CautiousInvestor

China Finally Recognizes Its Excess Capacity

After expanding bank lending 300% in H12009 in support of the large fiscal stimulus package, signs are appearing that there are divergences between plans and what is actually happening. Much money is being invested in surplus capacity and some is leaking.....actually gushing... into equities and casino's.

"Premier Wen Jiabao said in comments published this week that the government will maintain its fiscal and monetary policies as economic recovery isn’t stable yet and faces many uncertainties. Authorities can’t be “blindly” optimistic as a “decline in external demand may continue for a longer time” and excess production capacity may restrain industrial growth"

Like all of us, the Chinese are inclined to follow familiar policies that have worked in the past. Much excess capacity is arising in industries that have served as export machines; adding capacity to these industries (1) creates construction jobs and (2) and full time employment when the fatories are humming and shipping manufactures across the world. With exports collapsing, the second half of the equation is not being satisfied and China is getting stuck with excess capacity like the rest of the world.

In response, the government will increase “guidance” of industries including steel, cement, coal chemical, plate glass and wind power equipment, the State Council, China’s cabinet, said in a statement on its Web site on Wednesday. The government will further strengthen controls on approval of stock and bond sales by companies in these industries to ensure capital is not raised and then invested in surplus capacity.

With China's markets down 15% to 20% off thier highs, the Baltic Dry index off 45% from its early June peaks and various commodities falling in price it is not unreasonable to assume that something is taking place in China that signals change. A month or so ago China was being lauded for how it handled the economic crisis; today there is a curious slience and MSM is focusing upon strength within the US as if China's help were not needed.

Stay tuned.