BEIJING — The failure of Chinese leaders to tackle the problem of excess industrial production has intensified an economic slowdown in the country and threatens to wreak havoc on global markets, a prominent European business association said in a new report on Monday.
Warning that the effects of overcapacity had become “ever more destructive,” the report by the European Union Chamber of Commerce in China blamed government policies and recalcitrant officials for inefficiencies across many of China’s major industries, including steel, cement and chemicals.
“Without a sustained effort to address it now, overcapacity may well seriously impede the effectiveness of China’s economic reform agenda,” said Joerg Wuttke, president of the chamber. He said ineffective policies and parochialism among provincial officials had exacerbated the problem.
China has for decades grappled with overcapacity, which occurs when demand for a product falls below what an industry is capable of producing. But the problem has worsened significantly in recent years, as the government has pumped capital into heavy industries like shipbuilding and glassmaking, even as global demand has fallen.
Demand for steel, for example, has weakened in recent years. But the production of steel in China has continued to rise, surpassing the combined output of India, Japan, Russia and the United States, according to the report, titled “Overcapacity in China: An Impediment to the Party’s Reform Agenda.”
The issue of overcapacity has exacerbated trade tensions, as Chinese producers have sought to export surpluses. Several foreign governments, including the United States, have imposed tariffs on some Chinese steel products, and European steelworkers have protested the import of cheap Chinese steel.
“Trade frictions hamper supply chains,” the report said. “This poses a major threat to the positive effects of globalization.”
Chinese officials have in turn criticized the protests in Europe, saying that overcapacity is a global problem and that the Chinese government is working to restructure the steel industry. Chinese officials have pledged to cut production in several industries plagued by overcapacity.
As China’s economy slows after more than two decades of breakneck growth, government leaders are facing increasing pressure to find ways to expand the service sector, increase consumer spending and shift resources away from traditional industries.
Their efforts to overhaul the economy have been hampered by protectionism among local officials, who worry that closing factories will result in the loss of important sources of tax revenue.
In its report, the European Union Chamber of Commerce in China offered several suggestions to Chinese leaders, including cutting capital expenditures in some industries and imposing a value-added tax to offer local governments alternative sources of revenue.