China's glut of goods is raising global risks

Article by: KEITH BRADSHER , New York Times
Updated: August 23, 2012 - 11:36 PM

Slowdown in world's second-largest economy could spiral abroad.

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Bags of toys in storage filled a shop in Guangzhou, China, part of the inventory overhang.

Photo: Forbes Conrad, New York Times

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

The glut of steel, household appliances, 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 led manufacturers to redouble efforts to export what they cannot sell at home.

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 at a time 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.

The severity of China's inventory overhang has been carefully masked by the blocking or adjusting of economic data by the government to prop up confidence in the economy.

But the main nongovernment 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.

"Across the manufacturing industries we look at, people were expecting more sales over the summer, and it just didn't happen," said Anne Stevenson-Yang, the research director for J Capital Research, an economic analysis firm in Hong Kong. With inventories very high and factories now cutting production, she added, "Things are kind of crawling to a halt."

Chinese export growth, a mainstay of the economy for the past three decades, has slowed to a crawl. Imports have also practically stopped growing. Real estate prices have slid sharply, and money has been leaving the country through legal and illegal channels.

Wu Weiqing, the manager of a faucet and sink wholesaler, said that his sales had dropped 30 percent in the past year and he has piled up extra merchandise. Yet the factory supplying him is still cranking out shiny kitchen fixtures at a fast pace. "My supplier's inventory is huge because he cannot cut production -- he doesn't want to miss out on sales when the demand comes back," he said.

Part of the problem is that Chinese leaders have decided to put quality-of-life concerns ahead of maximizing economic growth when it comes to two of the country'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 result has been a steep decline in residential real estate prices, a sharp fall in housing construction and widespread job losses among construction workers.

At the same time, the Chinese auto industry, which has grown in the past decade to challenge to Detroit, is starting to look more like Detroit in its dark days in the 1980s. Inventories of unsold cars are soaring at dealerships. Quality problems are emerging. And buyers are becoming disenchanted as car salesmen increasingly resort to hard-sell tactics to clear clogged dealership lots. So many auto factories have opened in China in the past two years that its industry is operating only at about 65 percent of full capacity -- far below the 80 percent usually needed for profitability.

"I worry that we're going down the same road the U.S. went down, and it takes quite some time to fix that," said Geoff Broderick, the general manager of Asian operations at J.D. Power & Associates.