Beijing’s Latest Mistake: China’s Excess Manufacturing Capacity

To offset the property crisis and weak domestic demand, Beijing invested in manufacturing capacity. Now, it has too much and no way to use it.CommentaryFaced with the economic drag of China’s ongoing property crisis, dispirited consumers, and discouraged private business owners, Chinese authorities threw the weight of the country’s planning behind manufacturing, especially areas they called “new productive forces.”These included semiconductors, electric vehicle (EV) batteries, solar, and wind generation. Because China is still very much a command economy, money flowed into these areas. No one, it seems, considered where the output from this buildup would go. The sluggish domestic economy could not absorb it, and the developed West was and is resistant to China trade for an array of reasons. Now, China has more capacity in these areas than it—and anyone—can use. That is not much help for the economy.Sources in the United States, Europe, and Japan have all pointed to this troublesome overcapacity. The European Union (EU) sees it as the reason China is dumping cheap EVs on European markets, so severely, in fact, that the EU is setting up to levy hefty tariffs on these products.Unsurprisingly, China’s leadership has denied that any excess capacity exists. According to recent statements by Chinese Communist Party leader Xi Jinping, “there is no so-called problem of Chinese overcapacity.” If Chinese EVs are flooding into Europe, he argues, it is simply because they are better cars and more competitive than the Western product. He may be correct about the competitiveness of Chinese EVs, but that has little to do with overcapacity. And on that point, the flow of information coming out of China says he is wrong.Even areas not designated “new productive forces” show signs of excess. Steel production, for instance, has risen far beyond domestic needs. In 2001, the output of steel in China about equaled domestic use. By 2023, steel output exceeded domestic use by 5 percent, and this year, it seems set to exceed domestic use by 8 percent.Related StoriesTo be sure, much of this reflects the impact of the property crisis and the collapse of construction demand for steel. It is an excess, nonetheless. Solar panels are one of the areas selected for special support, and the excess is much greater there. Domestic installations have indeed jumped from a rate of 50 gigawatts last year to a likely 90 gigawatts this year. However, output has far surpassed these rates and shows signs of rising to more than 150 gigawatts this year. It is fair to question where China will sell all these panels and why the planners failed to consider that when they engaged in the buildup.Other measures, though less direct, tell the same story. Last year, at the start of the “new productive forces” push, investment spending in electrical equipment and EVs leaped off the charts. For the former, such spending rose 40 percent, and for the latter, it rose 25 percent—both far more than the 5 percent increase in manufacturing capacity generally.This year, as if to announce that there never was justification for that increase, investment spending for electrical equipment and EVs has fallen back to Earth and is now running a touch slower than overall investment spending in manufacturing. But the previous spending jumps have clearly made for a capacity excess. If direct measures are hard to come by, the drop in manufacturing’s gross margins gives evidence. At present, it is running some 2 percentage points beneath its long-term average.In a fast-growing economy, as China’s once was, overcapacity problems can find remedies in just one or two years of demand growth, often less. Alternatively, if China were the world’s workshop, as it once was, overcapacity would disappear in short order. However, China’s economy is not growing fast, and China is not the workshop of the world.As a consequence, the mistake with this capacity buildup will persist for some time to come and compound the economy’s other problems. It will take that much longer to rid China’s economy of the imbalance because the developed West and Japan have turned away from China trade, 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. Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.

Beijing’s Latest Mistake: China’s Excess Manufacturing Capacity

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To offset the property crisis and weak domestic demand, Beijing invested in manufacturing capacity. Now, it has too much and no way to use it.

Commentary

Faced with the economic drag of China’s ongoing property crisis, dispirited consumers, and discouraged private business owners, Chinese authorities threw the weight of the country’s planning behind manufacturing, especially areas they called “new productive forces.”

These included semiconductors, electric vehicle (EV) batteries, solar, and wind generation. Because China is still very much a command economy, money flowed into these areas. No one, it seems, considered where the output from this buildup would go. The sluggish domestic economy could not absorb it, and the developed West was and is resistant to China trade for an array of reasons. Now, China has more capacity in these areas than it—and anyone—can use. That is not much help for the economy.

Sources in the United States, Europe, and Japan have all pointed to this troublesome overcapacity. The European Union (EU) sees it as the reason China is dumping cheap EVs on European markets, so severely, in fact, that the EU is setting up to levy hefty tariffs on these products.

Unsurprisingly, China’s leadership has denied that any excess capacity exists. According to recent statements by Chinese Communist Party leader Xi Jinping, “there is no so-called problem of Chinese overcapacity.” If Chinese EVs are flooding into Europe, he argues, it is simply because they are better cars and more competitive than the Western product. He may be correct about the competitiveness of Chinese EVs, but that has little to do with overcapacity. And on that point, the flow of information coming out of China says he is wrong.

Even areas not designated “new productive forces” show signs of excess. Steel production, for instance, has risen far beyond domestic needs. In 2001, the output of steel in China about equaled domestic use. By 2023, steel output exceeded domestic use by 5 percent, and this year, it seems set to exceed domestic use by 8 percent.

To be sure, much of this reflects the impact of the property crisis and the collapse of construction demand for steel. It is an excess, nonetheless. Solar panels are one of the areas selected for special support, and the excess is much greater there. Domestic installations have indeed jumped from a rate of 50 gigawatts last year to a likely 90 gigawatts this year. However, output has far surpassed these rates and shows signs of rising to more than 150 gigawatts this year. It is fair to question where China will sell all these panels and why the planners failed to consider that when they engaged in the buildup.

Other measures, though less direct, tell the same story. Last year, at the start of the “new productive forces” push, investment spending in electrical equipment and EVs leaped off the charts. For the former, such spending rose 40 percent, and for the latter, it rose 25 percent—both far more than the 5 percent increase in manufacturing capacity generally.

This year, as if to announce that there never was justification for that increase, investment spending for electrical equipment and EVs has fallen back to Earth and is now running a touch slower than overall investment spending in manufacturing. But the previous spending jumps have clearly made for a capacity excess. If direct measures are hard to come by, the drop in manufacturing’s gross margins gives evidence. At present, it is running some 2 percentage points beneath its long-term average.

In a fast-growing economy, as China’s once was, overcapacity problems can find remedies in just one or two years of demand growth, often less. Alternatively, if China were the world’s workshop, as it once was, overcapacity would disappear in short order. However, China’s economy is not growing fast, and China is not the workshop of the world.

As a consequence, the mistake with this capacity buildup will persist for some time to come and compound the economy’s other problems. It will take that much longer to rid China’s economy of the imbalance because the developed West and Japan have turned away from China trade, 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.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.

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