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Prof. Lu Feng: Multiple Causes Trigger New Wave of Overcapacity

Mar 15-2024   



The Central Economic Working Conference at the end of 2023 and the 2024 Government Work Report both affirmed economic achievements while pointing out practical challenges, such as excess production capacity in certain industries and rising complexity, severity and uncertainty of the external environment. In a recent event for experts to analyze messages from the Two Sessions (the National People’s Congress and the Chinese People’s Political Consultative Conference), Prof. Lu Feng of the NSD said that overcapacity has taken on new connotations as China’s global standing rises amid shifting ties between large nations and evolving geopolitical and economic relationships. He underlined that China’s overcapacity is linked to cross-border overcapacity.

 

China experienced the first major wave of overcapacity towards the end of 1990s as well as sporadic patches between the dawn of the new millennium and the supply side reforms. However, the current round of excess capacity in frontier industries, such as petrochemical raw material, conventional semiconductor, car, new-energy car, and traction battery, is unprecedented. Such industries are technology- and capital-intensive. Automotives used to be a pillar industry of developed countries, but as emerging economies build up their own car industry, excess productivity has resulted and the chain effects constitute a fresh phenomenon, said Prof. Lu.

 

These industries churn out products that have a high degree of tradability and are closely associated with import and export activities. Prof. Lu emphasized that when such industries with global supply chains expand into the realm of overcapacity, disruptive effects would ripple across international trade. The disruptive power is more potent than that caused by the overcapacity of cement or coal, which is mostly limited to domestic market.

 

Prof. Lu said that this fresh wave of overcapacity can be traced to the impact of the pandemic: pandemic-induced insufficient supply and the resultant inflation have led many countries to ramp up investment in some industries, but there hasn’t been a quick surge in demand to match with the productivity. As far as China is concerned, manufacturing upgrade and productivity expansion have been achieved in recent years due to a mixture of reasons such as industrial upgrade policy, focus on innovation, and sharp increase in external demand amid the pandemic. As domestic demand has posted too weak growth to absorb production, products vie for the export market and result in trade surplus. According to Prof. Lu’s estimates, China’s trade surplus of industrial products has reached the unprecedented scale of USD1.5-1.7 trillion, or around 30% of total industrial added value.

 

This demonstrates the competitiveness of Chinese firms but also points to their strong dependence on the external market, he said. Pre-emptive measures should be taken to deal with the ramifications of China’s reasonable capacity expansion for the global supply and demand equilibrium.

 

He also highlighted the fact that the international mechanism for coping with overcapacity has become partially ineffective, which adds to the complexity of external trade environment. At the end of 2023 the EU launched an anti-subsidy investigation into China’s electric car export. Such cases point to the need for good will of import countries and international cooperation.

 

Prof. Lu believed that China should continue to push forward industrial upgrade with new-quality productive forces, while applying proactive macro control measures and structural reforms to boost demand and absorb some capacity. At the same time, it should work on maintaining the stability of international balance of payments and exchange rates, so as to avoid having its trade competitiveness passively increased due to low actual exchange rates. In managing large-power relationships and geopolitical and economic ties, China as an emerging market should actively get into play the positive functions of multilateral trade mechanisms like the G20. Through international cooperation, it can aim to constructively address a new round of overcapacity and avoid further dysfunction of international trade rules. This, according to Prof. Lu, benefits both the global economy and China’s rising.

Prof. Lu Feng: Multiple Causes Trigger New Wave of Overcapacity

Mar 15-2024   



The Central Economic Working Conference at the end of 2023 and the 2024 Government Work Report both affirmed economic achievements while pointing out practical challenges, such as excess production capacity in certain industries and rising complexity, severity and uncertainty of the external environment. In a recent event for experts to analyze messages from the Two Sessions (the National People’s Congress and the Chinese People’s Political Consultative Conference), Prof. Lu Feng of the NSD said that overcapacity has taken on new connotations as China’s global standing rises amid shifting ties between large nations and evolving geopolitical and economic relationships. He underlined that China’s overcapacity is linked to cross-border overcapacity.

 

China experienced the first major wave of overcapacity towards the end of 1990s as well as sporadic patches between the dawn of the new millennium and the supply side reforms. However, the current round of excess capacity in frontier industries, such as petrochemical raw material, conventional semiconductor, car, new-energy car, and traction battery, is unprecedented. Such industries are technology- and capital-intensive. Automotives used to be a pillar industry of developed countries, but as emerging economies build up their own car industry, excess productivity has resulted and the chain effects constitute a fresh phenomenon, said Prof. Lu.

 

These industries churn out products that have a high degree of tradability and are closely associated with import and export activities. Prof. Lu emphasized that when such industries with global supply chains expand into the realm of overcapacity, disruptive effects would ripple across international trade. The disruptive power is more potent than that caused by the overcapacity of cement or coal, which is mostly limited to domestic market.

 

Prof. Lu said that this fresh wave of overcapacity can be traced to the impact of the pandemic: pandemic-induced insufficient supply and the resultant inflation have led many countries to ramp up investment in some industries, but there hasn’t been a quick surge in demand to match with the productivity. As far as China is concerned, manufacturing upgrade and productivity expansion have been achieved in recent years due to a mixture of reasons such as industrial upgrade policy, focus on innovation, and sharp increase in external demand amid the pandemic. As domestic demand has posted too weak growth to absorb production, products vie for the export market and result in trade surplus. According to Prof. Lu’s estimates, China’s trade surplus of industrial products has reached the unprecedented scale of USD1.5-1.7 trillion, or around 30% of total industrial added value.

 

This demonstrates the competitiveness of Chinese firms but also points to their strong dependence on the external market, he said. Pre-emptive measures should be taken to deal with the ramifications of China’s reasonable capacity expansion for the global supply and demand equilibrium.

 

He also highlighted the fact that the international mechanism for coping with overcapacity has become partially ineffective, which adds to the complexity of external trade environment. At the end of 2023 the EU launched an anti-subsidy investigation into China’s electric car export. Such cases point to the need for good will of import countries and international cooperation.

 

Prof. Lu believed that China should continue to push forward industrial upgrade with new-quality productive forces, while applying proactive macro control measures and structural reforms to boost demand and absorb some capacity. At the same time, it should work on maintaining the stability of international balance of payments and exchange rates, so as to avoid having its trade competitiveness passively increased due to low actual exchange rates. In managing large-power relationships and geopolitical and economic ties, China as an emerging market should actively get into play the positive functions of multilateral trade mechanisms like the G20. Through international cooperation, it can aim to constructively address a new round of overcapacity and avoid further dysfunction of international trade rules. This, according to Prof. Lu, benefits both the global economy and China’s rising.