Overcapacity poses major risk to China's economy

China's latest figures on industrial activities indicated that the world's second largest economy faced worsening overcapacity despite a slew of measures and repeated warnings from the leadership.

Analysts said overcapacity was posing a big, if not the biggest, threat to China's future development, and there was no quick fix. They suggested the country should try to eradicate the roots of industrial overcapacity from within the economic system through further reforms.

Chinese industrial businesses saw their profits rise 15.1 percent year on year in October, slowing from 18.4 percent in September, according to figures released on Thursday by the National Bureau of Statistics.

Total profits from main operations by industrial companies with annual revenues of more than 20 million yuan (3.26 million U.S. dollars) stood at 566.9 billion yuan in October, up 6 percent year on year, slowing from 7.5 percent in September.

Analysts said the two decelerations should be mainly attributed to the ever-growing inventory of industrial companies owing to the overcapacity.

The inventory of finished products among industrial companies in China was worth a total of 3.25 trillion yuan (529.6 billion U.S. dollars) by the end of October, an increase of 6.2 percent from a year ago. The inventory has risen for nine consecutive months since February.

According to Zhao Xiaoling, a Beijing-based macro economic analyst, the inventory of 959 manufacturing companies listed on the Chinese stock market was worth a record high of 1.14 trillion yuan by the end of the third quarter of 2013, a jump of 61 percent from the end of 2009.

"What's the principal contradiction for China's economy? I think it is overcapacity. Future reforms and structural adjustment should focus on this problem, or it will be hard to see results," said Wang Jian, secretary general of the China Society of Macroeconomics, quoted by Xinhua-run Economic Information Daily.

According to Wang, it is unclear whether the lasting problem of overcapacity will push China into an economic crisis, but the over-200-year history of capitalist countries showed that there was a natural relationship between overcapacity and economic crises.

The manufacturing-based Chinese economy began to suffer overcapacity after the outbreak of the global financial tsunami in 2008, which led to sluggish external demand.

China's over-reliance on investment and foreign trade had fueled rapid growth in some sectors before 2008, and when global demand plunged and domestic production costs rose, overcapacity surfaced along with falling profits.