This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

China's Overcapacity Bubble

Stocks in this article: AA HTHIY BHP RIO

TAIPEI ( TheStreet) -- If we say anything contrary about China's expansive and expanding economy, we normally point to slow export demand in major Western markets and the awkward rebalancing of economic policy that is supposed to replace industrial investment with consumer spending.

The whole sundae of tasty common explanations came up on Monday when China's premier gave an annual political convention his forecast for 7.5% economic growth in 2013, down from 9%-10% levels for most of the past decade.

A less-discussed yet more crucial explanation lies in the 20-year-old crisis of manufacturing overcapacity. Some call this problem the core threat to China's $7.4 trillion GDP, which is No. 2 in the world and an economic engine affecting every continent. The threat, on its face, should add to GDP growth. But eventually it will force today's expansion at least to melt.

Overcapacity in some of the country's anchor industries is already chafing at global trade relations by putting more stuff on the market. If the bloated banana boat finally bursts, foreign companies that have invested in the overwrought makers of steel, copper and aluminum -- three culprit industries -- will find themselves without a life raft. Overseas firms that sell orders to these companies for expansion would obviously need a new source of income.

Utilization rates for six of the most suspect industries ranged from 67% in aluminum to 85% in refining, according to a European Chamber of Commerce-Roland Berger study done in 2009. The other industries were cement, steel, wind power and ethylene chemicals. More recent reports say the problem that began in the 1990s has hardly abated since 2009.

A lot of these companies are just deeper in debt now and less profitable. Often pushed by local governments to boost employment, the manufacturers take out loans for new capacity. Rates are low and state-run companies easily qualify, though some are reluctant to go along with the local government campaigns as profits fall.

"A company will refuse to take on this mandate and say 'our balance sheets are weaker and not making money,'" notes Helen Lau, senior metals and mining analyst with Singapore-based securities firm UOB Kay Hian.

1 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs