XING DANWEN FOR TIME

Brand new Chery automobiles await shipment in China's Anhui province

Too Much, Too Soon?
	China is making more cars, TVs and washing machines than it can consume. Eventually, this glut could swamp the world
	By Matthew Forney | Xi'an

Posted Monday, November 17, 2003; 21:00 HKT
Old Chinese bomb factories never die. They just become car plants. At least that's what has happened at Qin Chuan in the northern city of Xi'an. The aging state-owned enterprise, which a decade ago made 130-mm artillery shells, now houses assembly lines that stamp out a boxy, four-door hatchback with a .8 liter engine, called the Flyer. Last year it built just 17,000 of the underpowered, Chinese-designed vehicles. Many went to taxi companies that were encouraged by provincial officials to buy them, but that doesn't dismay factory officials. China's car market is booming. In February, a Shenzhen-based maker of lithium batteries bought the Flyer factory. Although the new owner, called BYD (acronym for Brings You Dollars), has no experience building cars, it still plans to invest a war chest raised on the Hong Kong stock exchange to build a new facility that will start producing a family of Flyers as early as next year. "Once we're established," says Liu Zhenyu, the factory's general manager, "we'll use our batteries to make electric cars."

BYD's business plan might sound more credible if so many other companies did not have similar aspirations. There's no question that demand for cars is zooming. Purchases of passenger cars in China surged last year and rose 69% through the first nine months of this year, making China the fourth largest car market in the world behind Germany and signaling that the mainland's consumer culture is finally reaching critical mass. But the country already has more than 200 carmakers, ranging from creaky Communist-era holdovers to former washing-machine manufacturers to modern joint ventures run by Volkswagen, General Motors (GM), Ford and Honda—and almost all of them have responded to growing demand with massive capacity expansion programs. The accounting firm KPMG predicts that within two years China will be capable of building 4.9 million sedans a year—that's roughly equal to the output of Germany, and will outstrip even the mainland's fast-growing appetite for personal transport by 2.3 million cars a year.

It's a recipe for glut that could reverberate around the globe, and auto manufacturing isn't the only sector in China that appears to be careening toward trouble. The country's white-hot economy (GDP is on track to reach 9% growth this year) is attracting record amounts of investment in new factories across the mainland's industrial belt. Even though the country's emerging middle class pushed retail sales up 8.6% in the first three quarters of 2003, industrial output has expanded at rates up to 17.2% in October compared with a year earlier. Mobile phones, metals, clothes, refrigerators and just about anything that can be forklifted out of a factory is running into oversupply. When too many factories make too many goods chasing too few buyers, the results are invariably unpleasant: deflation, widespread business failure, layoffs, loan defaults and shaky banks. And with the rest of Asia retooling their economies to supply the China surge, Beijing won't be facing its problems alone. "Overinvestment will lead to a supply shock that will affect the whole world," predicts Dong Tao, chief Asia economist for Credit Suisse First Boston.

Tao might appear to some as a killjoy. After all, China at the moment is the star on the world economic stage; the country's soaring need for a host of goods, including agricultural products and commodities such as oil, iron ore and aluminum, is a major contributor to global economic recovery. China is poised this year to pass Japan as the world's third largest importer, and its economy has become potent enough to threaten even the mighty U.S.—the mainland's surging exports to America put China on track for a massive $130 billion trade imbalance that has prompted members of Congress to call for punitive tariffs. Fears that China is taking U.S. manufacturing jobs has become a front-burner political issue.

Those closest to the gears of the global economy were among the first to notice China's growing prominence. Last winter, a broker in London named Albert Stahl watched the spot-market price for cargo-vessel leases rise to $22,000 a day for a ship big enough to transport iron ore. He assumed the spike was due to the impending Iraq war. But through the summer the price kept increasing; shipowners stopped giving quotes in expectation of prices jumping again the following day. Then Stahl began hearing reports of vessels the size of three soccer fields anchored off the Chinese coast for up to two weeks waiting for a berth—sometimes paying $100,000 a day for the privilege. Finally, he pieced it together. "There's a shortage of available ships in the world because of congestion in China, and nobody knows how to deal with it," says Stahl, a director at CTI Transport and Logistics. "Maybe someone will build more ships."

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