China's grand expansion

Obsession with steel size and global power may prove to be the Achilles Heel of the Chinese Communist Party's (CCP) vision of China becoming the factory of the world and the dominant global economic, industrial and military powerhouse.

The perception that China's export-reliant economy and insatiable demand for resources will provide the energy to drive the global economic recovery may be ill founded, especially for resource export reliant countries. The objective of the stimulus plan was to spend US$586 billion by the end of 2010 and raise China's GDP (gross domestic product) by 0.1 per cent.

While infrastructure spending exceeded the target and elevated GDP to double digit growth, it also exposed banks, local government and the state to unprecedented levels of questionable quality debt.

Debt bubbles

The emerging debt bubbles of the related steel, property, local government and state banks are shaping as the greatest challenge to China's economy and the CCP as government.

The CCP claims its economic management is responsible for "China the economic miracle", provider of employment, raising the rural and urban poor out of poverty, and elevating China to its rightful place as the major global power.

Scrutiny of China's export industries, state v private sector, and net contribution to GDP and taxation revenues, however, questions those claims. Two of Mao's three generals are under serious threat: General Steel and General Coal.

Steel

Before the global financial crisis, serious industrial overcapacity was an emerging problem in various sectors, especially steel.

Beijing's infrastructure-driven stimulus spending created unprecedented demand for steel, cement, copper, heavy equipment and motor vehicles and is planned to continue to the end of 2010.

The steel content in the stimulus spending was a major contributor to China recording recent double-digit GDP growth figures. Major steel state owned enterprises (SOEs) received a substantial share of the US$3 billion in discount loans and special funding for technology upgrades.

Four sectors of the ambitious infrastructure program have insatiable appetites for steel:

• railways;
• energy;
• urbanisation; and
• construction.

In 2009, China's steel production capacity rose 13.5 per cent, reaching 567.8 million tones. That 50 million tons in expansion produced an excess capacity of 20 million tons. By early 2010, China's total capacity rose to 660 million tons and January steel production reached 47 per cent of global production. Overcapacity could reach 20 million tonnes during 2010.