Excess manufacturing capacity in China, including in plastics, is increasing trade tensions with the rest of the world and hindering innovation and development of the country's domestic industries, according to a new study from the largest European business organization in China.
The recent study from the European Union Chamber of Commerce in China said overcapacity is a major factor holding back China's sustainable development, leading to more environmental problems and lower profits and less research and development spending for Chinese firms.
Our study shows that the impact of overcapacity is subtle but far reaching, affecting dozens of industries and damaging economic growth not only in China but worldwide, said EU Chamber President JÃ¶rg Wuttke, who is also the China head of German chemical firm BASF SE of Ludwigshafen.
Domestically, excess capacity squeezes profit margins, hampers innovation and prevents the emergence of true local champions, while on the global stage its influence is clearly seen in the rise in trade tensions between China and its major trading partners, he said.
The EU report said there is overcapacity in several sectors of China's chemicals industry, including PVC, ethylene derivates, polyester and coal-to-chemicals projects.
It said China is pursuing self-sufficiency in chemicals production, in spite of global oversupply in some industries, and said the problem is fueled by local governments that want to promote their own chemical industries and by smaller firms operating outside state supervision.
The report notes that the Middle East is leading in capacity expansion in some areas, such as ethylene, and will have low-cost feedstock advantages. That suggests that the decision of Chinese firms to expand could lead to a tough challenge for them, the EU report said.
The European report said the Chinese government considers overcapacity to be a serious problem and has taken steps to curb it, but the EU group recommends that the country step up efforts to boost domestic consumption, promote a vibrant services sector and encourage market-driven consolidation.
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