2009-02-26

Overcapacity in the transport sector

中国中铁中标226亿元工程
China Railway wins $3.3 bln contracts as gov boosts spending


Regarding the rail contract, here's Ambrose Evans-Pritchard on the dangers of malinvestment leading to deflation:
China nears deflation trap as rail freight collapses
Railway freight in China’s Shanghai region plunged 31pc in January and industrial production fell 12pc, dashing hopes that Beijing’s stimulus policies will soon begin to fuel recovery.

Building more rail as part of a stimulus package will cause rates to fall further. If the government wants low rates, they are pursuing the proper course.
“External demand is shrinking, some sectors have overcapacity, and urban unemployment is rising. Downward pressure on economic growth is increasing. There exists a big risk of deflation,” said the bank. Factory gate inflation has dropped to minus 3.3pc.

There's nothing the country can do about the slack demand from the U.S. and Europe except to accept that demand isn't coming back for years.
The figures tally with the catastrophic drop in exports from Japan, Korea, Taiwan, and Singapore over the last three months. These countries are an integral part of the supply chain for Chinese industry.

Taiwan said yesterday that export orders to China fell 55pc in January, suggesting that Asian trade will remain trapped in depression deep into Spring. The fall in total orders was 41pc, while industrial output fell 43pc.

China is further down the supply chain, at the lower orders of production. We should see these numbers filter through to China in the next couple of months.

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