China hopes Silk Road plan will sew up supply glut

XUZHOU (China) • Two years after China unveiled a sweeping plan to rebuild Silk Road trade links with Europe and Asia, machinery maker XCMG Group has opened a factory in Uzbekistan, sent 300 staff abroad and set ambitious goals to grow overseas.

XCMG's foreign venture piggybacks on China's bold scheme to extend its global influence through financing infrastructure projects in 65 nations and win new markets for companies weighed down by overcapacity at home.

"This is China's grand strategy," said Mr Hanson Liu, assistant president at Xuzhou Construction Machinery Group, which aims to grow overseas income from 15 per cent of total revenue last year to more than 30 per cent in the next five years. "It's like how a person in a village has gotten rich and wants to fix roads and build power points and street lamps for the neighbourhood," he added.

Stretching from Hungary to Indonesia, Beijing estimates its much-hyped "One Belt, One Road" initiative will add US$2.5 trillion (S$3.56 trillion) to China's trade in the next decade, more than the value of its exports in 2013 when it was the world's top exporter.

While it is too early to assess whether that lofty goal will be realised, the drive offshore is already proving to be a boon for firms like XCMG, whose listed unit, XCMG Construction Machinery, has posted three years of declining sales.

After years of breakneck growth, the extent of China's overcapacity problem is becoming clear as waning domestic demand and efforts to retool the economy slows growth to a pace dubbed by President Xi Jinping as the "new normal". That has exposed glaring supply gluts in the steel, coal and cement sectors, where factories have the capacity to produce up to 30 per cent more than current demand, official data showed.

There is evidence, from companies and data, that some effect is already being felt.

Auditing firm PwC estimates more than US$250 billion worth of projects, from railways to power plants, have been contracted since "One Belt, One Road" was announced in 2013.

Buoyed with a US$50 billion credit line from the Bank of China for such projects, China's largest cement maker, Anhui Conch, is building at least six cement plants in Indonesia, Vietnam and Laos.

Steel firms are also looking to ramp up foreign acquisitions to move capacity to regions such as South-east Asia and Eastern Europe. But others are struggling to gain a foothold.

Eight steel mills in Hebei said the scheme was not increasing demand enough to solve their biggest problem of low prices caused by excess supply. "There has been a little impact from 'One Belt, One Road', but it is not evident," said a manager at one steel mill.

Local brokerages estimate that up to 1.5 trillion yuan (S$336 billion) in state funding has been committed to the initiative so far in investments, grants and loans.

That's about a 20th of the stimulus spending unleashed by Beijing in response to the global financial crisis, said IHS senior economist Brian Jackson.

He added it was "a bit of fantasy" to believe the scheme could be a cure for China's deep structural problems of overcapacity, created in part by that earlier splurge.


A version of this article appeared in the print edition of The Straits Times on September 08, 2015, with the headline 'China hopes Silk Road plan will sew up supply glut'. Print Edition | Subscribe