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Manufacturing growth set to slow down

By Chen Yang (Global Times)

08:40, September 06, 2012

The output of China's manufacturing sector has already become the world's largest and a decline in its growth rate is inevitable amid weakening global demand, the Ministry of Industry and Information Technology (MIIT) said Wednesday.

The country's industrial output is expected to grow at 10 percent in 2012, down from 13.9 percent in 2011, the ministry said in a report.

The latest estimate was 1 percentage point lower than its previous estimate made in February.

"Industrial production came in below 10 percent (very rare in the past decade) over April-July and it is expected to be 9.3 percent in August," Chris Leung, senior economist at DBS Bank (China), said in a research note sent to the Global Times.

"The primary economic weakness is clearly in the export-related manufacturing sector, and that naturally calls for a weaker currency. As a result, 0.7 percent depreciation of the yuan against the US dollar year to date is a logical policy response," Leung noted.

China is the world's largest producer of 220 kinds of industrial products ranging from steel to cement. But many industries, including some strategic emerging sectors, are faced with weakening demand and overcapacity problem, the report said.

For instance, the steel and cement industries have accumulated excess capacity of 160 million tons and 300 million tons, respectively. Only 65 percent of the capacity in the aluminum smelting industry has been utilized, according to data from the MIIT.

Strategic emerging industries such as polycrystalline silicon, wind turbines and new materials also face a potential overcapacity problem, the ministry said.

"The overcapacity problem in the manufacturing sector began to emerge in the early 2000s, and capacity was expanded significantly following the government's stimulus package during the global financial crisis in 2008," Luo Zhongwei, a researcher at the Institute of Industrial Economics under the Chinese Academy of Social Sciences, told the Global Times.

The country's manufacturing industry will need to reduce inventory in the short term and eliminate excessive capacity in the long term, so the industry's growth rate will face downward pressure, Fangzheng Securities Co said in a research report published Wednesday.

"Demand from the US and European markets might not pick up until the second half of 2013, while boosting domestic demand will take long time and requires improvement of the social welfare system," Luo said.

Companies in sectors with large overcapacity have reported sharp declines in profits. For example, major companies in the ferrous metal smelting and rolling sector posted a combined 60.8 percent year-on-year slump in profits for the first seven months of 2012.

Luo noted that the overcapacity problem mainly exists in low-end manufacturing sectors, and enterprises should put more efforts into technology innovation.

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