Overcapacity in China

If you want to be optimistic about the current economic course, China seems to be leading the world toward recovery. If you want to be pessimistic, China seems to be riding some kind of strange investment bubble:

In a disturbing new report, the European Chamber of Commerce in China lays out the challenge in six sectors: aluminium, where the capacity utilisation rate is forecast to be 67 per cent in 2009; wind power, on 70 per cent; steel, on 72 per cent; cement, on 78 per cent; chemicals, on 80 per cent; and refining, on 85 per cent. Yet vast additional capacity is on the way.

The scale of the excess capacity is breathtaking. At the end of 2008, China’s steel capacity was 660m tons against demand of 470m tons. This difference is much the same as the European Union’s total output. Yet, notes the report, “there are currently 58m tonnes of new capacity under construction in China”. To the extent that gross domestic product is driven by such absurd spending is a measure of waste, not of economic welfare.

This highlights some of the problems with China’s stimulus measures. But I think it also highlights the basic absurdity of these large economic downturns and of the fatalist view that we can do nothing about the situation except wait around with everything stagnating as some “recalculation” takes place. There are right now around the world billions of people who would like to have more stuff. And we possess in the world the ability to make more stuff. And there are lots of people who would like to take jobs building stuff, moving stuff, selling stuff, installing stuff, doing accounting for the people doing all of that, making advertisements for the stuff, writing articles for publications that sell advertisements for stuff, and performing all sorts of high- and low-end personal services for people who would pay for services if they had jobs and incomes.

The responsibility of the world’s monetary authorities is to try to make Say’s Law work in practice. Instead, the ECB and Bank of Japan seem obsessed with inflation, while the U.S. Federal Reserve is just a bit better and still constantly looking over its shoulder and worrying about an exit strategy.

(As a side note, how is it that China has substantial overcapacity in wind power, plus in steel, but also “needs” to build lots of new coal plants to keep growing? Couldn’t they just use the excess wind power capacity and use some of the excess steel to build more windmills?)