Beijing’s Planners Have Messed Up Again

Few politicians ever deserve praise for foresight. The folks in Beijing seem to have even less capacity to look into the future than most. Faced with the economic drag of China’s ongoing property crisis, dispirited consumer, and discouraged private business owners, they threw the weight of China’s planning behind manufacturing, especially areas that they called “new productive forces”—semiconductors, for instance, electric vehicles (EVs) batteries, solar, and wind generation. Because China is still very much a command economy, money flowed as the planners directed. No one it seems considered where the output from this buildup would go. The sluggish domestic economy has no way to absorb it, and the developed west was and is, for an array of reasons, resistant to China trade. Now China has more capacity in these areas than it – anyone – can use. That is not much help for an economy that already has many troubles.

The United States, Europe, and Japan have all called attention to this troublesome overcapacity. The European Union (EU) has declared 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 President 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 the best quality for the money and so 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 his denial is wrong.

Even steel, not one of the designated “new productive forces,” shows signs of excess. Steel production has risen far beyond domestic needs. In 2001, the output of steel in China about equaled domestic use. By 2023, steel output exceeded domestic uses by 5% and this year seems set to exceed domestic uses by 8%. Of course, much of this difference reflects the impact of the property crisis and the collapse of construction. It is nonetheless an excess. With solar panels, which are one of the areas selected for special support, the excess is much larger. Domestic installations have indeed jumped from a rate of 50 gigawatts last year to a likely 90 this year. But 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 is going to sell all these panels and why the planners failed to consider that when they authorized 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, up 40% for the former and 25% for the latter, both far more than the 5% 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 overall. 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.

When China was a fast-growing economy, overcapacity problems would find remedies in just one or two years of demand growth, often less. Alternatively, when China was the world’s workshop, overcapacity would disappear in short order. But China’s economy is neither growing fast nor is China the workshop of the world. The mistake with this capacity buildup will therefore 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.