China s Excess Capacity Nightmare

As a result, China now faces the problem of short term excess capacity.

Excess capacity and falling growth are mutually reinforcing. Not only does excess capacity have a negative impact on growth perhaps more important, sharply declining growth also contributes to massive redundancy in some industries (especially resources and the heavy and chemical industries).

To correct China s excess capacity problem would require the relevant enterprises, whether SOEs or private firms, to exit the market.

First, in a situation of widespread unemployment and excess capacity, short run output is determined primarily by demand, not supply.

Moreover, the younger countries are typically emerging markets, which have neither the scale nor the capacity to absorb the world s excess savings efficiently.

The ultimate irony is that there are simultaneously excess capacity and vast unmet needs and policies that could restore growth by using the former to address the latter.

The second, more profound challenge relates to the real economy how to redeploy workers and capital from the industrial sectors facing overcapacity and the most overbuilt cities.

Moreover, given the magnitude of excess capacity in real estate, lower interest rates will do little to revive real estate prices, much less inflate another consumption bubble.

But access to cheap credit from state controlled banks creates an incentive for SOEs to generate surplus capacity, which increases systemic risk in the economy.

Excess capacity has been a priority for the State Council since 2005, when it issued industry by industry restrictions on new projects and targets for shutting down inefficient production.

With a new round of stimulus, China s excess production capacity and underused outlays (for example, built up real estate assets) could be mobilized immediately, restoring 9 annual GDP growth.

There are still a few million surplus workers in Central Asia.

Finally, Spaniards could borrow excess German savings and increase consumption and investment.

In normal times, there are valid reasons for paying interest on excess reserves.

NATO has been involved in the destruction of a number of surplus stockpiles.

But the subsequent increase in official fixed asset investment which rose by 32 in 2009 alone delayed structural reforms, while over capacity and a real estate bubble became even larger and more deeply entrenched problems.

Investors might choose other places for their excess cash, like banks.

Likewise, the requirement that banks offer very low or even negative real interest rates to private depositors drove them to invest in fixed assets, leading to overcapacity in some sectors, such as real estate.

This is slowing the absorption into the economy of the excess resources in the construction industry.

(vi) Proceeds from the sale of surplus property are credited to the miscellaneous income of the respective funds.

The interest rate on these totally safe and liquid deposits induced the banks to maintain excess reserves at the Fed instead of lending and creating deposits to absorb the increased reserves, as they would have done before 2008.

But the more immediate problem remains deflation, given high unemployment and excess capacity.

Cheap credit and perverse incentives such as promotions for officials who contribute most to GDP growth have led to massive but redundant investment, which, in turn, has contributed to excess capacity in manufacturing and infrastructure.

But the new Fed policy of paying interest on excess reserves meant that this increased availability of excess reserves did not lead after 2008 to much faster deposit growth and a much larger stock of money.

As a result, all of this excess liquidity is flowing to the financial sector rather than the real economy.

China now stands ready to absorb some of that surplus saving to promote a shift toward internal demand.

The only way to sustain economic growth in the face of such an imbalance is to borrow surplus savings from abroad.

Given China s massive stock of surplus labor, this trend will not reverse itself soon.

The link between bond purchases and the money stock depends on the role of commercial banks excess reserves.

Through this control and manipulation of surplus resources, the elite's power continued to grow until about AD 950.

The surplus assets (due to the phasing down or closure of an operation, awaiting redeployment) were not reported.

China s excess capacity problem reveals a serious defect in its socialist market economy.

But, by raising the consumption share of its GDP, China will also absorb much of its surplus saving.

Even if real wages increase in some coastal cities, surplus labor could keep the national average flat.

More approaches like this and concerted efforts to find markets or uses for surplus food are needed.

The Federal government has thrown fiscal prudence out the window. The country as a whole is absorbing an astounding three quarters of global excess savings.

The only way to meet growing demand was to use OPEC s spare capacity and commercial inventories.

The larger deficits would also eliminate all of the excess saving that now underpins the current account surplus.

But, as long as Germany does not absorb its excess savings and accommodate the desired rise in Spanish savings, Spain is still faced with the same options.

The US government s loss of its AAA rating is a first sign that the most important outlet for excess Chinese savings might be losing its luster.

We now have the power to waste, and we want to flaunt it.

IMPROVING THE COMPETITIVENESS OF SMEs THROUGH ENHANCING PRODUCTIVE CAPACITY

To raise these extra amounts, the Obama administration could levy an excess profit tax on Wall Street to make up the budget gap.

The latter category includes income from sales publications, interest earned on surplus funds and other sundry items for which details are provided in a separate section.