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China confronts mounting piles of unsold goods

After three decades of torrid growth, China is encountering an unfamiliar problem with its newly struggling economy: a huge buildup of unsold goods that is cluttering shop floors, clogging car dealerships and filling factory warehouses, Keith Bradsher writes.

business Updated: Aug 24, 2012 22:30 IST

After three decades of torrid growth, China is encountering an unfamiliar problem with its newly struggling economy: a huge buildup of unsold goods that is cluttering shop floors, clogging car dealerships and filling factory warehouses.

The glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown.

It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home.

A non-government survey of manufacturers in China showed on Thursday that inventories of finished goods rose much faster in August than in any month since the survey began in April 2004.

The previous record for rising inventories, according to the HSBC/Markit survey, had been set in June. May and July also showed increases.

China is the world’s second-largest economy and has been the largest engine of economic growth since the global financial crisis began in 2008. Economic weakness means that China is likely to buy fewer goods and services from abroad when the sovereign debt crisis in Europe is already hurting demand, raising the prospect of a global glut of goods and falling prices and weak production around the world.

Part of the issue is that the Chinese government’s leaders have decided to put quality-of-life concerns ahead of maximizing economic growth when it comes to two of the nation’s largest industries: housing and autos.

Premier Wen Jiabao has imposed a strict ban on purchases of second and subsequent homes, in the hope that discouraging real estate speculation will improve the affordability of homes.

The ban has resulted in a steep decline in residential real estate prices, a sharp fall in housing construction and widespread job losses.

The Chinese auto industry has grown tenfold in the last decade to become the world’s largest, looking like a formidable challenger to Detroit.

But now, the Chinese industry is starting to look more like Detroit in its dark days in the 1980s.

Inventories of unsold cars are soaring at dealerships across the nation, and the Chinese industry’s problems show every sign of growing worse, not better.

So many auto factories have opened in China in the last two years that the industry is operating at only about 65% of capacity — far below the 80% usually needed for profitability.

Dealerships’ inventories of new cars rose 900,000 units, to 2.2 million, from the end of December to the end of June.

The New York Times