, some economists said China has missed the best time to run structural adjustment, what’s worse, overcapacity in some industries, like metallurgical industry and steel industry witnessed a huge increase from 2008 to 2012, which was thought as an essential reason of current painful sluggishness in demand.

At 11th International Steel Market and Trade Conference held on Mar 28-30 in Guangzhou, China, during her speech on China’s macro economy and real estate industry, RenXingzhou, the director of Institute of Market Economy, Development Research Center of the State Council, underlined for the first time in 18 years, Chinese central government is seeking improvement in stability instead of setting a target for rapid development. While, it seems that local governments could hardly keep in line with central government at this point. Over the past 3 months of 2013, several provinces have issued their plans of fixed asset investment, for instance, Sichuan (RMB 4.3 trillion), Guizhou (RMB 1.7 trillion), Zhejiang (RMB 10 trillion), Guangxi (RMB 1.5 trillion), Jiangxi (RMB 669.4 billion), Guangdong (RMB 786.9 billion) and Yunnan (RMB 377.055 billion), indicating a sum of around RMB 20 trillion ($3.2 trillion). This amount has been much more than the stimulus package of RMB 4 trillion ($570 billion) in 2008.

In the National People’s Congress and the Chinese Political Consultative Conference (NPC&CPPCC), Dong Dasheng, Deputy Auditor-General of National Auditing Administration estimated that the total volume of local debts in China might be RMB 15-18 trillion ($2.4-2.9 trillion). The huge amount of local debts has exerted a negative impact on China’s sovereign rating, for instance, Fitch has downgraded China’s rating from AA to A+ on Apr 9, while Moody lowered China’s rating from positive to stable on Apr 16. As the first year of a new group of leaders in China, 2013 is regarded as a big chance to show new leaders’ abilities around the country, which stimulates high growth in FAI. However, some economists suggest that China must stop the high-risky mode of “expansive investment-expansive debt”, to implement a soft landing of economic development, or overcapacity will become worse and worse.

The overcapacity of China’s steel industry has become an accepted fact, with its rate of capacity utilization in 2012 at only 72%, while whose crude steel output in 2012 accounted for 46.3% of global steel output. At the same time, the rate of capacity utilization in cement industry was around 75% in 2012. Some previous emerging industries, like photovoltaic industry and wind power industry also faced the problem of overcapacity, with Suntech-power, the leader in China’s photovoltaic industry going bankrupt on Mar 18 due to overlapping investment among the country.

More and more people in China realized high growth in GDP might not equal to more happiness, as high speed of FAI, GDP will inevitably push up consumption prices and labor costs. While higher inflation always indicates the living standard goes down.


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