Huang Yiping on the Root of the New Round of Overcapacity in China
Huang Yiping, Dean of the National School of Development at Peking University calls government to solve "high investment while low consumption" problem
Hello everyone, Happy Labor Day holiday! I took a two-day leave and went to Tianjin for a short vacation. Tianjin is an important municipality and commercial port in northern China, located about a two-hour drive away from where I live in Beijing. In contrast to the fast pace of life in Beijing, people in Tianjin have adapted to a more "Buddhist style" of life ("佛系"), which is more relaxed and easygoing. Food prices in Tianjin are amazing, and the cuisine has a traditional northern Chinese flavor. Cooks use starchy sauces extensively, with limited use of frying. This is partially because oil was rare and precious in pre-modern Chinese society, and the starchy sauce can make the dish more visually appealing with a smaller amount of oil. As a harbor city, Tianjin has an abundance of fresh seafood at more affordable prices, especially the mantis shrimp. When steamed, the mantis shrimp becomes juicy and flavorful, and you only need vinegar and soy sauce as a dipping sauce to enjoy its natural taste.
During the vacation, I noticed a report published by The Economic Observer. The report featured an interview with Huang Yiping, who recently succeeded Yao Yang as the Dean of the National School of Development at Peking University earlier this year. In the interview, Huang provided a detailed explanation of the primary reason behind the new round of overcapacity in China.
According to Huang, China's economy is currently at a crucial juncture, undergoing a significant phase of industrial upgrading and transformation. Many traditional industries are struggling to continue their development and are in dire need of finding new directions to sustain themselves. As a result, when industries with potential for growth emerge, resources from enterprises and even local governments nationwide tend to concentrate heavily on these sectors. This sudden influx of resources ultimately leads to a rapid surge in capacity within a short period.
Huang attributed the root of overcapacity to the macroeconomic imbalance, that is, high investment and low consumption. Such contradictions in macroeconomic imbalances must be solved to resolve the current overcapacity issue.
Huang then suggested four measures
The government needs to solve the high investment and low consumption problem.
Shift industrial policy's focus to the innovation chain's front end rather than excessively supporting capacity replication.
Restrain local governments and financial institutions from rushing to support so-called emerging industries.
Strengthen market discipline, allowing market forces to clear out a considerable portion of the excess capacity in private enterprises.
Full-text translation:
source: https://www.eeo.com.cn/2024/0502/658830.shtml
The term "overcapacity" has frequently appeared in official statements since the end of last year.
The Central Economic Work Conference held at the end of 2023 and the 2024 "Government Work Report" both mentioned overcapacity. In December 2023, a relevant person in charge of the Central Financial Office explained the Central Economic Work Conference, stating that "some emerging industries have repeated layouts and involution-style competition, and some industries have overcapacity."
The term "overcapacity" has not appeared in central policies for a long time. According to statistics from Juechuang Information, in the past 20 years of the Central Economic Work Conference, the term "overcapacity" has appeared 8 times in total, specifically in 2010 and 2012-2018.
The connotation of "overcapacity" mentioned in the above policy context is not the same as the "overcapacity" proposed by U.S. Treasury Secretary Yellen. For the latter, China's Ministry of Foreign Affairs, Ministry of Finance, and National Development and Reform Commission have all refuted it, stating that "having more export products does not equate to overcapacity." However, further analysis is needed on the causes and solutions of the former.
In this regard, the Economic Observer interviewed Huang Yiping, Dean of the National School of Development at Peking University. Huang Yiping said that the main reason for the new round of overcapacity is that China's economy is at a critical period of industrial upgrading and transformation, and many old industries urgently need to find new directions as they cannot continue to develop. Once an industry with development potential emerges, resources from enterprises and even local governments across the country will concentrate on these industries, ultimately leading to a surge in capacity in the short term.
Since the 1990s, China has experienced several rounds of overcapacity. Huang Yiping believes that the fundamental reason for China's recurring overcapacity problem lies in macroeconomic imbalances, namely, high investment and low consumption. To resolve the current overcapacity issue, efforts still need to be made to reduce the contradictions in macroeconomic imbalances.
|Dialogue|
The Economic Observer: Compared to previous rounds of overcapacity, why is the range of industries involved in this round of overcapacity relatively ambiguous, with no clear official industry judgment yet, and different scopes determined by multiple researchers? Which industries do you think have overcapacity?
Huang Yiping: Literally, overcapacity means capacity exceeds demand. In a closed economy, overcapacity can be defined relatively simply. For example, in the past, industries such as steel, aluminum oxide, and cement had relatively severe overcapacity, basically relative to domestic market demand. Of course, some of these industries solved the overcapacity problem through large-scale exports. In an open economy, defining overcapacity is very difficult unless there is a global oversupply.
Recently, some U.S. officials have claimed that China has overcapacity, which seems to be more from the perspective of the impact of China's large exports on the industrial production and employment of other countries, so it is not necessarily "overcapacity" in a strict sense. Moreover, the discussion on "overcapacity" this round is indeed more complicated, involving both traditional industries such as steel, aluminum oxide, and shipbuilding, as well as emerging industries such as electric vehicles, lithium batteries, and photovoltaics.
The Economic Observer: What are the differences between this round of overcapacity and the previous rounds?
Huang Yiping: Compared with the previous rounds of overcapacity, the new round of overcapacity does have some obvious differences. In the past, overcapacity mainly occurred in traditional industries, but now it is starting to appear in some emerging industries. In the past, the contradictions of overcapacity were mainly concentrated in state-owned enterprises, but now they may be more concentrated in private enterprises. This may indicate that the mechanism causing this round of overcapacity is different from before.
At the same time, in the past, overcapacity was mainly driven by government investment, and the technological content of related industries was relatively low. At that time, even if state-owned enterprises had overcapacity, they would not easily withdraw from excess capacity. The main reason for the new round of overcapacity, although there is also government promotion, especially through industrial policies, is that China's economy is at a critical period of industrial upgrading and transformation, and many old industries urgently need to find new directions as they cannot continue to develop. Once an industry with development potential emerges, resources from enterprises and even local governments across the country will concentrate on these industries, ultimately leading to a surge in capacity in the short term.
The Economic Observer: Can current data such as the production-to-sales ratio and capacity utilization rate reflect that China has widespread overcapacity?
Huang Yiping: On average, capacity utilization rate data does not seem to reflect that China has widespread overcapacity, but this involves the definition of overcapacity. For example, in 2023, China's exports of the "new three items" (electric vehicles, lithium batteries, and photovoltaic products) increased by nearly 30% year-on-year. If the "new three items" lack international market demand, the domestic industry overcapacity problem may be more prominent.
The Economic Observer: What is the reason for the formation of overcapacity this time? Does China need to promote a round of top-down "capacity reduction"?
Huang Yiping: The fundamental reason for China's recurring overcapacity problem lies in macroeconomic imbalances, namely, high investment and low consumption.
Since the 2008 global financial crisis, China's supply and demand imbalance problem has gradually eased, but the contradiction is still very prominent. Currently, China's total consumption accounts for 57% of its gross domestic product (GDP), which is 20 percentage points lower than the global average. Insufficient consumer demand can easily lead to overcapacity.
In fact, in the past 40 years of reform and opening up, China has almost always had an overcapacity problem. It's just that in earlier years, China digested the domestic overcapacity problem through exports. However, it now seems to be very difficult to digest excess capacity through exports. The first factor is the reversal of globalization policies, the reduced openness of the world market, and the addition of geopolitical contradictions, which have significantly reduced the acceptance of Chinese exports. The second factor is that China has leaped from a small economy to a large economy. Now, "whatever you buy is expensive, and whatever you sell is cheap." Trade partners' reactions to China's imports and exports are also greater.
The top-down "capacity reduction" in 2016 was really out of helplessness. Although the policy measures achieved some effects, they also caused many problems. For example, most of the eliminated capacity was from private enterprises, not from state-owned enterprises.
To resolve the current overcapacity issue, first and foremost, efforts need to be made to reduce the contradictions in macroeconomic imbalances. Secondly, the focus of industrial policy should be shifted to the front end of the innovation chain, and excessive support for capacity replication should be avoided. Thirdly, local governments and financial institutions should be restrained from swarming to support so-called emerging industries. Finally, market discipline should be strengthened. Since most of the enterprises with overcapacity problems are private enterprises, the market will help them clear out a considerable portion of the excess capacity.
The Economic Observer: From the 1990s to the present, China has repeatedly experienced the problem of overcapacity. How do you view the role played by local governments in this?
Huang Yiping: The fundamental reason for China's repeated overcapacity problem lies in macroeconomic imbalances. A large amount of investment will eventually form capacity. If there is not enough demand, it will turn into excess capacity. Local governments also add fuel to the fire. In the past, local governments supported the development of traditional industries, and now they support the development of so-called emerging industries, and often pursue political correctness at any cost.
Market economies can also have overcapacity problems. Once a new industry emerges, a large amount of resources will be concentrated in this new industry, which can easily lead to overcapacity problems in the end. This is a normal phenomenon and can even be called a market failure phenomenon. If the market mechanism can function normally, once overcapacity occurs, the excess capacity will be gradually cleared out. Of course, clearing out excess capacity is bound to be a painful process.