China worries about overcapacity, but sees things differently from the United States

• Janet Yellen expressed concerns about Chinese overproduction during her recent visit to the country.
• China has responded to Yellen's concerns, but it is also worried about overcapacity, according to an economist.
• China's concerns on this issue, however, are different from those of the United States and other countries.

China produces too much stuff and Beijing knows it too.

Like the United States and all of China's trading partners, Chinese authorities are concerned about industrial overcapacity and want to curb it.

But while Beijing is aware and concerned about overproduction, it doesn't see it in the same way as the United States and China's other trading partners, says one economist.

Yue Su, senior China economist at the Economist Intelligence Unit, or EIU, wrote in a note Wednesday that Chinese policymakers were mainly concerned about “disorderly competition” and low factory capacity utilization rates.

“From China's perspective, it is essential to address overcapacity, especially when it leads to deflation, undermines the health of the banking sector and causes fiscal stress for local governments,” Su added.

In other words, for the United States, “overproduction” means having too much stuff. But when China considers the same problem, it worries that competition is becoming so intense and disorderly that it leads to too many unprofitable companies. Beijing is also concerned that its capacities are such that factories cannot be used at optimal levels.

The economist said the United States and other countries, however, were more focused on rapidly increasing overall capacity in China as well as the country's production volume.

Janet Yellen warned of the impact of Chinese overproduction on the United States and other countries.

Su's comments follow U.S. Treasury Secretary Janet Yellen's criticism of overcapacity and overproduction in China during her recent visit to the country that ended Tuesday.

“China is now simply too big for the rest of the world to absorb this enormous capacity,” Yellen said at a press conference Tuesday.

After all, Chinese dumping of products such as steel flooded the world more than a decade ago, decimating industries and communities around the world, a scenario the world wants to avoid repeating.

“The PRC's actions today can change global prices. And when the global market is flooded with artificially cheap Chinese goods, the viability of U.S. and foreign companies is called into question,” Yellen added, referring to the People's Republic of China. the official name of the country.

In addition to the United States, the European Union and even emerging countries like Thailand are concerned about the deluge of cheap Chinese goods and their impact on local industries.

For the US and EU, the rapid increase in capacity in green sectors such as electric vehicles, solar cells and lithium-ion batteries is of particular concern. The three hot new industries in which the US and EU also compete are what Beijing has identified as the new drivers of China's economic growth.

China has hit back at criticism over overproduction. In its annual political report, released last month, Chinese Premier Li Qiang committed to “preventing overcapacity”.

“The best way to address such imbalances is to let market forces play their role according to the law of value,” said Mao Ning, a spokesperson for the Chinese Ministry of Foreign Affairssaid Tuesday.

“Politicizing overcapacity or any other economic and trade issues and arbitrarily linking them to security goes against the laws of economics and harms our own industries and the stability of the world economy,” Mao added.

China expected to still dominate the green sector

Su, the economist, said the divergence in how China and its trading partners viewed the issue of overcapacity meant the country's oversupply of green products, as well as others, was likely to persist.

She added that China's trade surplus with the world meant Beijing might have less incentive to tackle the problem.

China recorded a trade surplus of $823 billion last year, according to Chinese customs data. The United States' trade deficit with China, meanwhile, stood at nearly $280 billion in 2023, according to the report. Commerce Department.

Su said she expected further investigations into Chinese subsidies and dumping in China's manufacturing industry for the rest of 2024. The probes could even extend to overseas Chinese factories, like those of Southeast Asian countries, she added.

Analysts expect the U.S. debate over its trade issues with China to intensify as the presidential election season approaches.

Despite this, the EIU expects China's manufacturing industry to continue to dominate the green sector, even if factories make fewer profits.

Su wrote: “Supply chain efficiency, intense competition in the private sector and efforts by local governments to protect domestic companies will contribute, even if industry profits continue to be reduced. »