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November 27, 2009

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EU body seeks more to be done on overcapacity

CHINA'S efforts to curb overcapacity are positive but more should be done to ensure sustainable development and even to reduce trade tensions, said a study by the European Union Chamber of Commerce in China yesterday.

However, its conclusion of the cause of trade tensions between China and other countries was slammed by a Chinese economist.

The study offered more than 30 suggestions, including stimulating domestic consumption, ensuring new "smart" investments and developing a vibrant services sector.

It also encouraged market-driven consolidation in sectors suffering from overcapacity and the introduction of reform of pricing mechanisms to balance capital, energy and resource inputs.

Joerg Wuttke, the chamber's president, said overcapacity is a major drag on China's sustainable economic development.

"The impact is subtle but far reaching, affecting dozens of industries and damaging economic growth not only in China but also worldwide," Wuttke said in Beijing.

He explained that excess capacity squeezes profit margins, hampers innovation and prevents the emergence of strong local firms. When the domestic market can't consume the products, they are sold abroad and become the cause of trade tensions and give rise to anti-dumping charges, he added.

An economist, however, rejected the argument, saying industries which suffer from overcapacity such as steel and cement are not big exporters and therefore can't rattle the international market.

"In sectors where China is a massive exporter, like electronics, there is no overcapacity because when exports collapse, factories just close," an economist surnamed Meng at BNP Parisbas SA said. The biggest victim of overcapacity is China's own economy, he said.

The State Council moved in September to curb expansion in certain industries.


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