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Reuters: China Industry Surveys Point to Overcapacity


A pair of surveys released on Thursday pointed to excess capacity as a growing problem in China's economy, although they gave mixed signals about the overall health of the manufacturing sector.

An official survey of purchasing managers produced for the National Bureau of Statistics showed that business conditions stablised in November as a pick-up in export orders and consumer demand offset weaker energy sectors.

The index derived from the survey, conducted by the China Logistics and Purchasing Association, stood at 54.1 last month, unchanged from October. It trended down from March to July but has since recovered.

"The November PMI indicates that China's economy is growing at a robust and steady pace while corporate confidence remains strong," the association quoted Zhang Liqun, a senior economist at the cabinet's Development Research Centre, as saying.

By contrast, the purchasing managers' index produced for Hong Kong brokerage CLSA fell below the critical no-change level of 50 for the first time in the 20-month history of the survey.

The index dipped to 49.8 last month from 50.1 in October, pointing to a slight deterioration in China's manufacturing economy.

As with the official PMI, a reading above 50 indicates expansion while one below 50 shows contraction.

Jim Walker, CLSA's chief economist, said the indications of a slight contraction in manufacturing were in line with anecdotal evidence of overcapacity from commodity suppliers and analysts.

"It should therefore come as no surprise that a decline in output led the fall in the PMI. And as demand weakens off input prices are falling," Walker said in a statement.


The CLSA survey found that average input prices showed a marked decline for the first time in four months, with evidence that excess supplies of key raw materials had forced down prices. Steel, for example, is down nearly 30 percent since March.

"Unfortunately there is little relief for profit margins as output prices continue to fall also. Export orders are holding up reasonably well but it will be an uphill struggle for exports to offset weakness in domestic industry as global demand conditions falter in 2006," Walker said.

British research firm NTC polls more than 350 industrial firms for the survey on behalf of CLSA, the Asian brokerage and investment banking arm of French Bank Credit Agricole.

The Chinese authorities have been striving for nearly two years to rein in excessive investment in a number of industries, fearing supply gluts that could force firms out of business and spawn a new batch of non-performing loans.

China, the world's top consumer of steel, will produce a surplus of the metal in 2006 equivalent to Japan's annual output as demand from the once red-hot property sector cools, the Development Research Centre said on Wednesday.

Although the domestic steel industry association dismissed the forecast as "rubbish", a sub-index of the official purchasing managers' index for firms producing raw materials and energy slipped below 50 in November from 48 in October.

"Overcapacity in heavy industries and chemical industries has appeared, which calls for structural adjustments just like other industries," Zhang was quoted as saying.

The two surveys also agreed that China's export prospects remained bright.

The official sub-index for new export orders hit the highest level in six months, while CLSA's sub-index rebounded from a four-month low as firms worried about weak demand and falling prices at home turned their attention to overseas sales.