China has swamped the world with shipbuilding capacity without an eye either on the global picture or on profitability. Even without the global economic recession, the shipbuilding industry was heading for an even deeper trough than the early 1980s plunge. Then, the heat was felt mainly by shipowners who had over-ordered as a result of easy financing when trade was growing and Korea competing with Japan for new orders.

This time around the owners – or most of them – are in deep trouble thanks to over-ordering, particularly of container vessels and bulk carriers. However the situation of the yards could be even more dire, particularly for those mainland ones which are still adding capacity, have limited order backlogs and lack the technology to build some of the more sophisticated ships such as LNG carriers.

A shipbuilding boom seems incongruous in the face of the global macroeconomic picture. Lloyd's Marine Intelligence Unit reported in August that nearly 10 percent of the world's merchant fleet is idle because of the collapse in global trade. The Baltic Dry Index fell by more than 90 percent in the second half of last year and, although it has recovered slightly, it remains at about 25 percent of its peak. Philippe Louis Dreyfus, the outgoing president of the European Community Shipowners' Associations, has called for the industry to scrap significant bottoms to shrink the surplus tonnage. The only bright spot China's continuing appetite for Australian iron oil and coal.

China has come from almost nowhere a decade ago to take about 35 percent of ship orders on hand and a higher and growing building capacity. Four years ago it was estimated that Chinese capacity would reach 40 million deadweight tons a year by 2010. But already capacity is put at 66 million dwt, double current production levels, and could reach 80-90 million in 2010 if current projects are completed – which seems likely as government stimulus packages push finance for every conceivable project, viable or not.

It also looks likely that the yards are going to carry on building even in the face of order cancellations and slumping ship prices. The reason is that money will continue to be available to keep yards busy and workers in work. It helps of course that the giant umbrella of the China State Shipbuilding Corp is a central state enterprise. Funding will also likely continue to be available from provincial and even city governments which have been behind part of the capacity surge.

This has created a particular problem for the non-state Korean yards, headed by Hyundai and Daewoo, which compete most directly with China. Currently they have, according to Morgan Stanley research, 176 million tons of orders on hand, or slightly more than China. But the question of who is going to finance the estimated $90 billion said to be needed to finance just the $165 billion of bulk carriers on order, let alone container vessels which face equally daunting problems?

For sure, China's fast expanding merchant fleet will absorb some of the extra capacity and the slump will enable speeding up of replacement of single-hull tankers and some older vessels with high operating costs. But the willingness of the likes of Cosco – big parts of which are listed on stock exchanges – to carry the shipbuilders' burden when their own profits have been plunging is limited. Cosco's Singapore arm has already cancelled several bulk carrier orders.

Logic suggests that capacity shrinkage on a massive scale and refusal of cheap credit to keep yards win business are necessary to bring shipbuilding and shipping back into equilibrium. But China is unlikely to take a lead and Korean taxpayers could well also have to take a hit as the government is pressed to help the yards with cheap financing.

Protectionist reality, notably in China, will likely ensure that they keep building even as shipping companies walk away from orders they are neither willing nor able to finance.

Whichever way one looks at it, subsidies are going to make the ship price slump far longer than it would have been if Chinese yards were subject to market forces. For sure, China was always going to succeed in increasing its share of global ship demand, mostly at the expense of Japan and Korea, as its skills improved while its labor costs remained low. However, if ever there was an example of China's over-reach and use of government money to grab global market share, this is it.