[Watermoon]

After three decades of torrid growth, China is encounterin
g an unfamiliar problem with its newly struggling economy: a huge buildup of u
nsold goods that is cluttering shop floors, clogging car dealerships and filli
ng factory warehouses.
The glut of everything from steel and household appliances to cars and apartme
nts is hampering China’s efforts to emerge from a sharp economic slowdown. It
has also produced a series of price wars and has led manufacturers to redoubl
e efforts to export what they cannot sell at home.
The severity of China’s inventory overhang has been carefully masked by the b
locking or adjusting of economic data by the Chinese government — all part of
an effort to prop up confidence in the economy among business managers and in
vestors.
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 mon
th since the survey began in April 2004. The previous record for rising invent
ories, 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 s
ales 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 Hon
g Kong. With inventories extremely high and factories now cutting production,
she added, “Things are kind of crawling to a halt.”
Problems in China give some economists nightmares in which, in the worst case,
the United States and much of the world slip back into recession as the Chine
se economy sputters, the European currency zone collapses and political gridlo
ck paralyzes the United States.
China is the world’s second-largest economy and has been the largest engine o
f economic growth since the global financial crisis began in 2008. Economic we
akness means that China is likely to buy fewer goods and services from abroad
when the sovereign debt crisis in Europe is already hurting demand, raising th
e prospect of a global glut of goods and falling prices and weak production ar
ound the world.
Chinese export growth, a mainstay of the economy for the last three decades, h
as slowed to a crawl. Imports have also practically stopped growing, particula
rly for raw materials like iron ore for steel making, as industrialists have l
ost confidence that they will be able to sell if they keep factories running.
Real estate prices have slid sharply, although there have been hints that they
might have bottomed out in July, and money has been leaving the country throu
gh a variety of legal and illegal channels.
Interviews with business owners and managers across a wide range of Chinese in
dustries presented a picture of mounting stockpiles of unsold goods.
Business owners who manufacture or distribute products as varied as dehumidifi
ers, plastic tubing for ventilation systems, solar panels, bedsheets and steel
beams for false ceilings said that sales had fallen over the last year and sh
owed little sign of recovering.
“Sales are down 50 percent from last year, and inventory is piled high,” sai
d To Liangjian, the owner of a wholesale company distributing picture frames a
nd cups, as he paused while playing online poker in his deserted storefront he
re in southeastern China.
Wu Weiqing, the manager of a faucet and sink wholesaler, said that his sales d
ropped 30 percent in the last year and he has piled up extra merchandise. Yet
the factory supplying him is still cranking out shiny kitchen fixtures at a fa
st pace.
“My supplier’s inventory is huge because he cannot cut production — he does
n’t want to miss out on sales when the demand comes back,” he said.
Part of the issue is that the Chinese government’s leaders have decided to pu
t quality-of-life concerns ahead of maximizing economic growth when it comes t
o two of the country’s largest industries: housing and autos.
Premier Wen Jiabao has imposed a strict ban on purchases of second and subsequ
ent homes, in the hope that discouraging real estate speculation will improve
the affordability of homes. The ban has resulted in a steep decline in residen
tial real estate prices, a sharp fall in housing construction and widespread j
ob losses among construction workers.

At the same time, the municipal government in Guangzhou, one of China’s large
st cities, has sharply reduced this summer the number of new car registrations
it allows so as to reduce traffic congestion and air pollution.

Municipal officials from all over China have been flocking to Guangzhou to ask
for details. Xi’an, the metropolis of northwestern China, has already announ
ced this month that it will limit car registrations, although it has not settl
ed on the details.
The Chinese auto industry has grown tenfold in the last decade to become the w
orld’s largest, looking like a formidable challenger to Detroit. But now, the
Chinese industry is starting to look more like Detroit in its dark days in th
e 1980s.
Inventories of unsold cars are soaring at dealerships across the nation, and t
he Chinese industry’s problems show every sign of growing worse, not better.
So many auto factories have opened in China in the last two years that the ind
ustry is operating at only about 65 percent of capacity — far below the 80 pe
rcent usually needed for profitability.
Yet so many new factories are being built that, according to the Chinese gover
nment’s National Development and Reform Commission, the country’s auto manuf
acturing capacity is on track to increase again in the next three years by an
amount equal to all the auto factories in Japan, or nearly all the auto factor
ies in the United States.
“I worry that we’re going down the same road the U.S. went down, and it take
s quite some time to fix that,” said Geoff Broderick, the general manager of
Asian operations at J. D. Power & Associates, the global consulting firm.
Automakers in China have reported that the number of cars they sold at wholesa
le to dealers rose by nearly 600,000 units, or 9 percent, in the first half of
this year compared to the same period last year.
Yet dealerships’ inventories of new cars rose 900,000 units, to 2.2 million,
from the end of December to the end of June. While part of the increase is sea
sonal, auto analysts say that the data shows that retail sales are flat at bes
t and most likely declining — a sharp reversal for an industry accustomed to
double-digit annual growth.
“Inventory levels for us now are very, very high,” said Huang Yi, the chairm
an of Zhongsheng Group, China’s fifth-largest dealership chain. “If I hadn’
t done special offers in the first half of this year, my inventory would be ev
en higher.”
Manufacturers have largely refused to cut production, and are putting heavy pr
essure on dealers to accept delivery of cars under their franchise agreements
even though many dealers are struggling to find places to park them or ways to
finance their swelling inventories. This prompted the government-controlled C
hina Automobile Dealers Association to issue a rare appeal to automakers earli
er this month.
“We call on manufacturers to be highly concerned about dealer inventories, an
d to take timely and effective measures to actively digest inventory, especial
ly taking into account the financial strain on distributors, as manufacturers
have to provide the necessary financing support to help dealers ride out the s
torm,” the association said.
Officially, though, most of the inventory problems are a nonissue for the gove
rnment.
The Public Security Bureau, for example, has halted the release of data about
slumping car registrations. Data on the steel sector has been repeatedly revis
ed this year after a new method showed a steeper downturn than the government
had acknowledged. And while rows of empty apartment buildings line highways ou
tside major cities all over China, the government has not released information
about the number of empty apartments since 2008.
Yet businesspeople in a wide range of industries have little doubt that the Ch
inese economy is in trouble.
“Inventory used to flow in and out,” said Mr. Wu, the faucet and sink sales
manager.“Now, it just sits there, and there’s more of it.”

[Igor Antunov]

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