While the Chinese economy is still benefiting from its rising status as a global manufacturing centre, warning lights have begun to flash about overcapacity in the domestic market.

The latest alarms show the problem might be more severe than most businesses have expected.

Last Sunday, an official from the National Development and Reform Commission pointed out that the country's car-making capacity will outgrow domestic demand by more than 100 per cent by 2010. It is estimated that car sales in China will reach about 9 million then, but the output could be 20 million.

No doubt the forecast sent fresh shivers down the spines of domestic automakers, who are already caught in the quagmire of increasingly fierce competition.

A rash of car purchases by Chinese individuals a few years ago have persuaded most global auto giants to pin their hopes on the Chinese market. But the sudden slowdown of car sales since last year, largely due to worsening traffic and rising oil prices, have made many of their ambitious capacity-expansion plans look like pipe dreams.

Weakening demand and surging domestic supply will inevitably lead to price wars which most automakers in the country have tried to avoid.

Though some have recently scaled down their investment for the coming years, the forecast for the industry's output implies that most automakers are still reluctant to acknowledge reality.

It is true that China has the world's largest population. The theoretical potential of the Chinese market is therefore tremendous.

But the current Chinese conditions of a widening urban-rural income gap, poor urban planning and emerging problems of resources and environment all mean the market now, and in the foreseeable future, is not as huge as predicted.

The Chinese authorities have keenly realized the necessity to boost domestic consumption, especially rural consumption, to sustain the country's economic growth. But this arduous work will not be done overnight. Hence, foreign investors should better align their pace with the country's progress.

For domestic industrial enterprises, looming overcapacity means a serious threat to survival. As China's trade surplus rockets, trade tensions will make it more difficult for them to export when the domestic market is oversupplied.

Latest statistics indicate that the capacity of the domestic steel sector will exceed the demand by at least 100 million tons this year.

The country's ongoing urbanization and industrialization promise a steady growth in the demand for steel.

Nevertheless, breakneck investment growth in the steel sector, as the predicted overcapacity reflects, is just too short-sighted.

In addition, there is the structural problem of too many small and low-end producers in the sector, while prevailing ignorance of environmental costs will expose domestic steel producers' profitability to the country's aggressive environment protection strategies.

In the market, on the one hand, their growing appetite for iron ore will further push up the latter's price. On the other hand, rising supplies and weakening demand, for example, from major clients like automakers, are expected to lower steel prices.

The country released its first steel industry policy in July this year to rein in overcapacity and optimize output mix. Yet, the current situation provides no optimism for its implementation.

Besides, the concurrence of overcapacity in more than one domestic industry requires more comprehensive thinking and regulation by policy-makers.