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Prof. Huang Yiping: Macro-Economic Imbalance at Root of Overcapacity

May 06-2024   



China has had to repeatedly grapple with overcapacity, for which the most fundamental reason is an imbalance on macro-economic level, namely high investment and low consumption, said Prof. Huang Yiping, Dean of NSD, in a recent media interview.

 

Such an imbalance has been gradually alleviated since the 2008 financial crisis, though it remains rather acute these days, he pointed out. Currently, the country’s total consumption amounts to 57% of its GDP, about 20% lower than global average.

 

However, he also pointed out that what some US officials claimed as China’s overcapacity problem doesn’t necessarily fit neatly into a rigorous definition of the term. Their motive was to show concerns about the impact of China’s large-volume exports on other countries’ industrial production and employment. Prof. Huang said that current discussions about overcapacity are hard to untangle and pin down as it involves not only traditional industries, such as steel-making, aluminum oxide, and ship-building, but also newly emerging ones, like electric cars, lithium batteries, and photovoltaic cells.

 

Prof. Huang said that in an open economy, overcapacity is hard to justify unless there is a global glut. Previously, China relied on export to absorb its domestic surplus capacity. But this avenue seems to have become bumpier due to decreasing openness of the global market as a result of some countries’ de-globalization policies, which is further complicated by geopolitical clashes. Another reason is that as China rises from a small economy to a large one, its trading partners are reacting more greatly to its export and import, said Prof. Huang.

 

Efforts were made by the central and local governments to slash redundant capacity in 2016. Despite some positive effects, certain problems showed up. For example, excess capacity was mostly removed from private firms and hardly from SOEs.

 

To redress overcapacity, Prof. Huang proposed doubling down on macro-economic measures to reduce imbalances. In terms of industrial policy, the focus should be shifted to the front end of innovation chains instead of giving excessive support for the replication of capacity. He also advised putting constraints on local governments and financial institutions in their bandwagon-jumping to support so-called newly-emerging industries. Also important is strengthening market discipline, for example by allowing the market to push private firms to get rid of their excess capacity.

 

A market economy can incur overcapacity, a normal phenomenon that is also sometimes called market malfunction, said Prof. Huang. When a new industry appears, resources pour into it and give rise to overcapacity. As long as market mechanisms can play their due roles, overcapacity will be gradually cleared up, though the process will be a painful one, said Prof. Huang.

Prof. Huang Yiping: Macro-Economic Imbalance at Root of Overcapacity

May 06-2024   



China has had to repeatedly grapple with overcapacity, for which the most fundamental reason is an imbalance on macro-economic level, namely high investment and low consumption, said Prof. Huang Yiping, Dean of NSD, in a recent media interview.

 

Such an imbalance has been gradually alleviated since the 2008 financial crisis, though it remains rather acute these days, he pointed out. Currently, the country’s total consumption amounts to 57% of its GDP, about 20% lower than global average.

 

However, he also pointed out that what some US officials claimed as China’s overcapacity problem doesn’t necessarily fit neatly into a rigorous definition of the term. Their motive was to show concerns about the impact of China’s large-volume exports on other countries’ industrial production and employment. Prof. Huang said that current discussions about overcapacity are hard to untangle and pin down as it involves not only traditional industries, such as steel-making, aluminum oxide, and ship-building, but also newly emerging ones, like electric cars, lithium batteries, and photovoltaic cells.

 

Prof. Huang said that in an open economy, overcapacity is hard to justify unless there is a global glut. Previously, China relied on export to absorb its domestic surplus capacity. But this avenue seems to have become bumpier due to decreasing openness of the global market as a result of some countries’ de-globalization policies, which is further complicated by geopolitical clashes. Another reason is that as China rises from a small economy to a large one, its trading partners are reacting more greatly to its export and import, said Prof. Huang.

 

Efforts were made by the central and local governments to slash redundant capacity in 2016. Despite some positive effects, certain problems showed up. For example, excess capacity was mostly removed from private firms and hardly from SOEs.

 

To redress overcapacity, Prof. Huang proposed doubling down on macro-economic measures to reduce imbalances. In terms of industrial policy, the focus should be shifted to the front end of innovation chains instead of giving excessive support for the replication of capacity. He also advised putting constraints on local governments and financial institutions in their bandwagon-jumping to support so-called newly-emerging industries. Also important is strengthening market discipline, for example by allowing the market to push private firms to get rid of their excess capacity.

 

A market economy can incur overcapacity, a normal phenomenon that is also sometimes called market malfunction, said Prof. Huang. When a new industry appears, resources pour into it and give rise to overcapacity. As long as market mechanisms can play their due roles, overcapacity will be gradually cleared up, though the process will be a painful one, said Prof. Huang.