China: Serious task of tackling overcapacity begins - Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 11, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Research Team at Nomura, suggests that the Chinese government has set the reduction of overcapacity as its primary economic task for 2016 and we expect a significant impact on the real economy – in terms of growth and employment – and on the financial sector.

    Key Quotes

    “As such, we believe investors need to be not only made more aware of just how severe the overcapacity problem is, and what impact its reduction could have, but also informed with regular updates on progress. To that end, we launch our new “Reducing overcapacity series”, aimed at providing a panoramic view of this managed structural adjustment of the economy.

    • Overcapacity in certain industries is severe and the government has started to deal with the problem seriously.

    • The process of reducing overcapacity will continue to weigh on growth, mainly via slower production, investment, consumption and greater financial risks.

    • We maintain our call of real GDP growth slowing to 5.8% in 2016 from 6.9% in 2015.

    More often than not, “overcapacity” is used as a fancy name to describe weak demand, but in China today it is much more than that – at the very least, it describes a weakening in aggregate demand due to structural issues rather than business cycles. To meet the fast growth of property investment and infrastructure investment which accounted for around 50% of total fixed asset investment (FAI) over the last decade, China built up huge capacity to produce investment goods.

    Now, with property investment growth down to 1% and property floor space under construction outstripping annual sales by more than six times, capacity to produce investment-associated capital goods seems structurally redundant. Although the government is trying to boost growth in infrastructure investment, it cannot fill the gap left by slower property investment growth.

    As China’s economic growth model shifts from being investment- to consumption- and service-driven, the problem of overcapacity is only worsening – it could take several years to clear the surplus in industries with overcapacity, making this one of the major structural challenges to growth in the years ahead.”
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