Beijing’s planners are confused again

Few politicians ever deserve praise for foresight. People in Beijing seem to have even less capacity to see the future than most. Faced with the economic drag of China’s ongoing property crisis, depressed consumers and discouraged private business owners, they threw the weight of China’s planning behind manufacturing, especially areas they called “new productive forces.” semiconductors, for example, electric vehicle (EV) batteries, solar and wind generation. Because China is still a very command economy, money flowed as the planners directed. No one seems to have considered where the produce from this collection would go. The sluggish domestic economy has no way of absorbing it, and the developed West was and is, for a variety of reasons, resistant to trade with China. Now China has more capacity in these areas than “anyone” can use. That’s not much help for an economy that already has a lot of problems.

The United States, Europe and Japan have all drawn attention to this worrying overcapacity. The European Union (EU) has cited it as the reason China is dumping cheap EVs on European markets, so heavily, in fact, that the EU is deciding to impose high tariffs on these products. Unsurprisingly, China’s leadership has denied that any excess capacity exists. According to the latest statements by President Xi Jinping, “there is no so-called Chinese overcapacity problem”. If Chinese electric vehicles are flooding into Europe, he argues, it is simply because they are better value for money and thus more competitive than Western ones. product. He may be right about the competition from Chinese electric vehicles, but that has little to do with overcapacity. And at this point the flow of information coming out of China says his denial is wrong.

Even steel, not one of the designated “new productive forces,” shows signs of oversupply. Steel production has grown far beyond domestic needs. In 2001, China’s steel production was almost equal to domestic use. By 2023, steel production exceeded domestic uses by 5% and this year looks set to exceed domestic uses by 8%. Of course, much of this change reflects the impact of the housing crisis and the construction collapse. However, it is an exaggeration. With solar panels, which is one of the areas selected for special support, the surplus is much greater. Domestic installations have indeed increased from a rate of 50 gigawatts last year to a possible 90 this year. But production has far exceeded these rates and shows signs of increasing to more than 150 gigawatts this year. It is fair to question where China will sell all these panels and why the planners did not take this into account when they authorized construction.

Other measures, although less direct, tell the same story. Last year, at the start of the “new manufacturing forces” push, investment spending on electrics and EVs was off the charts, rising 40% for the former and 25% for the latter, both far outpacing growth of 5% in production capacity in general. This year, as if to signal that there was never an excuse for that surge, investment spending on electrics and EVs has fallen back to earth and is now running slightly slower than overall manufacturing investment spending overall. But previous spending increases have clearly caused overcapacity. If direct measures are difficult to achieve, the decline in gross manufacturing margins provides evidence. Currently, it is about 2 percentage points below its long-term average.

When China was a fast-growing economy, overcapacity problems would be resolved in just a year or two of demand growth, often less. Otherwise, when China was the workshop of the world, the overcapacity would disappear in no time. But China’s economy is not growing rapidly, nor is China the workshop of the world. Therefore, the mistake with this capacity building will continue for some time and will complicate other problems of the economy. It will take much longer to free China’s economy from imbalance, because the developed West and Japan have withdrawn from trade with China, at least to the extent that they once engaged in it. This is not the first time that Beijing’s planners have exacerbated the country’s economic problems.