China’s Supply Problem

CommentaryTreasury Secretary Janet Yellen recently said she would raise the problem of oversupply in environmental products like solar panels from China in upcoming talks with counterparts in Beijing. China’s oversupply problem is not just a problem for the world but for China.China is a manufacturing colossus in the world economy. Despite an economy that accounts for roughly 16–18 percent of global activity, China is responsible for 32–35 percent of global manufacturing. Following the East Asian Tiger model from Japan and South Korea, China started selling low-skilled manufactured products like garments and basic assembly, working its way up the value chain. Though remaining concentrated in those areas, China produces an increasing variety of low, middle, and high-tech products for export.Typically thought of as a low-wage country churning out low-skill products like garments, Beijing policymakers have sought to increase state-linked firm exports and manufacturing in strategic sectors. While it is true that China enjoys a top-quality manufacturing base with network effects, among other factors that make the country an excellent manufacturing destination, there is increasingly another factor that drives its most rapidly growing areas of exports.The export industries in China are enjoying the most rapid growth in sectors that receive enormous state assistance, such as automobiles and rare earth minerals. Even as China’s car consumption has remained effectively stagnant, its auto exports have exploded since 2020, becoming the largest single-car exporter globally.China engages in a range of activities to boost its manufacturing capacity that boils down to state-directed finance through state-owned banks, whether it is automobile companies that receive more in subsidies than they receive in profit or wildly indebted steel companies with loans that never come due. Just recently, Li Automotive announced it was the first major Chinese electric vehicle firm to be profitable, but in stock filings, it declared it received a range of government subsidies.Related StoriesThe state involvement and subsidization of strategic sectors and firms matter for multiple reasons.First, China, through its direction of state-sponsored finance, wildly overinvests in industries declared strategic by Beijing. For instance, Chinese solar panel manufacturing capacity is equivalent to 80 percent of global demand. Other industries have similar mismatches. China can only make these sectors profitable by flooding global markets at nonprofitable prices.Second, this flood of products is increasingly resulting in countries considering trade barriers against Chinese goods based upon what they consider unfair trade practices. Even though car consumption in China has stagnated since 2016, car manufacturing capacity has continued to increase, with exports increasing rapidly. This pattern is causing increasing protectionism as countries try to prevent Chinese firms from decimating domestic firms that do not enjoy the same subsidies.Third, the process of subsidization is keeping unprofitable firms in business. A wealth of research demonstrates that Chinese firms, as they grow, become less innovative and increasingly dependent on government largesse, and yield lower returns. For instance, the Chinese stock market is basically flat this century even as the economy has grown significantly. These firms are starting and staying in business due to state-directed finance. What follows is overpaying for assets, selling unprofitable products, and loading up on debt for bad investments, all of which are reflected in Chinese data. This strategy may make for good national politics, but it does not make for good or sustainable economics.China is driving massive amounts of oversupply, and even when it sells products, it cannot sell those products profitably. This prevents a shift from an investment-driven economy toward more consumption and inhibits free market innovation by these firms looking to Beijing for direction on everything. Secretary Yellen may have been talking about solar panels, but she is describing the entire Chinese economy.Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.

China’s Supply Problem

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Commentary

Treasury Secretary Janet Yellen recently said she would raise the problem of oversupply in environmental products like solar panels from China in upcoming talks with counterparts in Beijing. China’s oversupply problem is not just a problem for the world but for China.

China is a manufacturing colossus in the world economy. Despite an economy that accounts for roughly 16–18 percent of global activity, China is responsible for 32–35 percent of global manufacturing. Following the East Asian Tiger model from Japan and South Korea, China started selling low-skilled manufactured products like garments and basic assembly, working its way up the value chain. Though remaining concentrated in those areas, China produces an increasing variety of low, middle, and high-tech products for export.

Typically thought of as a low-wage country churning out low-skill products like garments, Beijing policymakers have sought to increase state-linked firm exports and manufacturing in strategic sectors. While it is true that China enjoys a top-quality manufacturing base with network effects, among other factors that make the country an excellent manufacturing destination, there is increasingly another factor that drives its most rapidly growing areas of exports.

The export industries in China are enjoying the most rapid growth in sectors that receive enormous state assistance, such as automobiles and rare earth minerals. Even as China’s car consumption has remained effectively stagnant, its auto exports have exploded since 2020, becoming the largest single-car exporter globally.

China engages in a range of activities to boost its manufacturing capacity that boils down to state-directed finance through state-owned banks, whether it is automobile companies that receive more in subsidies than they receive in profit or wildly indebted steel companies with loans that never come due. Just recently, Li Automotive announced it was the first major Chinese electric vehicle firm to be profitable, but in stock filings, it declared it received a range of government subsidies.

The state involvement and subsidization of strategic sectors and firms matter for multiple reasons.

First, China, through its direction of state-sponsored finance, wildly overinvests in industries declared strategic by Beijing. For instance, Chinese solar panel manufacturing capacity is equivalent to 80 percent of global demand. Other industries have similar mismatches. China can only make these sectors profitable by flooding global markets at nonprofitable prices.

Second, this flood of products is increasingly resulting in countries considering trade barriers against Chinese goods based upon what they consider unfair trade practices. Even though car consumption in China has stagnated since 2016, car manufacturing capacity has continued to increase, with exports increasing rapidly. This pattern is causing increasing protectionism as countries try to prevent Chinese firms from decimating domestic firms that do not enjoy the same subsidies.

Third, the process of subsidization is keeping unprofitable firms in business. A wealth of research demonstrates that Chinese firms, as they grow, become less innovative and increasingly dependent on government largesse, and yield lower returns. For instance, the Chinese stock market is basically flat this century even as the economy has grown significantly. These firms are starting and staying in business due to state-directed finance. What follows is overpaying for assets, selling unprofitable products, and loading up on debt for bad investments, all of which are reflected in Chinese data. This strategy may make for good national politics, but it does not make for good or sustainable economics.

China is driving massive amounts of oversupply, and even when it sells products, it cannot sell those products profitably. This prevents a shift from an investment-driven economy toward more consumption and inhibits free market innovation by these firms looking to Beijing for direction on everything. Secretary Yellen may have been talking about solar panels, but she is describing the entire Chinese economy.

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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