Fearing that overcapacity would fuel a fresh wave of cheap exports, China’s policymakers, keen to improve manufacturing, are directing money towards manufacturers of high-tech products, from semiconductors to electric vehicles.`

China’s central bank’s lending statistics provides an indication of the priorities of the government: as of September’s end, outstanding loans to the industrial sector increased by 38.2% while loans to the struggling real estate sector decreased by 0.2% year over year.

Economists warn that current investment tsunami is distinct from a previous capital investment boom that, among other things, caused China’s solar panel industry to balloon, sparked a trade spat, and forced a large number of businesses out of business.

However, several important trading partners are concerned about the trend, especially in Europe where there is an ongoing probe into Chinese EV subsidies.

“There is lower consumption in China right now but you have massive overcapacity that is being pushed out to the world, including in batteries, solar and chemicals,” said Jens Eskelund, president of the European Chamber of Commerce in Beijing.

“Europe and China are like two trains that are going to collide,” Eskelund said, referring to trade.

At this week’s Asia Pacific Economic Cooperation (APEC) forum conference in San Francisco, where Chinese President Xi Jinping is set to meet US President Joe Biden, China’s industrial strategy will be on the table.

China has worked under Xi to establish itself as a global leader in advanced manufacture of luxury products, such as wind turbines, electric vehicles, aerospace parts, and cutting-edge electronics. Opponents claim that the drive has overshadowed the need for China to increase consumption and decrease exports, a structural change that many economists believe is essential to maintaining rapid economic growth.

Overcapacity has been a problem for policymakers before. According to Frederic Neumann, chief Asia economist at HSBC, stimulus during the global financial crisis of 2007–2008 not only spurred a boom in solar, steel, and other industries, but also created growth that ultimately assisted in absorbing much of that additional production.

This time, the government’s objectives are more focused; specifically, the 14th five-year plan’s 2021 aim of “advanced manufacturing” and high technology are the focus.

“China has adopted a strategy to shift investment spending from the real estate sector into manufacturing, which will drive up capacity further. Rather than boosting goods absorption via surging construction, China is opting to drive up the capacity of goods-producing industries,” said Neumann.

“Global markets, unfortunately, are not in a position to absorb the additional capacity.”

Another distinction from earlier overcapacity episodes is the lesser sums.

According to Tao Wang, chief China economist at UBS, the headline growth rate for financing into manufacturing is probably close to 18% because bonds, the other key source of funding for businesses, are declining substantially, resulting in a more moderate combined increase.

As a result of a soft market, producers in China are responding with slower overall increase in investment in manufacturing.

“Orders and profits are down and they tend to react to that,” said Wang.

Nonetheless, high-tech manufacturing receives more investment than the rest of the industry. According to figures from China’s National Bureau of Statistics, it increased by 11.3% year over year in the first nine months of 2023, while the total growth rate for industrial investment was 6.3%.

Numerous provincial and municipal governments are raising the percentage of government loans allocated to green development, advanced manufacturing, and strategic industries, according to a Reuters analysis of more than 100 publicly available policy documents and state media publications.

For instance, according to official media, Guangdong province has expanded loans by roughly 45% to both high-tech and sophisticated industry. In the first half of 2023, the amount of outstanding loans to Shandong’s (the eastern province) high-tech manufacturing industry increased by 67%.

A fifth of the economy of Dongguan, a 7.5 million-person industrial city in the south, was made up of unpaid loans to high-tech enterprises as of the end of September, totaling 246 billion yuan ($33.7 billion).

Excess capacity is starting to show.

According to predictions, China will soon be able to supply all of the world’s needs for lithium-ion batteries, according to Rystad Energy vice president Duo Fu.

Similar to this, according to data from the China Passenger Car Association (CPCA), its automakers, including EV manufacturers, have the potential to create 43 million cars annually by the end of 2022, with plants running at just 54.5% capacity.

Unfortunately, domestic purchasing power is constrained by slow economic growth and reduced consumption.

Even before the most severe COVID-19 lockdowns, household consumption only made up 38% of GDP in 2021 after decades of supply-side growth, according to World Bank data. This is in contrast to the US’s 68% and the global average of 55%.

According to Lu Zhengwei, the head economist at Shanghai’s Industrial Bank, China benefits from the rush to invest in cutting-edge industries in certain areas.

“Generally speaking, I think the investment in the new sectors is healthy and will support the sectors’ long-term development. They are investing while seeing overcapacity, which drives technological development.”

Chinese output may contribute to reducing inflation in the global economy.

“Far from losing global export market shares, Chinese produces may gain competitiveness,” said Neumann. “In turn, this could raise disinflationary pressures in global goods markets, helping to curtail inflation.”

Neither point will mitigate trade tensions, particularly as many countries push plans to favour domestic high-tech industries.

“Over the long term, we need to have an adjustment process,” said a Chinese government trade adviser, speaking on condition of anonymity. “We should let market forces eliminate some firms.”

(Adapted from GlobalTimes.cn)