The world has changed; but China has not. China has responded to the world financial crisis with what seems to be great success. But this is an illusion. China's solution – a surge in spending on investment – will create greater excess capacity. China's high-savings, high-investment economy is costly for its people and destabilising for the world. The time for a radical reform is long past.
In a disturbing new report, the European Chamber of Commerce in China lays out the challenge in six sectors: aluminium, where the capacity utilisation rate is forecast to be 67 per cent in 2009; windpower, on 70 per cent; steel, on 72 per cent; cement, on 78 per cent; chemicals, on 80 per cent; and refining, on 85 per cent. Yet vast additional capacity is on the way.
The scale of the excess capacity is breathtaking. At the end of 2008, China's steel capacity was 660m tons against demand of 470m tons. This difference is much the same as the European Union's total output. Yet, notes the report, “there are currently 58m tonnes of new capacity under construction in China”. To the extent that gross domestic product is driven by such absurd spending is a measure of waste, not of economic welfare.