Michael Greenberg
Macroeconomic Policy
10/15/2013

Capacity Utilization of China

For a long time, we have suggested that because of China’s GDP growth being driven primarily by investment, the end result will inevitably be over-capacity. This has been rather apparent in some industries such as steel, cement and wind power. We also believe that the construction boom after the 2008/09 stimulus has already led to over-building of residential real estate. The only problem we all have is that there are no accurate official statistics in China (like those in the US) that we are aware of for capacity utilization.

With investment increasing by 5 percent of GDP over the past three years, estimates show that capacity utilization has declined from just under 80 percent before the crisis to around 60 percent today. This low rate of capacity utilization, together with continued low core inflation, suggests that there is large excess capacity in China’s economy.

The estimates also show that China has had excess capacity for the better part of the past decade. The gap was closing in the run-up to the financial crisis, but did so based on an unsustainable level of external demand. Even in 2007, when growth exceeded 14 percent, nonfood inflation was low and stable, suggesting the economy was still operating below capacity. Then, in 2008, the government put in place a large investment stimulus that increased growth and broadened capacity in a range of areas. Filtering techniques which impose a cycle on the data would point to a negative output gap since 2007 even though price pressures were virtually nonexistent and excess capacity was growing.

References

Badkar, Mamta. "China Stimulated Its Economy Like Crazy After The Financial Crisis ... And Now The Nightmare Is Beginning." Business Insider. N.p., 13 June 2013. Web. 15 Oct. 2013.