China Industrial Overcapacity Problems Worsened In Q2: Survey

--Survey Also Finds Conditions Contracted Modestly

     China's industrial sector was still in a modest contractionary stage in the

second quarter, with overcapacity problems having worsened somewhat, according

to a survey report published by Gan Jie, a professor at Cheung Kong Graduate

School of Business.

     The quarterly report, which was published Tuesday, surveys more than 2,000

medium- and large-size industrial companies about their operating conditions and

funding demands. Of these, about 1,900 are private enterprises. 

     The industry sentiment index on overall current conditions stood at 46 in

the second quarter, down from 47 in the first quarter, signaling that activity

contracted at a slightly faster rate in the latest period. 

     Weak investment plans dragged down the index. Only 1% of the companies

agreed that now would be a good time to increase investment -- the same level as

in the first quarter -- while 71% said current investment conditions were normal

and 28% said it was not a good time to invest, compared with 74% and 25%,

respectively, in the first quarter. Only 1% of companies surveyed said they

increased their investment in new capacity in the second quarter, compared with

2% in the first quarter, the report said.

     Despite official data showing that industrial output has been expanding,

the survey found that production was at the same level in the second quarter as

in the first.

     "Two reasons might cause the official data to show industrial output is

expanding. The first is the rise of prices, which can cause industrial output to

rise even if production does not increase," the report said. "The second reason

is that state-owned enterprises and foreign enterprises expanded, while private

companies did not expand," as this report focused more on private companies.

     Looking ahead to the third quarter, insufficient demand is seen as the

biggest impediment to industrial activity, cited by 72% of the respondents. Some

16% of companies said labor and raw material costs will hamper production in the

third quarter. Only 2% of respondents said access to funding would be a

restricting factor in the third quarter, as nearly all companies said retained

profits were their primary method of financing operations.

     The problem of production overcapacity remains serious, with 65% of

companies saying their inventories of finished products exceeded demand. Some

36% of companies said excess capacity was 10% above balance, while 16% said

their excess was 20% above balance, up from 33% and 13% in the first quarter,

suggesting a worsening overcapacity trend. Some companies said they did not

think their overcapacity problems would improve in the third quarter. 

     "Our discoveries show second-quarter GDP growth was mainly driven by

infrastructure investment and government purchases, with the structural problems

of industry still quite serious," the report concluded. "Supply-side reform

needs to focus on cutting overcapacity as well as helping to consolidate and

upgrade industries to enhance overall competitiveness. Given the state of

overcapacity, even a relaxed monetary policy cannot lift the industrial

economy."

     "We believe China's economy will develop well in the long term as the

government supports its transformation," the report said.

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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