Analyst sees industrial overcapacity last until 2016

The process for China to gradually eliminate excessive production capacity in over-supplied sectors may last till 2016, a Chinese macroeconomic analyst has warned.

Overcapacity problems intensified following over-investment in 2009, and it will be seven years from that point before the excessive production is eased, Chen Letian, chief macroeconomic analyst with Rising Securities, wrote in an article published on the China Securities Journal reported on Friday.

Had it not been the massive expansion in industrial capacity amid massive stimulus in 2009, China's current round of production capacity would likely be reduced to normal levels in 2013, Chen wrote.

Overcapacity has led China's several sectors, including the steel industry, to the edge of losses.

By the end of the first quarter, the debt-to-asset ratio of the steel sector reached 61.52 percent, while average daily crude steel output climbed to a record high of 2.132 million metric tons.

Overcapacity also troubles China's emerging solar and wind industries, with the solar sector seeing a capacity utilization rate of 60 percent and the wind turbine industry's rate at less than 70 percent.

A capacity utilization of less than 70 percent is dangerous and could trigger vicious competition, Chen warned.

High profit expectation and widely support from local governments led to China's overcapacity problems.

Chen wrote in the article that China will face urgent need to cope with overcapacity in the coming years; otherwise, bankruptcy, debt and unemployment may cause a financial crisis.

He suggested that some of the excess capacity could be absorbed through mergers and reorganization, improving companies' capacity for innovation and encouraging Chinese businesses to expand overseas.