UPDATE 1kitchen faucet-China overcapacity risks trade friction -EU Chamber
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EU business group says overcapacity harming China, world
Warns of rise in anti-dumping cases, drop in FDI
* Yuan is not cause of problem but may be part of solution
BEIJING, Nov 26 - China faces a protectionistbacklash next year because its manufacturers are saddled withovercapacity and are offloading excess output into world markets,the European Union Chamber of Commerce in China said on Thursday.
Joerg Wuttke, the head of the business group, said it takesabout 12 months to prepare a case alleging dumping, the practiceof selling goods for less than it costs to produce them.
"This lead time would indicate to me that in the second halfof 2010 there will be far more dumping cases against China,unfortunately," Wuttke said.
He was speaking at the launch of a study into industrialovercapacity in China, a long-standing scourge that the chamberbelieves has grown more serious as a result of the globalfinancial meltdown and Beijing's aggressive response to it.
"The crisis has throttled demand for exports from China at atime when even more investment, in the form of the Chinesegovernment's massive stimulus package, is being pumped intobuilding new plants and adding unnecessary capacity.
"As a result, the problem is actually getting worse in manyindustries," the report said.
In a survey of the chamber's members, 56 percent ofrespondents identified local government policies aimed at luringinvestment as the main macroeconomic reason for overcapacity;loose lending was the second most frequently cited cause.
Wuttke welcomed efforts by the central government to curb newcapacity, but said it was often powerless in the face of localgovernments that crave new factories for the tax revenues andjobs they generate and that do everything to keep existing plantsfrom going under.
"Local protectionism kicks in. So even if Beijing sees aproblem and wants to tackle it, they are very often derailed bylocal politics," Wuttke said.
Apart from generating trade frictions, rampant overcapacitywould weigh on foreign direct investment into China. "Why wouldyou invest if that market is already oversupplied?" he asked.
SWEEPING SOLUTIONS
By wasting resources and eroding profits, overcapacity detersresearch and development and encourages firms to cut corners onhealth and safety standards as well as environmental protection.
Further, the creation of unneeded capacity raises the risk ofnon-performing loans for banks that finance the investment. Italso generates trade tensions as producers offload their surplusproduction overseas at cut-rate prices, the study said.
The State Council recently singled out iron and steel,cement, electrolytic aluminium, glass, coal chemical, polysiliconand wind power equipment as the worst offenders when it came toovercapacity and announced steps to rein in their expansion.
The Chamber applauded the cabinet's actions but said thefundamental answer was to shift from investment- and export-ledgrowth and to focus more on domestic consumption and services.
The report made a series of recommendations that amount to aroot-and-branch overhaul of China's economic model. They include:
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