China Stockpiles Mount

Business, China, Company Strategy, Economics, Japan, US


Source: New York Times


By John Richardson

INVENTORIES of finished goods are mounting in factories across China as manufacturers continue to run hard, according to this New York Times article – perhaps in the hope that in 3-6 months time, everything will be alright again.

“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,” Wu Weiqing, the manager of a faucet and sink wholesaler, told the NYT.

Here is another explanation, from Forbes:

“It is more likely that Wu’s supplier has been told by the local government to keep production lines going no matter what.

“And why would city and municipal officials do that? For one thing, local officials don’t want to deal with unrest that idle workers cause. Moreover, lower-level cadres are judged by growth in their districts. The value of a sink sitting in a factory’s inventory, even if never sold, is counted as gross domestic product.”

Carmakers have solved their inventory problems by forcing dealers to take autos they cannot sell, adds Forbes.

“Inventories at the dealers in the first six months of the year increased by 900,000 units. These retailers are now carrying 2.2 million cars in their showrooms. Even with dealers taking unneeded cars, the manufacturers are operating at around 65 percent of capacity when 80 percent is thought to be the breakeven point,” continues the magazine.

And yet, underlining our argument about the difficulties in changing China’s investment-focused growth model, auto production capacity keeps on increasing.

For example, over the next three years, auto production is set to rise by an amount equal to all the factories in Japan, and nearly all the factories in the US, says the central government’s National Development and Reform Commission.

And what is Beijing’s solution to the problem? Manipulate inventory data, according to both the NYT and Forbes as politicians try to understate the scale of the problem. This might well be motivated by the desire to keep a lid on social unrest during the leadership transition.

But the HSBC Flash PMI for August shows that inventories climbed by their fastest rate since the survey began in April 2004.


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