Chinese Equipment Makers Struggle With Slumping Economy
The Chinese yuan tumbled 3.8% after Chinese officials announced they were devaluing their currency on August 12, and further drops are expected. But for Chinese exporters, including those dealing in construction equipment, these currency shifts may help them compete on price in the global market.
"It is true that a weaker currency could drive Chinese exports higher," concedes Benjamin Duyck, director of market intelligence at the Association of Equipment Manufacturers. Meanwhile, U.S. equipment exporters are struggling to raise exports at a time when the dollar is relatively strong.
The devaluation is a bright spot for Chinese manufacturers, which have been struggling with both a weakening economy and a stock market crash this summer that wiped out 30% of China's stock valuations—the equivalent of $4 trillion.
The stock crash hit construction companies particularly hard, who were already reeling under a government-directed reduction in property prices and a mounting debt problem.
The real-estate sector comprises more than 25% of China's gross domestic product, and a nearly 3% reduction in GDP has severely hurt the industry. As a result, construction companies are expected to rely more on old or rented machinery instead of buying new, industry sources say.
China's manufacturing sector has suffered the largest blow. The key indicator of manufacturing, the Purchasing Managers Index, sank to 47.8 in July, the lowest level in two years. Factory output has slumped to 47.1, marking a third consecutive monthly drop and the worst result in three-and-a-half years.
The export advantage of a devalued yuan may provide some relief, but China's construction equipment makers continue to face excess capacity of 60% or more. U.K.-based analyst Off-Highway Research estimates an annual excess capacity of wheel loaders in China at 255,000 units, against a "theoretical capacity" of 420,000. In the case of excavators (crawled, wheel and mini), the theoretical capacity is 548,000 units, and excess capacity is now 129,500 units.
The construction industry, and its equipment-manufacturing cousin, have also come up against the government's highly publicized drive against corrupt practices and environmentally hazardous projects.
The country's ministry of environmental protection recently said it has rejected 17 construction projects worth a total of $17.6 billion either because they endangered the environment or they involved corrupt deals among officials.
Off-Highway Research also predicts a sharp fall in sales of China's construction machinery, to $13 billion this year from $17 billion in 2014. This follows already sliding sales figures of $36 billion in 2011, $24 billion in 2012 and $22 billion in 2013.
