China is worried about overcapacity, too — but it sees the problem differently than the US

Chinese leader Xi Jinping visits machinery manufacturer Guangxi Liugong Group in the city of Liuzhou in the region Guangxi on April 26, 2021.

Ju Peng/Xinhua/Getty

• US Treasury Secretary Janet Yellen raised concerns about China's overproduction of goods in her recent visit to the country.
• China has hit back at Yellen's concerns, but Beijing is also concerned about overcapacity, said an economist.
• However, China's concerns about the issue are different from those of the US and other countries.

China is producing too much stuff — and Beijing knows it, too.

Just like the US and all of China's trading partners, Chinese authorities are concerned about industrial overcapacity and want to curb it.

But while Beijing is aware of and worried about overproduction, it doesn't quite see it the same way as the US and China's other trading partners do, said an economist.

Chinese policymakers are primarily concerned about "disorderly competition" and low utilization rates of factory capacity, Yue Su, the principal economist for China at the Economist Intelligence Unit, or EIU, wrote in a note on Wednesday.

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

In other words, to the US, "overproduction" means having too much stuff. But when China considers the same problem, they are concerned about the competition getting so intense and disorderly that it leads to too many unprofitable companies. Beijing is also worried about having so much capacity that factories are not able to utilize at optimal levels.

However, the US and other countries are focusing more on the rapid rise of overall capacity in China as well as the country's production volume, the economist said.

Yellen warned about the impact of China's overproduction on the US and other countries

Su's comments followed US Treasury Secretary Janet Yellen's criticisms about overcapacity and overproduction in China during her recent visit to the country that ended on Tuesday.

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

After all, China's dumping of products like steel flooded the world over a decade ago, decimating industries and communities globally— a scenario the world wants to avoid repeating.

"Actions taken by the PRC today can shift world prices. And when the global market is flooded by artificially cheap Chinese products, the viability of American and other foreign firms is put into question," Yellen added, referring to the People's Republic of China, the country's official name.

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

China has hit back against criticism of overproduction. In his annual policy report, released last month, Chinese Premier Li Qiang pledged to "prevent overcapacity."

"The best way to address such imbalances is to let the market forces play their role according to the law of value," Mao Ning, a spokesperson at China's foreign ministry, said on Tuesday.

"To politicize overcapacity or any other economic and trade issue and arbitrarily link them to security goes against the law of economics and harms one's own industries and the stability of the global economy," Mao added.

China is still likely to dominate the green sector

The discrepancy in how China and its trading partners view the issue of overcapacity means the country's excessive supply of green products, as well as others, is likely to persist, said Su, the economist.

After all, China's trade surplus with the world means there may be fewer incentives for Beijing to tackle the issue, Su added.

China posted a trade surplus of $823 billion last year, according to China's customs data. Meanwhile, the US' trade deficit with China was nearly $280 billion in 2023, according to the Commerce Department.

Su expects further probes into China's subsidies and dumping in the Chinese manufacturing industry for the rest of 2024. The investigations may even extend into China's factories overseas, such as those in Southeast Asian countries, she added.

Analysts expect the US debate over its trade issues with China to heat up heading into the presidential election season.

Despite this, the EIU expects Chinese manufacturing to continue dominating the green sector — even if factories make less profit.

"The efficiency of the supply chain, intense competition in the private sector, and local government efforts to protect domestic companies will all contribute to this, albeit with industry profits continuing to be squeezed," Su wrote.

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