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China in danger of manufacturing overcapacity, warns S&Ps

Just days after John Rutherford, chairman and CEO of Moody’s, preached his views on the need for financial reform in China, S&Ps has released its own verdict on the state of the world’s most vigorous economy.

 

Strong growth in China’s industrial sector backed by export figures, robust consumer demand and high government spending have led to expectations that China’s economy will grow more than 10% in the second half of 2003. China’s excess capacity and labour supply, according to S&Ps, are the reason why the economy has not succumbed to inflationary pressure.

 

But despite the positive assessment S&Ps offers a caveat. "The threat of future overcapacity in mainland China's manufacturing sector continues to be a key concern for the country's corporate credit standing", said S&P's managing director Paul Coughlin. "The previous investment cycle produced some irrational investment and expansion of low-end production capacity. A repeat of this experience could have a detrimental effect on corporate profits and could lead to a further round of nonperforming bank loans", adds Coughlin.

 

The overcapacity, says the ratings agency, is affecting certain sectors, most notably steel, aluminium, property, automobile, telecommunications equipment and consumer goods industries.

 

"Overcapacity increases the risk of price competition, reduced operating margins, and weak cash flow," said John Bailey, director at S&P's.

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