Understanding China's Economic Overcapacity Challenges

"The Chinese economy is stuck. Following Beijing’s decision, in late 2022, to abruptly end its draconian “zero COVID” policy, many observers assumed that China’s growth engine would rapidly reignite. After years of pandemic lockdowns that brought some economic sectors to a virtual halt, reopening the country was supposed to spark a major comeback. Instead, the recovery has faltered, with sluggish GDP performance, sagging consumer confidence, growing clashes with the West, and a collapse in property prices that has caused some of China’s largest companies to default. In July 2024, Chinese official data revealed that GDP growth was falling behind the government’s target of about five percent. The government has finally let the Chinese people leave their homes, but it cannot command the economy to return to its former strength. To account for this bleak picture, Western observers have put forward a variety of explanations. Among them are China’s sustained real estate crisis, its rapidly aging population, and Chinese leader Xi Jinping’s tightening grip on the economy and extreme response to the pandemic. But there is a more enduring driver of the present stasis, one that runs deeper than Xi’s growing authoritarianism or the effects of a crashing property market: a decades-old economic strategy that privileges industrial production over all else, an approach that, over time, has resulted in enormous structural overcapacity. For years, Beijing’s industrial policies have led to overinvestment in production facilities in sectors from raw materials to emerging technologies such as batteries and robots, often saddling Chinese cities and firms with huge debt burdens in the process. Simply put, in many crucial economic sectors, China is producing far more output than it, or foreign markets, can sustainably absorb. As a result, the Chinese economy runs the risk of getting caught in a doom loop of falling prices, insolvency, factory closures, and, ultimately, job losses. Shrinking profits have forced producers to further increase output and more heavily discount their wares in order to generate cash to service their debts. Moreover, as factories are forced to close and industries consolidate, the firms left standing are not necessarily the most efficient or most profitable. Rather, the survivors tend to be those with the best access to government subsidies and cheap financing." #china #economy #trade #exports https://lnkd.in/gJTU6ku2

It isn't easy to define "overcapacity," because it is unclear what the "over" is in comparison to. Should China's industrial scale, and new investment, be benchmarked against its current growth? Against the world's growth? Or against China's future growth? What is clear is that since 2021, Chinese companies have invested more in manufacturing than usual, even though domestic demand and exports have often been weak. China is the world's largest steel producer and consumer. Its exports tend to surge when the property market runs into trouble. But the nation is still using a higher percentage of its steel production domestically than it did at the height of the last big real-estate downturn in 2015, and during the global financial crisis in 2009. Profit margins for steel look much worse than in 2015, though, in part because of pricey iron ore. That means steelmakers have a strong incentive to find higher prices abroad. For batteries, the global supply-and-demand balance looked better until recently. But there are now clear warning signs ahead. Export prices of Chinese lithium-ion batteries have trended sharply down since late 2023 as global automakers tapped the brakes on the EV revolution. Meanwhile, Chinese manufacturers are preparing a historic surge of supply, despite recent guidelines from Beijing aiming to restrict investment in low-end battery capacity. Goldman Sachs last year estimated that Chinese EV battery production capacity, adjusted for yield, will reach around 1,000 gigawatt-hours by 2025—roughly twice the bank's forecast for Chinese demand. Goldman expects battery factory utilization rates outside China to fall from nearly 100% in 2022 to around 80% by 2026. #Economy #Trade

Insightful Article from Foreign Affairs on "China’s Real Economic Crisis": China's economic challenges stem from its long-standing industrial policy: it emphasizes production over consumption. This approach has led to significant overcapacity in sectors such as steel, electric vehicles, and solar panels, resulting in falling prices, increasing debt, and factory closures. While this model has historically driven rapid growth, it now poses serious risks to both China’s domestic economy and global markets by depressing prices and escalating trade tensions. Beijing’s reluctance to move away from this production-centric strategy is closely tied to maintaining political control. By ensuring industries remain dependent on state-backed financing, the government secures loyalty from business elites. However, this approach is becoming increasingly unsustainable, deepening economic inefficiencies and straining international trade relations. The West's response of imposing trade barriers may not address the underlying issues and could even push China to reinforce its industrial policies. Read: https://lnkd.in/eJ3kCjCM

China’s Factories Are Drowning in Debt—And Trump’s Trade War Just Made It Worse Overcapacity and weak demand hit profits at more Chinese companies China’s industrial sector is bleeding cash as overcapacity, weak demand, and plunging profits create a financial squeeze. Nearly a quarter of Chinese A-share companies, publicly traded firms on China's Shanghai and Shenzhen stock exchange, reported losses in Q3 2024, with profit margins at their lowest since 2009. A state-driven push to dominate key industries, like solar energy and steel, has led to price wars, forcing companies to slash costs and delay investments. With the Trump administration imposing new 10% tariffs on Chinese goods, manufacturers face even greater pressure. While Beijing has resisted sweeping stimulus, investors and analysts warn that China’s biggest challenge isn’t tariffs—it’s reigniting domestic consumption in an economy struggling under real estate woes, rising debt, and deflation. My Take China’s economic slowdown isn’t just about trade tensions—it’s a structural reckoning. The aggressive state-backed push into key industries has fueled a race to the bottom, where companies can’t compete on value, only on price. The real test isn’t whether China weathers U.S. tariffs, but whether it can rebalance its economy before overcapacity and debt drag it down further. #ChinaEconomy #TradeWar #Tariffs #Manufacturing #SupplyChain #SolarIndustry #GlobalMarkets #EconomicTrends Link to article: https://lnkd.in/eVuKZQgC Credit: WSJ This post reflects my own thoughts and analysis, whether informed by media reports, personal insights, or professional experience. While enhanced with AI assistance, it has been thoroughly reviewed and edited to ensure clarity and relevance. Get Ahead with the Latest Tech Insights!  Explore my searchable blog: https://lnkd.in/eWESid86

Decoding China’s Industrial Policies: Insights from 3 Million Government Documents 🚀. The study itself is interesting which I summarise below - what is even more interesting is how LLMs will unlock government and regulaotry datasets and make them accessible and cheap! Researchers analyzed over 3 million Chinese government documents from 2000 to 2022, identifying 770,000 industrial policies using Large Language Models (LLMs). Deep Understanding: As industrial policies gain global traction—from the US CHIPS Act to India’s “Atmanirbhar Bharat”—understanding their formulation and impact is crucial. China serves as a pivotal case study due to its extensive and varied policy landscape. 📌 Detailed Takeaways: Targeted Industries: Manufacturing and production-related services dominate, accounting for 32% and 45% of policies respectively. Policy Tools: Fiscal subsidies are the most common tool (43%), but over half of the policies use alternative tools, highlighting diverse approaches. Regional Variation: More developed regions deploy more industrial policies, aligning with local comparative advantages. Policy Evolution: Tools evolve with industry development phases, from entry subsidies to R&D support. Impact on Firms: Policies boost firm entry and investment, though effects on productivity vary based on tool implementation. Policy Diffusion: Early adopters in developed regions influence nationwide policy trends, but imitation can lead to inefficiencies like overcapacity. ⚖️ Implications: While China’s industrial policies align with economic theories by targeting sectors with comparative advantages, the study uncovers challenges such as regional overcapacity and the mixed effectiveness of different policy tools. 🔗 References: Fang, H., Li, M., & Lu, G. (2024). Decoding China’s Industrial Policies. Working Paper #IndustrialPolicy #ChinaEconomy #EconomicGrowth #PolicyAnalysis #LLM #Innovation #RegionalDevelopment #EconomicResearch