On China’s overcapacity

The article below, written for Friends of Socialist China by Shiran Illanperuma, addresses the latest ideological weapon in the Biden-Trump trade war against China: that of ‘overcapacity’. According to Western politicians and neoliberal economists, China’s industrial subsidies and production capacity are to blame for the US’s trade deficit and its apparent inability to reindustrialise its economy.

Shiran, citing fellow Marxist economist Michael Roberts, observes that the US and EU have sustained trade deficits since decades ago, before China’s emergence as an industrial superpower: “In a previous era, it was Japan and Germany that were the source of the US’s protracted trade deficits.” This rather suggests that “the main problem is the decline in the competitiveness and productive capabilities of the US itself rather than China’s (or, for that matter, anyone else’s) industrial policies.”

The article shows that China’s capacity utilisation and inventory levels almost exactly match those of the US. Hence, according to standard metrics, China is no more guilty of ‘overcapacity’ than the US itself. What is true is that China is actively working to contain excess capacity in mature industries such as coal and steel. However, in emerging technologies – particularly those required for solving the climate crisis – China is leveraging its socialist market economy to rapidly innovate and develop its productive forces. It should be noted that this strategy is responsible for a decrease in solar PV and wind energy costs of around 90 percent over the last decade. From the standpoint of maintaining a habitable Earth, the accusations of Chinese ‘overcapacity’ are beyond absurd.

Ultimately, what’s driving these accusations is that “Western imperialism is in crisis and can no longer sustain the position of its old labour aristocracy.”

The thesis of Chinese overcapacity therefore serves a dual purpose. First, it provides the Western ruling class with a means to deflect criticism of its own neoliberal policies in order to scapegoat China for the destruction of its industrial base. Second, it allows that same ruling class to resort to protectionism and subsidies on behalf of monopoly capitalists.

Shiran concludes:

For its part, China is developing technologies that are crucial for the future of mankind. It has done so while the ruling elite in the West gamble away wealth produced by workers through stock buybacks and real estate speculation. It is up to the Western Left to organise workers against imperialism and anti-China chauvinism, and to fight to liberate the productive forces necessary to address the socioeconomic and ecological challenges of this century.

Shiran Illanperuma is an independent journalist and researcher. He is currently reading for a master’s degree in economic policy at SOAS University of London.

In the last few months, there has been an intensified campaign by Western politicians, academics, and mainstream media to popularise the narrative of “Chinese overcapacity.” Like the disproven narrative of the “Chinese debt trap” before it, this appears to be a coordinated attempt by the West to scapegoat China for structural problems and imbalances in the world capitalist economy.

The thesis of China’s manufacturing overcapacity has been in circulation since at least the global financial crisis. In short, the argument goes that China’s investment-driven growth model creates both local and global imbalances. It is argued that higher investment suppresses consumption (as a share of GDP) and drives income inequality and excess production capacity within China. It is further argued that such imbalances are to blame for China’s excessive exports and massive trade surplus, which is said to be at the cost of the United States’ trade deficit.

In academia, this argument has been popularised by Keynesian economist Michael Pettis, who is a Professor of Finance at Peking University. Brad Setser, a former senior advisor to the United States Trade Representative, has also been a champion of this argument. Notably, the overcapacity thesis has also been a consistent theme of the IMF on China.

In May, the IMF Mission to China published a report stating that in order to ensure growth, China’s key priorities should include “rebalancing the economy towards consumption by strengthening the social safety net, liberalising the services sector, and scaling back distortive supply side policies that support the manufacturing sector [emphasis added].”

The IMF is, of course, a Western-dominated institution, where China controls just 6% of voting shares despite contributing to 18% of global GDP.

The overcapacity thesis has been an increasing source of diplomatic tension. US Treasury Secretary Janet Yellen has attempted to rally the G7 on the issue and coax Global South countries such as India and Mexico into the debate. Meanwhile, European Commission President Ursula von der Leyen has argued that Chinese industrial policy is distorting the EU market for electric vehicles (EVs).

The Chinese side has reacted strongly to these allegations. Chinese President Xi Jinping said that there was no such thing as a Chinese overcapacity problem. Meanwhile, Chinese Ministry of Commerce spokesperson He Yadong has said that the accusation of Chinese overcapacity was a typical Western double standard. More recently, Chinese Foreign Ministry Spokesperson Wang Wenbin said, “Overcapacity is just a pretext the US uses to try to coerce G7 members into creating fences and restrictions for Chinese new energy products.”

Following in Trump’s footsteps, the Biden administration recently threw up a slew of new tariffs against Chinese products, including 25% on steel and aluminium, 50% on semiconductors, 50% on solar panels, and a whopping 100% on electric vehicles (EVs). As the US-led trade war against China intensifies, it is worth reflecting on the facts behind the overcapacity thesis.

Measuring China’s overcapacity

French entrepreneur and analyst Arnaud Bertrand has argued that the concept of overcapacity can be measured with a few standard metrics: 1. capacity utilisation rates; and 2. inventory levels.

In economics, capacity utilisation refers to the share of production capacity that is in use at any given time. Generally speaking, a prolonged period of high capacity utilisation can indicate a need to expand productive capacity. In contrast, a prolonged period of low capacity may indicate a need to reduce productive capacity. Bertrand points out that the capacity utilisation rate in China is 76%, which is around the same as in the United States, which is 78%.

Inventory levels are generally used as a measure of how well sales are doing. A growing inventory of goods might mean a combination of sluggish demand or overproduction, while a shrinking inventory might mean growing demand and underproduction. Bertrand points out that the finished good inventory index PMI for China stood at 49, while a similar index for manufacturing inventory for the United States stood at 50.

Neither of the above numbers suggests that China has any more overcapacity than the US. On the contrary, the fact that Chinese industrial profits continue to grow suggests that there is ready demand for Chinese manufactures. Several analysts have also argued that China’s drive to increase production capacity for new energy products makes it indispensable in the global fight for ecological sustainability.

Understanding consumption in China

Marxist economist and blogger Michael Roberts notes that while the proportion of household consumption to GDP in China may be low, absolute consumption has soared in the past few years. From 2008 to 2021, average annual private consumption grew by 8% in China, compared to just 5.7% in India, 1.7% in the United States, and 0.6% in the EU. Logically, China could never have lifted 800 million people out of poverty unless there was a substantial increase in their consumption!

Further, traditional statistics on consumption are misleading without taking into consideration the political and economic context. For example, in a situation where essential services are privatised, consumption figures may be misleadingly high due to households paying out of pocket for these services. In China, private consumption is supplemented by several social transfers in kind (including for healthcare, education, and food), which amount to up to 6% of GDP.

Finally, it should be noted that China has signalled that it does not seek to emulate the decadent and extravagant aspects of Western consumer societies. The turn to consumerism in the West has not staved off economic crises but rather led to an erosion in productive capabilities. By contrast, China’s emphasis on investment and productive consumption has helped it avoid major crises while improving the standard of living of its citizens.

China’s industrial production and the West’s trade deficit

Michael Roberts has also pointed out that the United States and European Union have had sustained trade deficits long before China’s industrial rise. In a previous era, it was Japan and Germany that were the source of the US’s protracted trade deficits. This is an important point, as it suggests that the main problem is the decline in the competitiveness and productive capabilities of the US itself rather than China’s (or, for that matter, anyone else’s) industrial policies.

While mainstream economists have often portrayed China’s rise as the result of “export-oriented industrialisation,” the facts are a little more complex. In China, exports as a share of GDP only rose above 20% between 2000 and 2016, the period immediately following China’s ascension to the WTO. In comparison, exports as a share of GDP comprise a much more significant 53% for Sweden, 51% for Germany, and 48% for South Korea, yet we never hear talk of their “overcapacity” distorting world trade in the mainstream media. Unlike China, these countries are US allies and fully integrated into US-led imperialist system and its military industrial complex.

China’s home market has always been a major basis for its development. It should be noted that even foreign companies operating out of China’s Special Economic Zones have been producing more for China’s home market than they do for export since at least 2005. According to research by Barry Naughton, an American economist who focuses on the Chinese economy, foreign companies in China sold 2.7 times more in the home market than they exported in 2017.

To use more contemporary examples, companies like Tesla and BYD have exported only 36% and 8% respectively of the EVs they manufacture in China, with the rest being sold in the home market. This in turn may be due to China’s superior infrastructure for EVs, which raises another point: investment in infrastructure is itself crucial for facilitating consumption.

China’s industrial policy

The question of overcapacity has been the subject of debate within academic circles in China. Lan Xiaohuan, a Professor of Economics at Fudan University, has discussed the issue in his recently published book How China Works: An Introduction to China’s State-led Economic Development. Lan concedes that overinvestment is a downside of China’s industrial policy, which encourages local governments to enact preferential policies for strategic sectors.

However, he explains that, within the framework of China’s socialist market economy, this strategy has certain benefits. First, overinvestment in strategic sectors leads to the rapid development of productive forces in that area. Second, the initial buildup of firms in strategic sectors leads to competitive price wars, which are beneficial to consumers. In that sense, high levels of investment are a feature and not a bug of China’s industrial policy, and stand in stark contrast to Western monopoly capital, which thrives on artificial scarcity.

Given the diplomatic backlash from the West as well as the contradictions inherent in a market economy, the Chinese government has indicated that it will take steps to curtail overcapacity. For example, a work report that was delivered at the 14th National People’s Congress in March had this to say: “We will strengthen coordination, planning, and investment guidance for key sectors to prevent overcapacity and poor-quality, redundant development.”

From the Chinese perspective, however, it is far more urgent to contain overcapacity in mature or maturing industries (such as coal, steel, and perhaps real estate) than in emerging technologies, where there is still massive global demand and much room for innovation. It is precisely this that threatens the West, as China’s socialist market economy allows it to rapidly build up its productive forces in emerging technologies, which fundamentally threaten Western monopoly capital.

The political meaning of overcapacity

For many decades, large sections of the Western Left have taken a chauvinistic attitude towards the question of China’s Reform and Opening Up. As Marxist scholar Roland Boer has noted, the Western Left has tended to see socialism in abstract and idealistic terms as a classless society with collective ownership of the means of production. However, since most revolutions happened in the East, Marxists there were forced to contend with the blight of underdevelopment and to emphasise liberation of the productive forces as a precondition for socialist construction.

Today, there is a tendency towards the inversion of this situation. The development of the productive forces in China has allowed it to undertake more progressive reforms at home. Meanwhile, the West has undergone protracted deindustrialization during the era of neoliberalism, leading to the Western working class themselves demanding reindustrialization and decent manufacturing jobs. The Chinese overcapacity thesis needs to be understood in the context of this conjuncture.

Western imperialism is in crisis and can no longer sustain the position of its old labour aristocracy. The thesis of Chinese overcapacity therefore serves a dual purpose. First, it provides the Western ruling class with a means to deflect criticism of its own neoliberal policies in order to scapegoat China for the destruction of its industrial base. Second, it allows the that same ruling class to resort to protectionism and subsidies on behalf of monopoly capitalists. Such handouts are unlikely to benefit the Western working class, as they fail to adequately challenge monopoly capital and rentier interests, which constitute the main fetters to liberating the productive forces in the West.

For its part, China is developing technologies that are crucial for the future of humanity. It has done so while the ruling elite in the West gamble away wealth produced by workers through stock buybacks and real estate speculation. It is up to the Western Left to organise workers against imperialism and anti-China chauvinism, and to fight to liberate the productive forces necessary to address the socioeconomic and ecological challenges of this century.

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